Documente Academic
Documente Profesional
Documente Cultură
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TABLE OF CONTENTS
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TABLE OF CONTENTS
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TABLE OF CONTENTS
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TABLE OF CONTENTS
A. PLACE OF INCORPORATION TEST ............... 124 G. COMPENSATION [SEC. 30] ........................... 150
B. CONTROL TEST ............................................. 124 H. FIDUCIARY DUTIES AND LIABILITY RULES .. 151
IV. CORPORATE JURIDICAL PERSONALITY ... 126 J. INSIDE INFORMATION ................................... 153
K. CONTRACTS .................................................. 154
A. DOCTRINE OF SEPARATE JURIDICAL
PERSONALITY .................................................... 126 L. EXECUTIVE COMMITTEE ............................... 155
B. DOCTRINE OF PIERCING THE CORPORATE M. MEETINGS ..................................................... 155
VEIL ..................................................................... 127
VIII. STOCKHOLDERS AND MEMBERS .......... 157
V. INCORPORATION AND ORGANIZATION .... 128
A. RIGHTS OF A STOCKHOLDER AND MEMBERS
A. PROMOTER .................................................... 129 ............................................................................ 157
B. NUMBER AND QUALIFICATIONS OF B. PARTICIPATION IN MANAGEMENT ............. 158
INCORPORATORS ............................................. 129 C. PROPRIETARY RIGHTS ................................. 163
C. CORPORATE NAMELIMITATIONS ON USE D. REMEDIAL RIGHTS ....................................... 167
OF CORPORATE NAME ..................................... 129
E. OBLIGATION OF A STOCKHOLDER .............. 169
D. CORPORATE TERM .......................................130
F. MEETINGS ....................................................... 171
E. MINIMUM CAPITAL STOCK AND
SUBSCRIPTION REQUIREMENTS .....................130 XIV. CAPITAL STRUCTURE ......................... 173
F. ARTICLES OF INCORPORATION ...................130 A. SUBSCRIPTION AGREEMENTS .................... 173
G. REGISTRATION AND ISSUANCE OF B. CONSIDERATION FOR STOCKS ................... 174
CERTIFICATE OF INCORPORATION ................. 134 C. SHARES OF STOCK ....................................... 174
H. ADOPTION OF BY-LAWS .............................. 135 D. PAYMENT OF BALANCE OF SUBSCRIPTION
VI. CORPORATE POWERS ......................... 136 (SEC. 66 AND 67) ................................................ 179
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D. INSIDER TRADING .................................... 216 II. LAW ON SECRECY OF BANK DEPOSITS .... 239
V.PROTECTION OF INVESTORS A. POLICY .......................................................... 239
........................................................... 217 B. PURPOSE ...................................................... 239
A. TENDER OFFER RULE .............................. 217 C. PROHIBITED ACTS ....................................... 240
B. RULES ON PROXY SOLICITATION ........... 218 D. DEPOSITS COVERED ................................... 240
C. DISCLOSURE RULE ................................... 218 E. EXCEPTIONS ................................................. 240
VI. CIVIL LIABILITY ................................... 221 F. GARNISHMENT OF DEPOSITS ..................... 242
A. CIVIL LIABILITIES ON ACCOUNT OF FALSE III. GENERAL BANKING LAW OF 2000 ......... 243
REGISTRATION STATEMENT (SEC. 56) ............ 221
A. POLICY .......................................................... 243
B. CIVIL LIABILITIES ARISING IN CONNECTION
B. DEFINITION AND CLASSIFICATION OF BANKS
WITH PROSPECTUS, COMMUNICATIONS AND
........................................................................... 243
REPORTS (SEC. 57) ........................................... 222
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B. BASIC PRINCIPLES, SECTIONS 172.2, 175 AND F. WHEN IS MONEY LAUNDERING COMMITTED
181 ....................................................................... 287 ............................................................................ 310
C. COPYRIGHTABLE WORKS............................ 287 G. UNLAWFUL ACTIVITIES OR PREDICATE
CRIMES ................................................................ 311
D. NON-COPYRIGHTABLE WORKS.................. 289
E. RIGHTS OF COPYRIGHT OWNER ................. 290 H. ANTI-MONEY LAUNDERING COUNCIL ........ 312
I. FREEZING OF MONETARY INSTRUMENT OR
F. RULES ON OWNERSHIP OF COPYRIGHT .... 295
PROPERTY ......................................................... 313
G. LIMITATIONS ON COPYRIGHT ..................... 297
J. AUTHORITY TO INQUIRE INTO BANK
IV. RULES OF PROCEDURE FOR INTELLECTUAL DEPOSITS ........................................................... 314
PROPERTY RIGHTS CASES (A.M. NO. 10-3-10 SC)
........................................................... 301 III. FOREIGN INVESTMENTS ACT (R.A. 7042) .. 315
SPECIAL LAWS
I. THE CHATTEL MORTGAGE LAW AND REAL
ESTATE MORTGAGE LAW ......................... 307
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MERCANTILE LAW
LETTERS OF CREDIT AND
TRUST RECEIPTS LAW
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Thus, the different types of correspondent (7) Paying Bank the bank which undertakes
banks: to encash the drafts drawn by the seller.
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instruments themselves if they are been paid in full, or if the merchandise has
unsold or not otherwise disposed of, in already been sold, the proceeds of the sale
accordance with the terms and should be turned over to him by the importer or
conditions specified in the trust receipt. by his representative or successor in interest.
(PD 115, Sec. 4) (Prudential Bank v. National Labor Relations
Commission, 1995)
A trust receipt transaction is any transaction by
and between an entruster and the entrustee, B. RIGHTS OF THE ENTRUSTER
whereby the entruster (who owns or holds
absolute title or security interests over certain The entruster shall have the following rights:
specified goods, documents or instruments) (1) In case of sale: Right to the proceeds from
releases the same to the possession of the the sale of the goods, documents or
entrustee upon the latter's execution and instruments released under a trust receipt
delivery to the entruster of a signed document to the entrustee to the extent of the amount
called a trust receipt. (PD 115, Sec. 4) owing to the entruster or as appears in the
trust receipt
A. 1. LOAN/SECURITY FEATURE (2) In case of non-sale: Right to the return of
the goods, documents or instruments
In a letter of credit-trust receipt arrangement, a (3) Right to the enforcement of all other rights
bank extends a loan covered by the letter of conferred on him in the trust receipt (which
credit, and the trust receipt acts as the security are not contrary to the provisions of PD 115)
for the loan. In other words, the transaction (4) Right to cancel the trust and take possession
involves a loan feature represented by the letter of the goods, documents or instruments
of credit, and a security feature which is in the subject of the trust or of the proceeds
covering trust receipt (Vintola v. Insular Bank of realized therefrom at any time upon default
Asia and America, 1987). or failure of the entrustee to comply with
any of the terms and conditions of the trust
A. 2. OWNERSHIP OF THE GOODS, receipt or any other agreement between the
DOCUMENTS AND INSTRUMENTS entruster and the entrustee
UNDER A TRUST RECEIPT (5) Right to sell the goods, documents or
instruments at public or private sale, not
To secure that the banker (entrustee) shall be less than five days after serving or sending
repaid at the critical point that is, when the of notice to the entrustee of the intention to
imported goods finally reach the hands of the sell
intended vendee the banker takes the full (6) Right to purchase at a public sale the goods,
title to the goods at the very beginning, and he documents, or instruments
continues to hold that title as his indispensable (7) Right to recover deficiency from the
security until the goods are sold. entrustee should the proceeds be
insufficient (PD 115, Sec. 7)
The importer (entruster) becomes absolute
owner of the imported merchandise as soon as The entruster holding a security interest shall
he has paid its price. The ownership of the not, merely by virtue of such interest or having
merchandise continues to be vested in the given the entrustee liberty of sale or other
owner thereof or in the person who has disposition of the goods, documents or
advanced payment (entrustee), until he has instruments under the terms of the trust receipt
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juridical entities, the penalty shall be imposed Claims included in the warehousemans lien
upon the directors, officers, employees or other A warehouseman shall have a lien on the goods
officials or persons therein responsible for the deposited or the proceeds thereof in his hands:
offense, without prejudice to the civil liabilities (1) All lawful charges for storage and
arising from the criminal offense. (PD 115, Sec. preservation of the goods
13) (2) All lawful claims for money advanced,
interest, insurance, transportation, labor,
D. REMEDIES AVAILABLE weighing, coopering, and other charges and
expenses in relation to other goods
Upon default or failure of the entrustee to comply (3) All reasonable charges and expenses for
with the terms and conditions notice and advertisements of sale
(a) The entruster may cancel the trust and take (4) Sale of the goods where default had been
possession of the goods, documents or made in satisfying the warehousemans lien
instruments subject of the trust or of the (Act No. 2137, Sec. 27)
proceeds realized therefrom.
(b) The entruster may sell the goods, However, if a negotiable receipt is issued for the
documents or instruments not less than five goods, the warehouseman shall have no lien
days after serving or sending of the requisite thereon except for charges for storage of goods
notice, and the entruster may become a subsequent to the date of the receipt unless the
purchaser at a public sale. receipt expressly enumerated other charges for
(c) The proceeds shall be applied (a) to the which a lien is claimed. In such case, there shall
payment of the expenses thereof; (b) to the be a lien for the charges enumerated so far as
payment of the expenses of re-taking, they are within Sec. 27 although the amount of
keeping and storing the goods, documents the charges is not stated in the receipt. (Act No.
or instruments; (c) to the satisfaction of the 2137, Sec. 30)
entrustee's indebtedness to the entruster.
(PD 115, Sec. 7) Against what property the lien may be enforced
(a) Against all goods, whenever deposited,
In case of failure to turn over the proceeds of the belonging to the person who is liable as
sale, or failure to return in case of non-sale debtor for the claims in regard to which the
File a criminal case for estafa under RPC 315, lien is asserted, and
par. 1 (b). (PD 115, Sec. 13) (b) Against all goods belonging to others which
have been deposited at any time by the
E. WAREHOUSEMANS LIEN person who is liable as debtor for the claims
in regard to which the lien is asserted if such
The warehousemans lien under the Warehouse person had been so entrusted with the
Receipts Law is the warehousemans legal right possession of goods that a pledge of the
or interest in the depositors property. It is same by him at the time of the deposit to
similar to the depositarys right of retention, one who took the goods in good faith for
which is a means or device by which the value would have been valid. (Act No. 2137,
depositary is able to obtain payment of what Sec. 28)
may be due because of the deposit (Gomez-
Somera). Satisfaction of lien by sale
A warehouseman's lien for a claim, which has
become due, may be satisfied as follows:
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MERCANTILE LAW
NEGOTIABLE
INSTRUMENTS LAW
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The drawee pays the There is only one act E.3. SUM PAYABLE MUST BE
payee from his own the drawee pays CERTAIN
funds afterwards. directly from the
Section 2, NIL. What constitutes certainty as to
The drawee pays particular fund
sum. - The sum payable is a sum certain within
himself from the indicated.
the meaning of this Act, although it is to be
particular fund
paid:
indicated.
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Note: A sum is certain if from the face of the (a) When it is so expressed to be payable on
instrument it can be determined even if it demand, or at sight, or on presentation; or
requires mathematical computation. (b) In which no time for payment is expressed.
(Sundiang and Aquino) Where an instrument is issued, accepted, or
indorsed when overdue, it is, as regards the
E.4. PAYABLE IN MONEY person so issuing, accepting, or indorsing it,
The instrument must be capable of being payable on demand.
transformed into money, since negotiable
instruments are intended to be substitutes Note: The holder may call for payment any
for money time; and the maker has an option to pay at
Money as used in the law is not any time The refusal of the holder to accept
necessarily limited to legal tender as payment will terminate the running of interest,
defined by law but includes any particular if any, but the obligation to pay the note
kind of current money. (see, Sec. 6(e), NIL remains.
and PNB v. Zulueta)
An agreement to pay in foreign currency is F.2. AT A FIXED TIME
valid. (RA 8183) Only on the stipulated date, and not before,
may the holder demand its payment.
E.5. NON-NEGOTIABLE Should he fail to demand payment, the
An instrument which contains an order or instrument becomes overdue but remains
promise to do an act in addition to the valid and negotiable. It is merely converted
payment of money (with the exception of to a demand instrument with respect to
certain acts enumerated in Sec. 5 of the the person who issued, accepted, or
NIL) indorsed it when overdue. (Sec. 7, NIL)
Payable in personal property like
merchandise, shares of stock or gold. F.3. AT A DETERMINABLE FUTURE TIME
Maker or the person primarily liable has Section 4, NIL. Determinable future time; what
the option to require something to be done constitutes. - An instrument is payable at a
in lieu of payment of money. (Campos) determinable future time, within the meaning
But it is negotiable if the option to require of this Act, which is expressed to be payable:
something to be done in lieu of payment of (a) At a fixed period after date or sight; or
money is with the holder
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fictitious or non-existing person, and such person or to him or his order. It may be drawn
fact was known to the person making it so payable to the order of:
payable; or (a) A payee who is not maker, drawer, or
(d) When the name of the payee does not
drawee; or
purport to be the name of any person; or (b) The drawer or maker; or
(e) When the only or last indorsement is an (c) The drawee; or (d) Two or more payees
indorsement in blank. jointly; or
(d) One or some of several payees; or
Examples: (e) (f) The holder of an office for the time
(1) Expressed to be so payable - "I promise to being.
pay the bearer the sum" Where the instrument is payable to order, the
(2) Payable to a person named therein or payee must be named or otherwise indicated
bearer -"Pay to A or bearer" therein with reasonable certainty.
(3) Payable to the order of a fictitious person
or non-existing person, and such fact was Notes: Without the words "to order" or "to the
known to the person making it so payable - order of" the instrument is payable only to the
Pay to John Doe or order" person designated therein and is therefore
(4) Name of payee does not purport to be the non-negotiable. (Consolidated Plywood
name of any person "Pay to cash"; "Pay Industries vs. IFC Leasing, 1987)
to sundries."
(5) Only or last indorsement is an indorsement
G.6. WHERE THE MAKER IS THE PAYEE
in blank.
(1) In effect making himself liable to himself.
Thus, the instrument produces no legal
G.4. FICTITIOUS PAYEE RULE effect.
It is not necessary that the person referred to in
(2) Will produce legal effects only once the
the instrument is really non-existent or payee-maker indorses the instrument to
fictitious to make the instrument payable to
another person because such indorsement
bearer. The person to whose order the will then give rise to rights and obligations.
instrument is made payable may in fact be (Abad)
existing but he is still fictitious or non-existent
under Sec. 9(c) of the NIL if the person making
G.7. IF BILL OF EXCHANGE, DRAWEE
it so payable does not intend to pay the
MUST BE NAMED OR DESIGNATED WITH
specified persons. (PNB v. Rodriguez, 2008)
REASONABLE CERTAINTY
A check drawn payable to the order of "CASH" (1) Applies only to a bill of exchange
is a check payable to bearer, and the bank may (2) A bill may be addressed to 2 or more
pay it to the person presenting it for payment drawees jointly whether they are partners
without the drawer's indorsement. (Ang Tek or not, but not to 2 or more drawees in the
Lian vs. CA, 1950) alternative or in succession (Sec. 128, NIL).
Examples:
G.5. PAYABLE TO ORDER
(1) To Juan Cruz and Jose Reyes negotiable
Section 8, NIL. When payable to order. - The (2) To Juan Cruz or Jose Reyes not
instrument is payable to order where it is negotiable; no certainty as to drawee
drawn payable to the order of a specified
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B. BILL OF EXCHANGE
Section 126, NIL. Bill of exchange, defined. - A Section 17, NIL. Construction where instrument
bill of exchange is an unconditional order in is ambiguous. - Where the language of the
writing addressed by one person to another, instrument is ambiguous or there are
signed by the person giving it, requiring the omissions therein, the following rules of
person to whom it is addressed to pay on construction apply:
demand or at a fixed or determinable future x---x
time a sum certain in money to order or to
bearer. (Sec. 126) (e) Where the instrument is so ambiguous that
there is doubt whether it is a bill or note,
the holder may treat it as either at his
B.1. KINDS OF BILLS OF EXCHANGE
election;
(1) Draft used synonymously with bill of
exchange although it normally refers to a x---x
bill of exchange used in documentary
exchange like letters of credit transactions. (1) The drawer and the drawee are the same
(2) Inland and foreign bill an Inland bill is a person;
bill which is, or on its face purports to be, (2) Drawee is a fictitious person;
both drawn and payable within the (3) Drawee does NOT have the capacity to
Philippines. Any other bill is a foreign bill. contract (Sec. 130, NIL)
(3) Time draft draft that is payable at a fixed (4) Where the bill is drawn on a person who is
date. legally absent;
(4) Sight or demand draft payable when the (5) Where the instrument is so ambiguous that
holder presents it for payment. there is doubt whether it is a bill or note,
(5) Trade acceptance used in contracts of sale the holder may treat it as either at his
where the seller as drawer orders the buyer election (Sec. 17[e], NIL)
(as drawee) to pay a sum certain to the
same seller (payee). Promissory Note Bill of Exchange
(6) Bankers acceptance a time draft across
Unconditional promise Unconditional order
the face which the drawee has written the
word accepted. (Sundiang and Aquino) Involves 2 parties Involves 3 parties
(7) Check - A bill of exchange drawn on a bank Maker is primarily Drawer is only
payable on demand (Sec. 185). It is the most liable secondarily liable
common form of bill of exchange.
Only one presentment: Two presentments: for
for payment acceptance and for
B.2. INSTANCES WHEN A BILL OF payment
EXCHANGE MAY BE TREATED AS A
PROMISSORY NOTE:
Section 130, NIL. When bill may be treated as
promissory note. - Where in a bill the drawer
and drawee are the same person or where the
drawee is a fictitious person or a person not
having capacity to contract, the holder may
treat the instrument at his option either as a
bill of exchange or as a promissory note.
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Exceptions: F. FORGERY
(1) Mere addition of words describing him as an Sec. 23. Forged signature; effect of. - When a
agent WITHOUT disclosing his principal signature is forged or made without the
(Sec. 20, NIL) authority of the person whose signature it
(2) Where a broker or agent negotiates an purports to be, it is wholly inoperative, and no
instrument without indorsement, he incurs right to retain the instrument, or to give a
all liabilities in Sec. 65 of the NIL, unless he discharge therefor, or to enforce payment
discloses name of principal and the fact that thereof against any party thereto, can be
he is only acting as an agent. (Sec. 69, NIL) acquired through or under such signature,
unless the party against whom it is sought to
Requisites to negative personal liablity of enforce such right is precluded from setting up
agent: the forgery or want of authority.
(1) He must be duly authorized;
(2) He must act within the scope of his Counterfeit making or fraudulent alteration of
authority any writing, which may consist of:
(3) He must indicate in the instrument that he (1) Signing of anothers name with intent to
is signing merely as agent; and defraud; or
(4) He must disclose his principal. (2) Alteration of an instrument in the name,
amount, name of payee, etc. with intent to
E. INDORSEMENT BY MINOR OR defraud.
CORPORATION
The indorsement or assignment of the General rule: When a signature is forged or
instrument by a corporation or by an infant made without the authority of the person, only
(minor) passes the property therein, the forged signature (not the instrument itself
notwithstanding that from want of capacity, and the other genuine signatures) is wholly
the corporation or infant may incur no inoperative
liability thereon (Sec. 22, NIL).
The above provision does not change the rule Effects:
in civil law on minor's contracts, which (1) No right to retain the instrument
provides that a contract enetered into by a (2) No right to give a discharge therefor
minor is voidable, and the minor cannot be (3) No right to enforce payment thereof against
held liable thereon unless he ratifies it upon any party thereto can be acquired through
reaching majority. or under such signature
However, under Section 22 of the NIL, should
the minor indorse a negotiable instrument, Exception: The party against whom it is sought
although he cannot be held liable on his to be enforced is precluded from setting up the
contract of indorsement, title to the forgery or want of authority as a defense (Sec.
instrument passes to his indorsee and the 23, NIL).
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F.1 PERSONS PRECLUDED FROM Neal). Drawee cannot recover from the
SETTING UP DEFENSE OF FORGERY collecting bank because there is no privity
(CAMPOS) between the collecting bank and the drawer.
(1) Those who warrant or admit the The collecting bank does not give any
genuineness of the signature in question. warranty re: the drawers signature.
This includes indorsers, persons negotiating (Associated Bank vs. CA)
by delivery and acceptors. (3) Indorsers subsequent to forgery are liable
(2) Those who, by their acts, silence, or (such as collecting bank or last endorser)
negligence, are estopped from setting up (4) Party who made the forgery is liable
the defense of forgery.
Payees signature forged
(1) Payee is not liable
F.2 RULES ON FORGERY (2) Drawer is still secondarily liable
(3) Drawee is liable if it paid or accepted the
F.2.A. PROMISSORY NOTE instrument (Sec. 62, NIL; Price v. Neal), but it
Makers signature forged may pass liability back through the
(1) Maker is not liable because he never collection chain
became a party to the instrument. (4) Indorsers subsequent to forgery are liable
(2) Indorsers subsequent to forgery are liable (such as collecting bank)
because of their warranties. (5) Party who made the forgery is liable
(3) Party who made the forgery is liable.
Indorsers signature forged
Payees signature forged (1) Drawer, payee, indorser whose signature/s
(1) Payee is not liable. was/were forged and all indorsers
(2) Maker is still liable. (REASON: Indorsement preceding the forgery are not liable.
is not necessary to title and the maker (2) Drawee is liable if it paid or accepted the
engages to pay holder) instrument (Sec. 62, NIL; Price v. Neal).
(3) Indorsers subsequent to forgery are liable. (3) Indorsers subsequent to forgery are liable.
(4) Party who made the forgery is liable. (such as collecting bank)
(4) Party who made the forgery is liable.
Indorsers signature forged
(1) Maker, payee, indorser whose signature/s G. ACCEPTANCE AND PAYMENT
was/were forged, and all indorsers UNDER MISTAKE
preceding the forgery are not liable. Sec. 62. Liability of acceptor. - The acceptor, by
(2) Indorsers subsequent to forgery are liable. accepting the instrument, engages that he will
(3) Party who made the forgery is liable. pay it according to the tenor of his acceptance
and admits:
F.2.B. BILL OF EXCHANGE (a) The existence of the drawer, the
Drawers signature forged genuineness of his signature, and his
(1) Drawer is not liable because he was never a capacity and authority to draw the
party to the instrument. instrument; and
(2) Drawee is liable if it paid or accepted the (b) The existence of the payee and his then
instrument (no recourse to drawer) because capacity to indorse.
he admitted the genuineness of the
drawers signature (Sec. 62, NIL; Price v.
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(1) When the drawee accepts or pays a forged The negligence of the depositor/drawer
instrument would consist of the failure to to carefully
Price v. Neal doctrine: As between equally examine bank statements, cancelled
innocent persons, the drawee who pays checks, his check stubs, and other
money on, or accepts, a check or draft the pertinent records within a reasonable
signature on which was forged CANNOT time and to report any errors without
recover the money from the one who unreasonable delay to the drawee bank.
received it. The drawee is bound to know If a drawer/depositors negligence and
the signature of its depositor. delay should cause a bank to honor a
A bank is bound to know the signatures of forged check, the drawer cannot later
its depositors. If a bank pays a forged complain should bank refuse to recredit
check it must be considered as making his account (Campos).
the payment out of its own funds and
cannot charge the account of the (4) Effect of Payment under Forged
depositor whose signature was forged. Indorsements
(PNB vs. Quimpo, 1988) In the case of a drawee's acceptance or
A bank is liable, irrespective of its good payment of a bill on which only an
faith, in paying a forged check. (Samsung INDORSEMENT has been forged, the drawee
vs. Far East Bank, 2004) can recover the amount paid out by him.
RATIONALE: The drawee makes no warranty
(2) Extensions of Price v. Neal doctrine as to the genuineness of any indorsement
Notes: The bar to recovery on the part of a (Campos).
drawee who pays money on, or accepts, a
check or draft, is extended to overdrafts (5) Effect of negligence of drawee in informing
and stop payment orders. recipient of forgery
The rule is that a drawee's acceptance or
(a) Overdraft occurs when a check is issued payment of a bill on which only an
for an amount more than what the INDORSEMENT has been forged is not a
drawer has in deposit with the drawee bar to his right to recover the amount paid
bank. Rule: The drawee who pays the out by him; however, there is an exception
holder of the bill cannot recover from the to this rule.
holder what he paid under mistake If it is shown that the drawee on learning
(Campos) of the forgery did not give prompt notice
(b) Stop Payment Order is one issued by the of it to the holder and that damage
drawer of a check countermanding his resulted to said holder, recovery by the
first order to the drawee bank to pay the drawee is barred (Clearfield Trust Co. v. US,
check. Rule: The drawee bank is bound to 1943)
follow the order, provided it is received
prior to its certification or payment of the (6) Effect of negligence of drawer in case of
check (Campos). forged indorsement on checks
The drawer, as soon as he comes to know of a
(3) Effects of Negligence of Depositor forged indorsement should promptly notify the
If such negligence of the depositor was drawee bank. Otherwise, should his negligent
the proximate cause of the loss, the delay be the proximate cause of any
drawee-bank would NOT be liable
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subsequent loss to the bank, the latter may the degree of negligence of each will be
properly charge it to the drawer's account. weighed in considering the amount of loss
(7) Comparing the liability of a collecting bank which each should bear (BPI v CA, 1992)
and a drawee bank
A collecting bank is only liable for forged
indorsements and not forgeries of the drawer
VI. Consideration
or makers signature (PNB v CA, 1968).
Section 25, NIL. Value, what constitutes.
Value is any consideration sufficient to support
Rationale: In presenting the checks for clearing,
a simple contract. An antecedent or pre-
the collecting agent made an express
existing debt constitutes value; and is deemed
guarantee on the validity of all the prior
such whether the instrument is payable on
endorsements.
demand or at a future time.
The collecting bank or last indorser generally
Section 191, NIL. Definition and meaning of
suffers the loss because it has the duty to
terms. - In this Act, unless the contract
ascertain the genuineness of all prior
otherwise requires:
indorsements considering that the act of
x---x
presenting the check for payment to the
"Value" means valuable consideration;
drawee is an assertion that the party making
x---x
the presentment had done its duty to
ascertain the genuineness of the
indorsements (BPI v CA, 1992). Value and consideration are generally
convertible terms. However, they may have
A drawee bank is not liable for forged
indorsements. different implications. When the payee of a
noet sues the maker, or the payee of a bill
Rationale: The drawee bank is not similarly sues the drawer, or an indorsee sues his
immediate indorser, the word
situated as the collecting bank because the
former makes no warranty as to the consideration is the more proper term to
use. But where a holder sues any party to the
genuineness of any indorsement. The drawee
banks duty is but to verify the genuineness of instrument with whom he himself has not
the drawers signature and not of the dealt, the term value is more appropriate.
indorsement because only the drawer is its An antecedent or pre-existing debt
client. constitutes value; and is deemed such
whether the instrument is payable on
Note: demand or at a future time. (Sec. 25, NIL)
However, it should be noted that as an Value need not be full and a holder will be
exception to the rule that a drawee bank is one for value even if he gave less than the
not liable for a forged indorsement, when the face value of the instrument, provided the
negligence of the drawee bank is the intention of the transferor is to transfer the
proximate cause of the collecting banks full amount represented by the instrument.
payment of a check with a forged
indorsement, the drawee bank may be held
liable to the collecting bank.
Furthermore, when both the collecting bank
and the drawee bank are guilty of negligence,
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appears thereon, a valid and intentional (3) Must be of the ENTIRE instrument
delivery by him is presumed until the
contrary is proved (Sec. 16, NIL) Section 32, NIL. Indorsement must be of entire
(2) If it is in the hands of a holder in due course, instrument. - The indorsement must be an
the presumption of a valid delivery is indorsement of the entire instrument. An
conclusive (Sec. 16, NIL) indorsement which purports to transfer to the
indorsee a part only of the amount payable, or
Presumption as to date which purports to transfer the instrument to
(1) Date is not an essential element of two or more indorsees severally, does not
negotiability; it is not included in the operate as a negotiation of the instrument. But
requirements for an instrument to be where the instrument has been paid in part, it
negotiable under Sec. 1 of the NIL. may be indorsed as to the residue.
(2) An undated instrument is considered to be
dated as of the time it was issued (Sec. 17 (c), (a) CANNOT indorse a part only of the
NIL) amount payable; BUT if the instrument
has been paid in part, then the instrument
B.2. BY INDORSEMENT COMPLETED BY may be indorsed as to the residue (Sec.
DELIVERY IF PAYABLE TO ORDER 32,) NIL
(SEC. 30) (b) CANNOT transfer the instrument to two
or more indorsees severally (Sec. 32, NIL)
Section 191, NIL. Definition and meaning of
(c) If not an indorsement of the entire
terms. - In this Act, unless the contract
instrument, the transfer remains valid,
otherwise requires:
but as a mere assignment which subjects
x---x
the holder to all defenses on the
"Indorsement" means an indorsement
instrument (Campos)
completed by delivery;
x---x (4) If name misspelled in indorsement,
indorsement will be prima facie deemed not
B.2.A. INDORSEMENT; HOW DONE valid.
Section 31, NIL. Indorsement; how made. - The
indorsement must be written on the Section 43, NIL. Indorsement where name is
instrument itself or upon a paper attached misspelled, and so forth. - Where the name of a
thereto. The signature of the indorser, without payee or indorsee is wrongly designated or
additional words, is a sufficient indorsement. misspelled, he may indorse the instrument as
therein described adding, if he thinks fit, his
(1) Where placed The indorsement must be
proper signature.
written (Sec. 31, NIL):
(a) On the instrument itself (Sec. 31, NIL) , or (a) The indorsement should be made by the
(b) On a separate piece of paper attached to holder in the manner he was designated,
the instrument called allonge(Sec. 31, otherwise the signature will prima facie
NIL) not be a valid indorsement of the
instrument (Sec 43, NIL)
(2) Signature of the indorser, without additional
words, is a sufficient indorsement (Sec. 31,
NIL)
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(5) Indorsement where there are joint payees Section 40, NIL. Indorsement of instrument
(a)Where the instrument is payable or payable to bearer. - Where an instrument,
indorsed to A and B, they are joint payable to bearer, is indorsed specially, it may
payees and an indorsement by either A nevertheless be further negotiated by delivery;
or B only will not constitute a valid but the person indorsing specially is liable as
negotiation, UNLESS the one indorsing is indorser to only such holders as make title
authorized by the other (Campos). through his indorsement.
(b) But where the instrument is payable to
A or B, they payees are merely in the
Section 35, NIL. Blank indorsement; how
alternative, and either one may valdily
changed to special indorsement. - The holder
negotiate the same (Campos).
may convert a blank indorsement into a special
indorsement by writing over the signature of
B.2.B. KINDS OF INDORSEMENT
the indorser in blank any contract consistent
Section 33, NIL. Kinds of indorsement. - An
with the character of the indorsement.
indorsement may be either special or in blank;
and it may also be either restrictive or qualified (1) Special
or conditional. (a) Specifies the person to whom/to whose
There are four bases of classification of order the instrument is to be payable;
indorsements under the NIL: indorsement of such indorsee is
(1) Special or in blank necessary to further negotiation.
(2) Restrictive or Non-Restrictive (b) A special indorser is liable to all
(3) Qualified or unqualified subsequent holders, unless the
(4) Conditional or unconditional instrument is an originally bearer
instrument, in which case he is liable
All of the four bases of classification coexist only to those who take title through his
with each other; thus, an indorsement may be indorsement (Sec. 40, NIL).
special and qualified at the same time. It may (c) An instrument, payable to bearer, and
also be special and unqualified, special and indorsed specially, may nevertheless be
restrictive, special, unrestrictive and further negotiated by delivery. (Sec 40,
unqualified and so on (Campos). NIL)
Originally bearer instrument always
C. AS TO MANNER OF FUTURE remains a bearer instrument (Sundiang
METHOD OF NEGOTIATION and Aquino)
Section 34, NIL. Special indorsement;
indorsement in blank. - A special indorsement (2) Blank
specifies the person to whom, or to whose (a) Specifies no indorsee, instrument so
order, the instrument is to be payable, and the indorsed is payable to bearer, and may
indorsement of such indorsee is necessary to be negotiated by delivery
the further negotiation of the instrument. An (b) The holder may convert a blank
indorsement in blank specifies no indorsee, indorsement into a special indorsement
and an instrument so indorsed is payable to by writing over the signature of the
bearer, and may be negotiated by delivery. indorser in blank any contract consistent
with the character of the indorsement.
(Sec 35, NIL)
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(c) An order instrument may be converted (c) Transfer his rights as such indorsee, but
into a bearer instrument by means of a all subsequent indorsees acquire only
blank indorsement, and may be later the title of first indorsee under restrictive
reconverted into an order instrument by indorsement. (Sec 37, NIL)
a subsequent special indorsement
(2) Non-restrictive
D. AS TO TITLE TRANSFERRED
Section 36, NIL. When indorsement restrictive. - F. AS TO KIND OF LIABILITY
An indorsement is restrictive which either: ASSUMED BY INDORSER
(a) Prohibits the further negotiation of the Section 38, NIL. Qualified indorsement. - A
instrument; or qualified indorsement constitutes the indorser
(b) Constitutes the indorsee the agent of the a mere assignor of the title to the instrument. It
indorser; or may be made by adding to the indorser's
(c) Vests the title in the indorsee in trust for or signature the words "without recourse" or any
to the use of some other persons. words of similar import. Such an indorsement
But the mere absence of words implying power does not impair the negotiable character of the
to negotiate does not make an indorsement instrument.
restrictive.
(1) Qualified
Section 37, NIL. Effect of restrictive indorsement; (a) Constitutes indorser as mere assignor of
rights of indorsee. - A restrictive indorsement title
confers upon the indorsee the right: (b) Made by adding the words without
(a) to receive payment of the instrument; recourse (Sec. 38, NIL).
(b) to bring any action thereon that the (c) But this does not mean that the
indorser could bring; transferee only has the rights of an
(c) to transfer his rights as such indorsee, assignee; transfer remains a negotiation
where the form of the indorsement and transferee can still be a holder
authorizes him to do so. capable of acquiring a title free from
But all subsequent indorsees acquire only the defenses of prior parties.
title of the first indorsee under the restrictive (d) Effects:
indorsement. (i) Relieves the qualified indorser of his
liability to pay the instrument should
(1) Restrictive Such indorsement either: the maker be unable to pay
(a) Prohibits further negotiation of (ii) The qualified indorser does not
instrument guarantee the solvency of the maker,
(b) Constitutes indorsee as agent of indorser but merely his legal title to the
(c) Vests title in indorsee in trust for another instrument
(Sec 36, NIL) (iii) The instrument may still be
further negotiated; no effect on its
negotiability
E. RIGHTS OF RESTRICTIVE
(2) Non-qualified
INDORSEE
(a) Receive payment
(b) Bring any action thereon that the
indorser could bring.
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person adds to his signature words the instrument was defective, the burden is on
indicating that he signs for or on behalf of the holder to prove that he or some person
a principal or in a representative capacity, under whom he claims acquired the title as
he is not liable on the instrument if he was holder in due course. But the last-mentioned
duly authorized; but the mere addition of rule does not apply in favor of a party who
words describing him as an agent, or as became bound on the instrument prior to the
filling a representative character, without acquisition of such defective title.
disclosing his principal, does not exempt
him from personal liability. B.1. WHO ARE HDCS:
(2) Payment in due course to the holder (1) Holder in due course (HDC) under Sec. 52,
discharges instrument NIL
(2) HDC under Sec. 58, NIL: A holder who
B. HOLDER IN DUE COURSE (HDC) DERIVES title to the instrument through a
Section 52, NIL. What constitutes a holder in due HDC has all the rights of the latter even
course. - A holder in due course is a holder who though he himself satisfies none of the
has taken the instrument under the following requirements of due course holding
conditions: HDC under Sec. 59, NIL (presumption):
(a) That it is complete and regular upon its Every holder is deemed prima facie to be a
face; holder in due course
(b) That he became the holder of it before it
was overdue, and without notice that it has Sec. 191 of the NIL defines holder as the payee
been previously dishonored, if such was the or indorsee of a bill or note, who is in
fact; possession of it, or the bearer thereof. The
(c) That he took it in good faith and for value; word holder in the first clause of Sec. 52 and
(d) That at the time it was negotiated to him, in the second subsection thereof may be
he had no notice of any infirmity in the replaced by the definition in Sec. 191 so as to
instrument or defect in the title of the read a holder in due course as a payee or an
person negotiating it. indorsee in possession, etc. (De Ocampo v.
Gatchalian, 1961)
Section 58, NIL. When subject to original
B.2. THE SIGNIFICANCE OF DUE COURSE
defense. - In the hands of any holder other than
a holder in due course, a negotiable HOLDING
instrument is subject to the same defenses as if A holder in due course can acquire a better
it were non-negotiable. But a holder who title than his predecessors because he takes
derives his title through a holder in due course, the instrument free from any defect of title of
and who is not himself a party to any fraud or prior parties. He is furthermore free from
illegality affecting the instrument, has all the defenses available to prior parties among
rights of such former holder in respect of all themselves (Campos).
parties prior to the latter. A holder not in due course, on the other hand,
takes the instrument subject to all defenses
because he is treated as a transferee of a
Section 59, NIL. Who is deemed holder in due
non-negotiable paper. Real defenses,
course. - Every holder is deemed prima facie to
however, which attach to the instrument
be a holder in due course; but when it is shown
itself would be available even against a
that the title of any person who has negotiated
holder in due course (Campos).
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must have had actual knowledge of the infirmity accordance with the particular circumstances
or defect, or knowledge of such facts that his of each case (Campos).
action in taking the instrument amounted to
bad faith. (Sec. 56, NIL)
Suspicious circumstances
That at the time it was negotiated to him he General rule: A purchaser of an instrument is
had no NOTICE of any infirmity in the not required to investigate every suspicious
instrument or defect in the title of the person circumstance; failure to investigate such
negotiating it circumstances does not constitute him as
being in bad faith or having a notice of defect
Section 55, NIL. When title defective. - The title (Campos).
of a person who negotiates an instrument is
defective within the meaning of this Act when Rationale: The general principle that a
he obtained the instrument, or any signature purchaser who has knowledge of certain facts
thereto, by fraud, duress, or force and fear, or is put on inquiry does not operate to its full
other unlawful means, or for an illegal extent in the law of negotiable instruments.
consideration, or when he negotiates it in Negotiable instruments are usually issued in
breach of faith, or under such circumstances as pursuance of commercial transactions where
amount to a fraud. time is of the essence. To require investigation
of every suspicious circumstance would
hamper their function of facilitating exchange;
Section 56, NIL. What constitutes notice of
thus negligence in tracking down a suspicious
defect. - To constitutes notice of an infirmity in
circumstance which would put a prudent man
the instrument or defect in the title of the
on inquiry is not of itself sufficient to prevent
person negotiating the same, the person to
recovery (Campos).
whom it is negotiated must have had actual
knowledge of the infirmity or defect, or
Exceptions:
knowledge of such facts that his action in
(a) Suspicious circumstances TOGETHER WITH
taking the instrument amounted to bad faith.
other circumstances, may be admitted as
evidence of bad faith.
B.4.C. WHAT CONSTITUTES NOTICE OF (b) Where the suspicious circumstances are so
DEFECT OR BAD FAITH cogent and obvious
Under Section 56, in order to constitute notice,
the holder must: A check with 2 parallel lines in the upper left
(a) have ACTUAL and not merely hand corner means that it could only be
constructive knowledge of the defect; OR deposited and may not be converted to cash.
(b) have acted in bad faith (Campos) Consequently, such circumstance should put
the payee on inquiry and upon him devolves the
Gross negligence IN ITSELF would not duty to ascertain the holders title to the check
constitute notice since it is not the equivalent or the nature of his possession. Failing in this
of actual knowledge nor of bad faith (Campos). respect, the payee is declared guilty of gross
negligence amounting to legal absence of good
The question of good faith or bad faith is a faith and as such the consensus of authority is
question of fact which must be determined in to the effect that the holder of the check is not
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a holder in good faith. (State Investment House (2) But the last mentioned rule does not apply
vs. IAC, 1989) in favor of a party who became bound on
the instrument prior to the acquisition of
such defective title. (Sec. 59, NIL)
Defective title
Title is NOT defective when at the time it was C.2. HOLDER NOT IN DUE COURSE
negotiated to him, he had NO notice of: (1) One who became a holder of an instrument
(1) any infirmity in instrument without any, some or all of the requisites
(2) any defect in title of person negotiating under Sec. 52 of the NIL
(2) With respect to demand instruments, if it is
Title is DEFECTIVE when (Sec. 55, NIL) negotiated an unreasonable length of time
(1) instrument/signature obtained by fraud, after its issue, the holder is deemed not a
duress, force or fear or other unlawful holder in due course. (Sec. 53, NIL)
means OR for an illegal consideration; or (3) Rights of a holder not in due course (Sec. 51,
(2) instrument is negotiated in breach of faith, NIL):
or fraudulent circumstances (a) To sue on the instrument under in his own
name
NOTICE of infirmity or defect actual (b) To enforce the instrument
knowledge of the infirmity or defect OR
knowledge of such facts that his action in The only disadvantage of a holder who is not a
taking the instrument amounted to bad faith holder in due course is that the negotiable
(Sec.56, NIL) instrument is subject to defenses as if it were
non-negotiable. [Chan Wan vs. Tan Kim (1960)]
RIGHT of a transferee who receives NOTICE of
any infirmity or defect BEFORE he has PAID
THE FULL amount for the instrument. He will
be deemed a HDC only to the extent of the
X. Liabilities of Parties
amount therefore paid by him (Sec.54, NIL)
Primary liability: The unconditional promise
attaches the moment the maker makes the
C. DEFENSES AGAINST THE instrument while the acceptors assent to the
HOLDER unconditional order attaches the moment he
accepts the instrument. No further act is
necessary in order for the liability to accrue.
C.1. PRESUMPTION IN FAVOR OF DUE Presentment for payment is all that is
COURSE HOLDING necessary.
Every holder is deemed prima facie to be a
holder in due course (Sec. 59, NIL).
(1) BURDEN SHIFTS when it is shown that the
A. PARTIES PRIMARILY LIABLE
title of any person who has negotiated the (Sec. 60 and 62)
instrument was defective. Holder MUST Persons who by the terms of the instrument
then PROVE that he or some person under are absolutely required to pay the same
whom he claims acquired the title as a
holder in due course.
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B.2.B. IRREGULAR INDORSER (2) His then capacity to indorse (Sec. 60)
When a person not otherwise a party to an
instrument, places thereon his signature in DRAWERS WARRANTIES
blank before delivery, he is liable as an (1) The drawer admits the existence of the
indorser, in accordance with these rules: payee AND
(1) Instrument payable to order of 3rd person: (2) His then capacity to endorse
liable to payee and to all subsequent parties
(2) Instrument payable to the order of
maker/drawer, or payable to bearer: liable ACCEPTORS WARRANTIES
to all parties subsequent to maker/drawer (1) As to the drawer, the acceptor admits:
(3) Signs for accommodation of payee: liable (a) His existence
to all parties subsequent to payee (Sec. 64) (b) Genuineness of his signature
(c) Capacity and authority to draw the
B.2.C. ORDER OF LIABILITY AMONG instrument
INDORSERS (SEC. 68) (2) As to the payee, the acceptor admits:
(1) Among themselves: liable prima facie in the (a) His existence
order they indorse, but proof of another (b) His then capacity to indorse (Sec. 62)
agreement admissible
(2) As to the Holder: Holder may sue any of the The acceptor is precluded from setting up
indorsers, regardless of order of certain defenses by reason of his warranties
indorsement like the defense that the drawer is a minor or
(3) Joint payees/indorsees deemed to indorse the signature of the drawer is forged. (Aquino)
solidarily
GENERAL INDORSERS WARRANTIES
(1) That the instrument is genuine in and in all
respects what it purports to be
XI. Warranties (2) That he has a good title to it
The primary or secondary liability of the parties (3) That all prior parties had capacity to
should be distinguished from their warranties. contract
(1) Primary or secondary liability of the parties (4) That the instrument is, at the time of his
makes them liable to pay the sum certain indorsement, valid and subsisting (Sec. 66)
in money stated in the instrument.
(2) Warranties are affirmations of the fact on These warranties are in favor of all subsequent
the part of the parties that impose no holders in due course. (Ang Tiong v. Ting,
direct obligation to pay in the absence of 1968)
breach thereof. (Aquino)
QUALIFIED INDORSERS WARRANTIES
In case of breach of warranties, the person who (1) That the instrument is genuine in and in all
breached the same may either be liable or he respects what it purports to be
may be barred from asserting a particular (2) That he has a good title to it
defense. (3) That all prior parties had capacity to
contract
MAKERS WARRANTIES (4) That he has no knowledge of any fact
(1) The maker admits the existence of the which would impair the validity of the
payee AND instrument or render it valueless. (Sec. 68)
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C. NECESSITY OF PRESENTMENT
E. DISPENSATION WITH
FOR PAYMENT
PRESENTMENT FOR PAYMENT
When necessary: In order to charge the drawer
When Excused:
and indorsers (Sec. 70)
(1) Where, after the exercise of reasonable
diligence, presentment cannot be made;
(2) Where the drawee is a fictitious person;
(3) By waiver of presentment, express or
implied. (Sec. 82)
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acceptance is necessary in order to fix the (1) By the holder, or by some person authorized
maturity of the instrument; or to receive payment on his behalf;
(2) Where the bill expressly stipulates that it (2) At a reasonable hour on a business day;
shall be presented for acceptance; or (3) At the proper place as herein defined (see
(3) Where the bill is drawn payable elsewhere Sec. 73);
than at the residence or place of business of (4) To the person primarily liable on the
the drawee.(Sec. 143) instrument or if he is absent or inaccessible,
to any person found at the place where the
Note: It is not necessary to present a check for presentment is made. (Sec. 72)
acceptance because it is not one of those
required under Sec. 143. Time of maturity: Every negotiable instrument
is payable at the time fixed therein without
C. WHEN PRESENTMENT FOR grace. When they day of maturity falls upon
ACCEPTANCE EXCUSED: Sunday, or a holiday, the instrument is payable
Presentment for acceptance is excused and a on the next succeeding business day.
bill may be treated as dishonored by non- Instruments falling due or becoming payable
acceptance in either of the following cases: on Saturday are to be presented for payment
(1) Where the drawee is dead, or has on the next succeeding business day, except
absconded, or is a fictitious person or a that instrument payable on demand may, at
person not having capacity to contract by the option of the holder be presented for
bill. payment before twelve oclock noon on Saturday
(2) Where, after the exercise of reasonable when that entire day is not a holiday. (Sec. 85)
diligence, presentment cannot be made.
(3) Where, although presentment has been F. HOW MADE (SEC. 145)
irregular, acceptance has been refused on In general:
some other ground. (Sec. 148) (1) By or on behalf of the holder
(2) At a reasonable hour
D. TIME/PLACE/MANNER OF (3) On a business day
(4) Before the bill is overdue
PRESENTMENT
(5) To the drawee or his agent
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H. DISHONOR BY NON-ACCEPTANCE
When dishonored by non-acceptance: A bill is XIX. Checks
dishonored by non-acceptance:
(1) When it is duly presented for acceptance A. DEFINITION
and such an acceptance as is prescribed by A check is a bill of exchange drawn on a bank
this Act is refused or cannot be obtained; or payable on demand. Except as herein
(2) When presentment for acceptance is otherwise provided, the provisions of this Act
excused and the bill is not accepted. (Sec. applicable to a bill of exchange payable on
149) demand apply to a check. (Sec. 185)
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Effects:
TYPES: SPECIAL AND GENERAL
(1) Equivalent to acceptance (Sec. 187) and is
The crossing may be special wherein between
the operative act that makes banks liable
the two parallel lines is written the name of a
(2) Assignment of the funds of the drawer in
bank or a business institution, in which case
the hands of the drawee (Sec. 189)
the drawee should pay only with the
(3) If obtained by the holder, discharges the
intervention of that bank or company, or
persons secondarily liable thereon (Sec. 188)
crossing may be general wherein between two
parallel diagonal lines are written the words
Refusal of drawee bank to certify: The holder
"and Co." or none at all as in the case at bar, in
has no action against the bank but he has a
which case the drawee should not encash the
right of action against the drawer. The drawer
same but merely accept the same for deposit
in turn has right of action against the bank
(supra).
based on the original contact of deposit
between them.
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MERCANTILE LAW
INSURANCE CODE
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contrary to law, morals, good customs, public becomes liable to pay the insured. However,
order, or public policy. many other conditions are usually required
(such as payments of premium or performance
Exceptions: Insurance contracts particularly of other act) as precedent to the right of the
liability insurance, may be required by law in insured to claim benefit under the insurance.
certain instances:
For motor vehicles (Compulsory Motor Vehicle G. CONTRACT OF INDEMNITY (FOR
Liability Insurance, Sections 386-402); NON-LIFE INSURANCE)
For employees (Compulsory Coverage in State The insured who has insurable interest over the
Insurance Fund, Articles 168-184, Labor Code); property is only entitled to recover the amount
As a condition to granting a license to conduct of actual loss sustained. The burden is upon
business or calling affecting the public safety him to establish the amount of such loss.
or welfare (De Leon (2010)).
Social Insurance for members of the General rule: This applies only to property
Government Service Insurance System (GSIS) insurance. An insurance contingent on the life
and for the employees of the private sector of a person is not an indemnity contract
covered by the Social Security System (SSS). because the value of a life is immeasurable.
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A.4.B. PERILS OF THE SHIP Sec. 133. A constructive total loss is one which
Perils of the ship are those which cause a loss gives to a person insured a right to abandon,
which in the ordinary course of events, results: under Sec. 141.
(1) From the ordinary, natural and inevitable
action of the sea; Sec. 141. A person insured by a contract of
(2) From ordinary wear and tear of the ship; marine insurance may abandon the thing
and insured, or any particular portion thereof
(3) From the negligent failure of the ships separately valued by the policy, or otherwise
owner to provide the vessel with the proper separately insured, and recover for a total loss
equipment to convey the cargo under thereof, when the cause of the loss is a peril
ordinary conditions. insured against:
(1) If more than three-fourths thereof in value
is actually lost, or would have to be
In the absence of stipulation, the risks insured expended to recover it from the peril;
against are only perils of the sea [Go Tiaco y (2) If it is injured to such an extent as to reduce
Hermanos v. Union Ins. Society of Canton (1919)] its value more than three-fourths;
(3) If the thing insured is a ship, and the
However, in an all risk policy, all risks are contemplated voyage cannot be lawfully
covered unless expressly excepted. The burden performed without incurring either an
rests on the insurer to prove that the loss is expense to the insured of more than three-
caused by a risk that is excluded [Filipino fourths the value of the thing abandoned
Merchants Ins. Co. v. CA (1989)] or a risk which a prudent man would not
take under the circumstances; or
A.5. LOSS (4) If the thing insured, being cargo or
Loss may be total or partial. Total loss may be freightage, and the voyage cannot be
actual or constructive. performed, nor another ship procured by
the master, within a reasonable time and
Sec. 132. An actual total loss is caused by: with reasonable diligence, to forward the
(a) A total destruction of the thing insured; cargo, without incurring either an expense
(b) The irretrievable loss of the thing by to the insured of more than three-fourths
sinking, or by being broken up; the value of the thin abandoned or a risk
(c) Any damage to the thing which renders it which a prudent man would not take under
valueless to the owner for the purpose for the circumstances. But freightage cannot
which he held it; in any case be abandoned unless the ship
(d) Any other event which effectively deprives is also abandoned.
the owner of the possession, at the port of Actual total loss is the irretrievable loss of the
destination of the thing insured. thing or any damage which renders the thing
valueless to the owner for the purpose for
Sec. 134. An actual loss may be presumed from
which he held it.
the continued absence of a ship without being
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Constructive total loss or technical total loss (3) Abandonment is made by giving notice
is one in which the loss, although not actually thereof to the insurer, which may be done
total, is of such character that the insured is orally, or in writing: Provided, That if the
entitled, if he thinks fit, to treat it as total by notice be done orally, a written notice of
abandonment. such abandonment shall be submitted
within seven days from such oral notice
As to when a constructive total loss exists, [Section 145];
three rules exist: (4) Abandonment must be absolute and total.
(1) English rule, which states that there is
constructive total loss when the subject No notice of abandonment is required for
matter of the insurance, while still existent recovery of loss in cases of actual total loss.
in specie, is so damaged as not to be worth,
when repaired, the cost of the repairs; Where the information upon which an
(2) American rule, which states that there is abandonment has been made proves incorrect,
constructive total loss when it is so or the thing insured was so far restored when
damaged that the costs of repairs would the abandonment was made that there was in
exceed one-half of the value of the thing as fact no total loss, the abandonment becomes
acquired; also known as the fifty percent ineffectual.
rule;
(3) Philippine rule, which states that the A.6.C. CHARACTERISTICS
insured may not abandon the thing insured Thus, a valid abandonment has the following
unless the loss or damage is more than characteristics:
three-fourths of its value. (1) There must be an actual relinquishment by
the person insured of his interest in the
A.6. ABANDONMENT thing insured;
A.6.A. DEFINITION (2) There must be a constructive total loss;
(3) The abandonment be neither partial nor
Sec. 140. Abandonment, in marine insurance, is
conditional;
the act of the insured by which, after a
(4) It must be made within a reasonable time
constructive total loss, he declares the
after receipt of reliable information of the
relinquishment to the insurer of his interest in
loss;
the thing insured.
(5) It must be factual;
(6) It must be made by giving notice thereof to
A.6.B. CONDITIONS the insurer which may be done orally or in
Aside from the requirement under Section 141 writing; and
already mentioned: (7) The notice of abandonment must be
(1) An abandonment must be neither partial explicit and must specify the particular
nor conditional [Section 142]; cause of the abandonment.
(2) An abandonment must be made within a
reasonable time after receipt of reliable A.6.D. EFFECTS
information of the loss, but where the (1) An abandonment is equivalent to a
information is of a doubtful character, the transfer by the insured of his interest to the
insured is entitled to a reasonable time to insurer, with all the chances of recovery
make inquiry [Section 142]; and indemnity [Section 148];
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(2) If a marine insurer pays for a loss as if it (6) It must be successful (i.e., resulted in the
were an actual total loss, he is entitled to saving of the vessel and/or cargo)
whatever may remain of the thing insured, (7) It must be necessary.
or its proceeds or salvage, as if there had
been a formal abandonment (Section 149); Particular averages include damages and
(3) Upon an abandonment, acts done in good expenses caused to the vessel or her cargo,
faith by those who were agents of the which have not inured to the common benefit
insured in respect to the thing insured, and profit of all the persons interested in the
subsequent to the loss, are at the risk of vessel and her cargo. A particular average loss
the insurer, and for his benefit (Section is suffered by and borne alone by the owner of
150). the cargo or of the vessel, as the case must be.
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(2) In a valued policy, the parties are bound by Casualty insurance includes all forms of
the valuation, in the absence of fraud or insurance against loss or liability arising from
mistake, similar to marine insurance. accident or mishap excluding certain types of
loss or liability which are not within the scope
If there is a valuation, the effect shall be similar of other types of insurance such as fire, marine,
to a marine insurance policy wherein the suretyship and life. It includes, but is not
valuation is conclusive between the parties in limited to, employers liability insurance,
adjusting the loss [Sec. 158] workmens compensation insurance, public
liability insurance, motor vehicle liability
In the absence of express valuation in a fire insurance, plate glass insurance, burglary and
insurance policy, the insured is only entitled to theft insurance, personal accident and health
recover the amount of actual loss sustained insurance as written by non-life insurance
and the burden of proof is upon him to companies, and other substantially similar
establish the amount of such loss by kinds of insurance (e.g., robbery and theft
preponderance of evidence. insurance).
Where the face value of the policy is less than
the agreed valuation, then even in case of total It is governed by the general provisions
loss, the insured can only recover up to the applicable to all types of insurance plus
policys face value, which is always the stipulations in the insurance contract (Fortune
maximum limit of the insurers liability [Tan Insurance & Surety Co v. CA (1995))
Chuco v. Yorkshire Fire & Life Ins. Co. (1909)]
C.2. INTENTIONAL AND ACCIDENTAL
In an open policy, the actual loss, as INJURY DISTINGUISHED
determined, will represent the total indemnity Intentional implies the exercise of the
due the insured except only that the total reasoning faculties, consciousness and volition.
indemnity shall not exceed the total value of Where a provision of the policy excludes
the policy [Devt. Ins. Corp. v. IAC (1986)] intentional injury, it is the intention of the
person inflicting the injury that is controlling. If
C. CASUALTY INSURANCE the injuries suffered by the insured clearly
C.1. DEFINITION resulted from the intentional act of the third
person, the insurer is relieved from liability as
Sec. 176. Casualty insurance is insurance
stipulated.
covering loss or liability arising from accident
or mishap, excluding certain types of loss
Accidental means that which happens by
which by law or custom are considered as
chance or fortuitously, without intention or
falling exclusively within the scope of other
design, which is unexpected, unusual and
types of insurance such as fire or marine. It
unforeseen. The terms do not, without
includes, but is not limited to, employers
qualification, exclude events resulting in
liability insurance, motor vehicle liability
damage due to fault, recklessness or
insurance, plate glass insurance, burglary and
negligence of third parties. The concept is not
theft insurance, personal accident and health
necessarily synonymous with no fault. It may
insurance as written by non-life insurance
be utilized simply to distinguish intentional or
companies, and other substantially similar
malicious acts from negligent or careless acts
kinds of insurance.
of man.
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not more than 500 times that of the current E.3. EXAMPLES OF LIFE INSURANCE
statutory minimum daily wage in the City of POLICIES
Manila, and if the words industrial policy are (1) Ordinary or whole life policy, where the
printed upon the policy as part of the insurer agrees to pay the face value of the
descriptive matter. policy upon the death of the insured;
Distinct variations of Whole Life Policy:
(A) Ordinary Life Insurance Premiums
Industrial life insurance refers to an insurance are paid throughout the lifetime of the
which provides insurance coverage to person insured or until the person
industrial workers or people who are unable to reaches a predetermined specified age
afford insurance for bigger amounts. at which point the coverage continues
Unlike an ordinary life insurance, this kind of without the payment of additional
insurance shall not lapse after non-payment of premiums.
premiums in 3 months after the expiration of (B) Limited Payment Life Insurance
the grace period, if such non-payment is due to Premiums are paid only during a
the failure of the company to send its specified number of years or until a
representatives to the insured to collect specified event occurs.
premium. (Sec. 235 & Carale, 2014) (C) Single Premium Life Insurance the
coverage is acquired by the payment of
E.2.D. MICROINSURANCE a single premium.
(D) Joint Life Insurance coverage is
Sec. 187. Microinsurance is a financial product payable upon the first death among
or service that meets the risk protection needs two or more insured (normally
of the poor, where: purchased by business partners or
The amount of contributions, premiums, fees spouse) and paid to the survivor.
or charges, computed on a daily basis, does (E) Universal Life Insurance emphasizes
not exceed 7.5% of the current daily minimum the separation of the portion of the
wage rate for nonagricultural workers in Metro premium that is used to cover the
Manila; and insurance protection from the portion
The maximum sum of guaranteed benefits is of the premium allocated to an
not more than 1,000 times of the said current investment.
daily minimum wage rate. (F) Variable Life Insurance some amount
of death benefit provided by a variable
Sec. 188. No insurance company or mutual life insurance policy is guaranteed by
benefit association shall engage in the the insurer, but the total death benefit
business of Microinsurance unless it possesses and the cash value of the insurance
all the requirements as may be prescribed by before death depend on the
the Commissioner, who shall issue such rules investment performance of that
and regulations governing microinsurance. portion of the premium which is
allocated to a separate fund.
(G) Pure endowment policy where the
insurer pays the insured if the insured
survives a specified period. If the
insured dies within the period, the
insurer is released from liability and
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Compulsory motor vehicle liability insurance is The following clauses are relevant to
a policy of insurance or guaranty in cash or compulsory motor vehicle liability insurance:
surety bond to indemnify the death, bodily (1) Authorized driver clause is a stipulation in a
injury, and/or damage to property of a third- motor vehicle insurance which provides
party or passenger arising from the use of a that the driver, other than the insured
motor vehicle. owner, must be duly licensed to drive the
motor vehicle, otherwise the insurer is
It is a requisite for registration or renewal of excused from liability;
registration of a motor vehicle by every land (2) Theft clause is a stipulation including theft
transportation operator or owner [Section 390]. as one of the risks insured against. If there
It is the only compulsory insurance under the is such a provision and the vehicle was
Insurance Code. unlawfully taken, the insurer is liable under
the theft clause and the authorized driver
It is a species of compulsory insurance that clause does not apply. The insured can
provides for protection coverage that will recover even if the thief has no drivers
answer for legal liability for losses and license.
damages for bodily injuries or property (3) No Fault Clause is a provision required in
damage that may be sustained by another every compulsory motor vehicle liability
arising from the use and operation of motor insurance regarding claims for death or
vehicle by its owner. It applies to all vehicles injury to a passenger or third party on a
whether public or private vehicles. liability insurance policy covering the
vehicle.
To the extent that motor vehicle insurance is
compulsory, it must be a liability policy, and Any claim for death or injury to any passenger
the provision making it merely an indemnity or third party shall be paid without the
insurance contract cannot have any effect necessity of proving fault or negligence of any
[Campos (1983)] kind, provided the total indemnity in respect of
any person shall not exceed P15,000.
The insurers liability is direct and primary so
the insurer need not wait for final judgment in
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The claim shall be made against only one There is a moral hazard in removing
motor vehicle. It shall lie against the insurer of insurable interest as a requirement for the
the vehicle in which the occupant is riding, and validity of an insurance policy It allows
no other. The claimant is not free to choose the insured to have an interest in the
from which insurer he will claim the no fault destruction of the subject matter rather
indemnity. [Perla Compania de Seguros v. than in its preservation. [Myer v. Grand
Ancheta (1988)] Lodge]
(2) As a measure of limit of recovery. The
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In general, the policy owner can change the Sec. 13. Every interest in property, whether real
beneficiary without the consent of such or personal, or any relation thereto, or liability
beneficiary. However, when this right to in respect thereof, of such nature that a
contemplated peril might directly damnify the
change is expressly waived, the consent of the
beneficiary is necessary. This means that insured, is an insurable interest.
despite the waiver, he can still change the
beneficiary, provided he obtained the Sec. 14. An insurable interest in property may
consist in:
beneficiarys consent.
(1) An existing interest;
(2) An inchoate interest founded on an
B.2. INTEREST IN HEALTH INSURANCE
existing interest; or
General rule: Interest in the life or health of a
(3) An expectancy, coupled with an
person must exist when the insurance takes
existing interest in that out of which
effect (at inception), but need not exist
the expectancy arises.
thereafter or when the loss occurs.
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who planted crops has insurable interest (3) A change in interest by will or succession
over his harvest which can be expected. upon the death of the insured [Sec. 23]
(4) A transfer of interest by one of several
A mere contingent or expectant interest in partners, joint owners, or owners in
anything, not founded on an actual right to the common who are jointly insured. The
thing, nor upon any valid contract for it, is not acquiring co-owner has the same interest;
insurable. [German Insurance v. Hyman] his interest merely increases upon
acquiring other co-owners interest (Sec.
A son has no insurable interest over the 24).
property of his father because such is just a
mere expectancy and has no legal basis before C.2. TRANSFER OF POLICY
he inherits such property. Interest cannot be transferred without the
insurers consent, because the insurer has
Insurable interest in property may be based on approved the policy based on the personal
a perfected contract of sale, vesting an qualifications and insurable interest of the
equitable title even before delivery of the insured.
goods. [Filipino Merchants Ins. Co. v. CA (1989)]
When there is an express prohibition against
When the seller retains ownership only to alienation in the policy, and there is alienation,
insure that the buyer will pay its debt, the risk the contract of insurance is not merely
of loss is borne by the buyer. Insurable interest suspended but avoided.
in property does not imply a property interest
in, or a lien upon, or possession of the subject C.3. MEASURE OF INDEMNITY
matter of the insurance, and neither ownership Being a contract of indemnity, the measure of
nor a beneficial interest is requisite to the insurable interest in property is the extent to
existence of such an interest. Anyone has an which the insured might be damnified by the
insurable interest in property who derives a loss of injury thereof. The insured cannot
benefit from its existence or would suffer loss recover a greater value than that of his actual
from its destruction [Gaisano Cagayan Ins. v. loss because it would be a wagering policy
Ins. Co. of North America, (2006)] contrary to public policy and void.
C. 1. TIME OF EXISTENCE
General rule: Interest in property insured must
exist both at inception and at time of loss, but
not in the intervening period.
Exceptions:
(1) A change in interest over the thing insured
after the loss contemplated. The insured
may sell the remains without prejudice to
his right to recover [Sec. 21];
(2) A change of interest in one or more several
distinct things, separately insured by one
policy. This does not avoid the insurance as
to the others [Sec. 22];
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Also, under Section 83, in case of an over Reinsurance has been referred to as an
insurance by several insurers other than life, insurance of an insurance.
the insured is entitled to a ratable return of the
premium, proportioned to the amount by D.4.A. ORIGINAL INSURANCE
which the aggregate sum insured in all the CONTRACT AND REINSURANCE
policies exceeds the insurable value of the CONTRACT DISTINGUISHED
thing at risk. The original insurance contract is separate and
distinct from the reinsurance contract.
D.2. RULES FOR PAYMENT Insurance contract is independent from the
Section 96 enunciates the principle of reinsurance contract. Insurance contract covers
contribution which requires each insurer to indemnity against damages. Reinsurance
contribute RATABLY to the loss or damage covers indemnity against liability.
considering that the several insurances cover
the same subject matter and interest against D.4.B. REINSURANCE TREATY AND
the same peril. If the loss is greater than the POLICY DISTINGUISHED
sum total of all the policies issued, each A reinsurance treaty is an agreement between
insurer is liable for the amount of his policy. two insurance companies whereby one agrees
to cede and the other to accept reinsurance
D.3. DOUBLE AND OVER INSURANCE business pursuant to provisions specified in the
DISTINGUISHED treaty. [De Leon (2010)]
Double insurance Over insurance
A reinsurance policy is a contract of indemnity
Amount of insurance Amount of insurance
may or may not exceed exceeds the value of
one insurer makes with another to protect the
the value of the the insureds first insurer from a risk it has already assumed.
insureds insurable insurable interest
interest Reinsurance treaties and reinsurance policies
There are always There may be one or are not synonymous. Treaties are contracts for
several insurers more insurers insurance; policies are contracts of insurance.
[Philamlife v. Auditor General (1958)]
D.4. REINSURANCE
D.5. DOUBLE INSURANCE AND
REINSURANCE DISTINGUISHED
Sec. 97. A contract of reinsurance is one by Double insurance Reinsurance
which an insurer procures a third person to
insure him against loss or liability by reason of Same interest Different interest
such original insurance. Insurer remains as Insurer becomes the
the insurer insured in relation
Sec. 99. A reinsurance is presumed to be a to the reinsurer
contract of indemnity against liability, and not
Insured is a party in The original insured
merely against damage.
interest in the is not a party in the
insurance contracts reinsurance contract
Sec. 100. The original insured has no interest in
a contract of reinsurance. Property is the The original
subject matter insurer's risk is the
subject matter
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A. OFFER AND
A.1. DELAY IN ACCEPTANCE
ACCEPTANCE/CONSENSUAL Delay in acting on the application does not
An insurance contract is consensual. It is constitute acceptance even though the insured
therefore perfected by mere consent. Consent has forwarded his first premium with his
is manifested by the meeting of the offer and application. [Perez v. CA (2000)]
the acceptance upon the object or the cause
which are to constitute the contract. When there is delay in acceptance due to the
negligence of the insurance company which
There is an offer when the insured submits an takes unreasonably long time before the
application to the insurer. There is acceptance application is processed and the applicant dies,
when the insurer approves the application. The the contract is not perfected. In this case, the
insurance contract becomes effective upon insurer can be liable for damages in
payment of first premium, provided there has accordance with the tort theory. The
been an approval of the application. insurance business is imbued with public
interest, thus it is the duty of the insurer to act
A contract of insurance must be assented to by with reasonable promptness in acting on
both parties, either in person or through their applications submitted to it [Wallace v.
agents and so long as an application for Hartford Fire Insurance Co(1918)]
insurance has not been either accepted or
rejected, it is merely a proposal or an offer to The measure of damage is the face value of the
make a contract. [Perez v. CA (2000)] policy. In life insurance, the proceeds will inure
to the insureds estate and not to the
Also, according to Enriquez v. Sun Life beneficiary.
Assurance Co. (1920):
(1) Submission of application, even with A.2. DELIVERY OF POLICY
premium payment is a mere offer on the Delivery is the act of putting the insurance
part of the applicant, and does not bind policy (the physical document) into the
the insurer; possession of the insured. The delivery can be
(2) An insurance contract is also not perfected a proof of the acceptance of the insurer of the
where the applicant dies before the offer of the insured. It is not, however, a pre-
approval of his application or it does not requisite of a valid contract of insurance.
appear that the acceptance of the Actual manual delivery is not necessary for the
application ever came to the knowledge of validity of the contract. Constructive delivery
the applicant; may be sufficient.
(3) An acceptance made by letter shall not
bind the person making the offer except Actual delivery to the insured is not essential to
from the time it came to his knowledge. give the policy binding effect as long as the
insured has complied with every condition
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required of him. [New York Life Ins. Co. v. Note: Sec. 77 was amended by RA 10607. Prior
Babcock (1898)] to amendment, there were 5 exceptions to Sec.
77:
There are conflicting views as to whether (1) Life and industrial life policy [Sec. 77]
delivery to the agent of the insurance company (2) Acknowledgement in the contract that
can be considered delivery to the insured. premium has been paid [Sec. 78]
(3) Agreement to grant credit extension for
In Bradley v. New York Life Ins. (1921), the agent payment of premium [UCPB v Masagana]
of the insurance company is not the agent of (4) Agreement to grant payment of premium
the insured. Thus delivery to the agent cannot in installment basis and partial payment
be considered delivery to the insured. has been made [Makati Tuscany v. CA]
(5) When parties are barred by Estoppel
B. PREMIUM PAYMENT [UCPB v. Masagana]
An insurance premium is the agreed price for
assuming and carrying the risk, that is, the However, because of RA 10607, the exceptions
consideration paid an insurer for undertaking were limited to 3:
to indemnify the insured against the specified (1) Life and industrial life policy [Sec. 77]
peril. (2) 90 day credit extensions covered by broker
or agency agreements with licensed
General rule: No insurance policy issued or intermediaries [Sec. 77]
renewal is valid and binding until actual (3) Acknowledgment in the contract that
payment of the premium (Section 77). Any premium has been paid [Sec. 79)]
agreement to the contrary is void. [Carale, 2014]
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encashment would retroact to the date of the of default in a premium payment after three
instrument and its acceptance by the creditor full annual premiums shall have been paid:
[Vitug, Commercial Laws and Jurisprudence (1) Receive the cash surrender value
(2006)] (2) Apply such value as the premium for
an extended insurance
B.3. NON-PAYMENT OF PREMIUM (3) Apply such value as the premium for a
Non-payment of first premium, unless waived, paid-up insurance
prevents the contract from becoming binding (4) Secure from such value an automatic
notwithstanding the acceptance of the premium loan before the expiration of
application nor the issuance of the policy. the grace period.
Non-payment of subsequent premiums does not C.1. CASH SURRENDER VALUE (CSV)
affect the validity of the contracts unless, by It is the amount that the insured is entitled to
express stipulation, it is provided that the receive if he surrenders the policy and releases
policy shall in that event be suspended or shall his claims upon it. The right to CSV accrues
lapse. In case of individual life insurance, the only after three full annual premium payments.
policy holder is entitled a grace period of either The insured is given the right to claim the
30 days or one month within which payment of amount less than the reserve, reduced by
any premium after the first may be made. In surrender charge.
cases of industrial life insurance, the grace
period is four weeks, and where premiums are The cash value or cash surrender value is an
paid monthly, either 30 days or one month. amount which the insurance company holds in
trust for the insured to be delivered to him
B.4. EXCUSES FOR NON-PAYMENT upon demand. When the companys credit for
(1) Fortuitous events which render payment by advances is paid out of the cash value or cash
the insured wholly impossible will not surrender value, that value and the companys
prevent forfeiture of the policy when the liability is diminished. [Manufacturers Life Ins. v.
premium remains unpaid. In other words, it Meer (1951)]
is not an excuse.
(2) Non-payment of premiums occasioned by Rationale: The premium is uniform throughout
war causes an insurance to be not merely a lifetime, but the risk is varied (i.e., higher risk
suspended, but is completely abrogated. It when older, lower when young). Thus, the cost
would be unjust to allow the insurer to of protection is more expensive during the
retain the reserve value of the policy, which early years of the policy.
is the excess of the premiums paid over the
actual risk carried during the years when C.2. ALTERNATIVE TO CSV
the policy had been in force in time of war (1) Extended insurance/term insurance - where
[Constantino v. Asia Life Ins. Co. (1950)] the insured, after having paid three full
annual premiums, is given the right to have
C. NON-DEFAULT OPTIONS IN LIFE the policy continued in force from date of
INSURANCE default for a time either stated or equal to
Sec. 227 (f) The law requires that in case of the amount of the CSV, taken as a single
life or endowment insurance, the policy shall premium. The face value of the policy
contain a provision specifying the options to remains the same but only within the term.
which the policy holder is entitled in the event It is also called term insurance where CSV
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embodied in it. Therefore, it is clear from these contained in the contract or properly
representations that he concealed his chronic incorporated constitute warranties [Carale,
heart ailment and diabetes. [Florendo v. Philam 2014].
Plans (2012)].
A warranty may also be made by the insurer.
Concealment Misrepresentation
Who may commit Sec. 68. A warranty may relate to the past, the
present, the future, or to all of these.
May be committed Committed only by
by either insured or insured.
insurer Sec. 69. No particular form of words is
necessary to create a warranty.
Act involved
Passive form Active form
C.1. KINDS OF WARRANTIES
Insured withholds Insured makes (1) Express warranty, which is an agreement
information of erroneous contained in the policy or clearly
material facts from statements of facts incorporated therein as part thereof
the insurer; he with the intent of relating to the person or thing insured or to
maintains silence inducing the insurer the risk as a fact [Sec. 71];
when he ought to to enter into the (2) Implied warranty, which is deemed
speak insurance contract included in the contract although not
Materiality expressly mentioned (e.g., implied
warranty of seaworthiness of the vessel in
Determined by the same rules
marine insurance and implied warranty not
Effect to alter the circumstances of the thing
Same effects on the part of the insured; insured);
insurer has right to rescind (3) Affirmative warranty, which asserts the
existence of a fact or condition at the time
Injured party is entitled to rescind a
it is made;
contract of insurance on ground of
(4) Promissory warranty or executory warranty,
concealment or false representation,
which is one where the insured stipulates
whether intentional or not.
that certain facts or conditions pertaining
to the risk shall exist or that certain things
C. BREACH OF WARRANTIES with reference thereto shall be done or
Warranty is a statement or promise by the omitted. It is in the nature of a condition
insured set forth in the policy itself or subsequent [Sections 72 and 73].
incorporated in it by proper reference, the
untruth or nonfulfillment of which in any C.2. EFFECT
respect and without reference to whether the
insurer was in fact prejudiced by such untruth C.2.A. MATERIAL WARRANTY
or non-fulfillment, renders the policy voidable
Sec. 74. The violation of a material warranty, or
by the insurer [Vance (1951)].
other material provision of the policy, on the
part of either the insured or insurer, entitles the
Statements or promises agreed upon by both
other to rescind.
parties to the insurance contract which are
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demand or request for payment [De Leon insurance, or when the same is stipulated in
(2010)]. the policy.
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insurance company and its agent. The same is such insurance company, its officers and agents,
not covered by the term doing or transacting and no new business shall thereafter be done by
insurance business under Section 2, neither is it such company or for such company by its
covered by Section 439, which grants the agents in the Philippines while such suspension,
Commissioner adjudicatory powers [Sundiang revocation, or disability continues or until its
and Aquino (2013)]. authority to do business is restored by the
Commissioner.
B. REVOCATION OF CERTIFICATE OF
AUTHORITY Before restoring such authority, the
The Certificate of Authority issued to the Commissioner shall require the company
domestic or foreign company by the concerned to submit to him a business plan
Commission may be revoked or suspended by showing the companys estimated receipts and
the Insurance Commissioner for any of the disbursements, as well as the basis therefor, for
following grounds: the next succeeding three years.
(1) The company is in an unsound condition;
(2) That it has failed to comply with the C. LIQUIDATION OF INSURANCE
provisions of law or regulations obligatory COMPANY
upon it; If the company is determined by the
(3) That its condition or method of business is Commissioner to be insolvent or cannot resume
such as to render its proceedings hazardous business, he shall, if public interest requires,
to the public or its policyholders; order its liquidation [Section 256].
(4) That its paid-up capital stock, in the case of
a domestic stock corporation, or its This should be distinguished from a situation
available cash assets, in the case of a where a conservator is appointed when the
domestic mutual company, or its security Commissioner finds that a company is in a state
deposits, in the case of a foreign company, of continuing inability or unwillingness to
is impaired or deficient; maintain a condition of solvency or liquidity
(5) That the margin of solvency required of adequate to protect the policyholders and
such company is deficient. creditors. The conservator will take charge of
[Section 254] the management of the insurance company
[Section 255].
The Commissioner is authorized to suspend or
revoke all certificates of authority granted to
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MERCANTILE LAW
TRANSPORTATION LAWS
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Common carrier Private carrier It is not necessary that the carrier be issued a
certificate of public convenience [Loadstar
Availability
Shipping Co., Inc. v. CA (1999)].
Holds himself out in Agrees in some With respect to the issuance of a certificate of
common, that is, to special case with public convenience, the issue of kabit system
all persons who some private arises. It is an arrangement whereby a person
choose to employ individual to carry who has been granted a certificate of
him, as ready to for hire convenience allows another person who owns
carry for hire motor vehicles to operate under such franchise
Binding effect for a fee [Lita Enterprises, Inc. v. IAC (1984)].
The kabit system is invariably recognized as
Bound to carry all Not bound to carry
being contrary to public policy and therefore
who offer and for any reason, such
void and inexistent under Art. 1409. Thus, for
tender reasonable goods as it is
the safety of passengers and the public, the
compensation for accustomed to
registered owner of the vehicle is not allowed to
carrying them carry, unless it
prove that another person has become the
enters into a special
owner so that he may be thereby relieved of
agreement to do so
responsibility [Lim v. CA (2002)].
Diligence required
Extraordinary Ordinary diligence Ratio: One of the primary factors considered in
diligence the granting of a certificate of public
convenience for the business of public
Governing law
transportation is the financial capacity of the
Civil Code; Code of Law on obligations holder of the license, so that liabilities arising
Commerce and and contracts from accidents may be duly compensated. The
special laws, if not kabit system renders illusory such purpose and,
regulated by the worse, may still be availed of by the grantee to
Civil Code (Art. escape civil liability caused by a negligent use of
1766); law of the a vehicle owned by another and operated under
country to which the his license. If a registered owner is allowed to
goods are to be escape liability by proving who the supposed
transported, if owner of the vehicle is, it would be easy for him
regarding liability to transfer the subject vehicle to another who
for loss, destruction, possesses no property with which to respond
or deterioration of financially for the damage done [Dizon v.
goods Octavio (1955)].
Regulation
However, one who has availed of the kabit
A public service, Not subject to
system is not precluded from filing for damages
therefore subject to regulation as a
against another who caused the injury, as the
provisions common carrier
policy against the kabit system will not be
governing common
defeated by giving such person standing to sue.
carriers and public
[Lim v CA (2002))]
utilities.
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II. Vigilance over Goods (1) Whether or not the cause of the loss,
destruction, or deterioration is included
A. LIABILITY, IN GENERAL under Art. 1734;
The law of the country to which the goods are to (2) If not, whether or not the common carrier
be transported shall govern the liability of the exercised extraordinary diligence.
common carrier for their loss, destruction or
deterioration [Art. 1753]. Thus, in De Guzman v. CA (1988), it was held
that hijacking, not being included in Art. 1734,
Under Philippine law, the liability of the must be dealt with under the provisions of Art.
common carrier with respect to vigilance over 1735, and thus, the common carrier is presumed
goods, in general, are as follows: to have been at fault or negligent.
(1) Common carriers are responsible for the
loss, destruction, or deterioration of the B.1. NATURAL DISASTER OR CALAMITY
goods [Art. 1734]. In fact, they are liable Requisites:
even in those cases where the cause of the (1) The natural disaster must have been the
loss or damage is unknown [Agbayani proximate and only cause of the loss;
(1987)]. (2) The common carrier must exercise due
(2) Moreover, if the goods are lost, destroyed, diligence to prevent or minimize the loss
or deteriorated, common carriers are before, during and after the occurrence of
presumed to have been at fault or to have the flood, storm or natural disaster [Art.
acted negligently [Art. 1735]. 1739];
(3) The common carrier must not have
B. EXEMPTING CAUSES negligently incurred delay [Art. 1740];
Common carriers are not responsible for the
loss, destruction, or deterioration of the goods if In order that a common carrier may be absolved
the same is due to any of the following causes from liability where the loss, destruction or
only: deterioration of the goods is due to a natural
(1) Flood, storm, earthquake, lightning, or disaster or calamity, it must be shown that such
other natural disaster or calamity; natural disaster or calamity was the proximate
(2) Act of the public enemy in war, whether and only cause of the loss; there must be an
international or civil; entire exclusion of human agency from the
(3) Act of omission of the shipper or owner of cause of the injury of the loss [Philippine
the goods; American General Insurance Co., Inc. v. MGG
(4) The character of the goods or defects in the Marine Services, Inc. (2002)].
packing or in the containers; Moreover, even in cases where a natural
(5) Order or act of competent public authority disaster is the proximate and only cause of the
[Art. 1734]. loss, a common carrier is still required to
exercise due diligence to prevent or minimize
In all other cases of loss, destruction, or loss before, during and after the occurrence of
deterioration, the common carrier is presumed the natural disaster, for it to be exempt from
to have been at fault or to have acted liability under the law for the loss of the goods
negligently, unless they prove that they [Art. 1739].
observed extraordinary diligence [Art. 1735]. Fire may not be considered a natural disaster or
calamity. This must be so as it arises almost
The analysis, therefore, is two-pronged: invariably from some act of man or by human
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means. It does not fall within the category of an notwithstanding such condition, it is not
act of God unless caused by lightning or by relieved of liability for loss or injury resulting
other natural disaster or calamity. It may even therefrom [Southern Lines v. CA (1962)].
be caused by the actual fault or privity of the
carrier [Eastern Shipping Lines v. IAC (1987)]. B.5. ORDER OF COMPETENT AUTHORITY
Requisites:
B.2. ACT OF PUBLIC ENEMY (1) There must be an order or act of competent
Requisites: public authority through which the goods
(1) The act of the public enemy was committed are seized or destroyed [Art. 1734];
either in an international or civil war [Art. (2) The said public authority must have had the
1734]; power to issue the order [Art. 1743].
(2) The act of the public enemy must have been
the proximate and only cause; The intervention of the municipal officials was
(3) The common carrier must exercise due not of a character that would render impossible
diligence to prevent or minimize the loss the fulfillment by the carrier of the obligation. A
before, during and after the act of the public carrier is not duty bound to obey an illegal order
enemy causing the loss, destruction or (of a mayor) to dump into the sea the scrap iron.
deterioration of the goods [Art. 1739]. There is absence of sufficient proof that the
issuance of the order was attended with such
B.3. ACT OR OMISSION OF SHIPPER OR force or intimidation as to completely
OWNER overpower the will of the carriers employees
[Ganzon v. CA (1988)).
The act or omission of the shipper must have
been the proximate and only cause of the loss, B.6. FORCE MAJEURE
destruction, or deterioration of the goods. Force majeure in general, has also been
If the shipper or owner merely contributed to invoked as an exempting cause based on Art.
the loss, destruction or deterioration of the 1174, which states that no person shall be
goods, the proximate cause being the responsible for a fortuitous event which could
negligence of the common carrier, the latter not be foreseen, or which, though foreseen, was
shall be liable for the damages, which shall, inevitable.
however, be equitably reduced [Art. 1741].
A fortuitous event has the following
B.4. CHARACTER OF THE GOODS characteristics:
Requisites: (1) The cause of the unforeseen and
(1) The loss, destruction, or deterioration of the unexpected occurrence, or the failure of the
goods is due to the character of the goods debtor to comply with his obligations, must
or defects in the packing or in the containers be independent of human will;
[Art. 1739]; (2) It must be impossible to foresee the event
(2) The common carrier must exercise due which constitutes the caso fortuito, or if it
diligence to forestall or lessen the loss [Art. can be foreseen, it must be impossible to
1741]. avoid;
(3) The occurrence must be such as to render it
If the fact of improper packing is known to the impossible for the debtor to fulfill his
carrier or its servants or apparent upon ordinary obligation in a normal manner; and
observation, but it accepts the goods
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(4) The obligor must be free from any D. DURATION OF LIABILITY FOR
participation in the aggravation of the injury GOODS
resulting to the creditor. A contract of transportation is consensual in
nature; therefore it is perfected upon the
There must be an entire exclusion of human meeting of the minds of the parties [Art. 1305].
agency from the cause of injury or loss.
However, the responsibility to exercise
Moreover, a common carrier may not be extraordinary diligence begins from the time the
absolved from liability in case of force majeure goods are unconditionally placed in the
or fortuitous event alone. The common carrier possession of and received by the carrier for
must still prove that it was not negligent in transportation [Art. 1736].
causing the death or injury resulting from an
accident [Yobido v. CA (1997)]. The carriers responsibility terminates in any of
the following cases:
Loss of a ship and of its cargo, in a wreck due to (1) When the goods are delivered actually or
accident or force majeure must, as a general constructively by the carrier to the
rule, fall upon their respective owners, except in consignee or to the person who has a right
cases where the wrecking or stranding of the to receive them [Art. 1736];
vessel occurred through the malice, (2) When the goods are temporarily unloaded
carelessness, or lack of skill on the part of the or stored in transit by reason of the exercise
captain or because the vessel put to sea is of the shipper or owner of his right of
insufficiently repaired and prepared. stoppage in transitu;
(3) When the consignee has been advised of
In order that the exemption due to force the arrival of the goods at the place of
majeure would apply, the carrier must prove destination and has had reasonable
that the loss or destruction of the merchandise opportunity to remove them or dispose of
was due to accident and force majeure and not them from the warehouse of the carrier at
to fraud, fault, or negligence on the part of the the place of destination [Art. 1738].
captain or owner of the ship [Tan Chiong Sian v.
Inchausti (1912)].
D.1. DELIVERY OF GOODS TO COMMON
CARRIERS
C. CONTRIBUTORY NEGLIGENCE Under Art. 1736, delivery means unconditionally
The liability of the common carrier shall be placing the goods in the possession of the
equitably reduced when the loss, destruction, or carrier and the carrier receiving them for
deterioration of the goods when: transportation.
(1) The negligence of the common carrier was Thus, if the common carrier received the
the proximate cause thereof; and goods not for transportation but only for
(2) The shipper or owner merely contributed to safekeeping, then the duty of extraordinary
such loss, destruction, or deterioration [Art. diligence has not yet started.
1741].
Unconditionally placing the goods in the
possession of the carrier means the shipper
cannot get them back from the common carrier
at will.
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The liability of the carrier as common carrier may be said that the carrier loses control of the
begins with the actual delivery of the goods for goods because of a custom regulation and it is
transportation and not merely with the formal unfair that it be made responsible for what may
execution of a receipt or bill of lading; the happen during the interregnum [Lu Do v.
issuance of a bill of lading is not necessary to Binamira (1957)].
complete delivery and acceptance. Even where
it is provided by statute that liability D.3. TEMPORARY UNLOADING OR
commences with the issuance of the bill of STORAGE
lading actual delivery and acceptance are The common carriers duty to observe
sufficient to bind the carrier [Cia. Maritima v. Ins. extraordinary diligence over the goods remains
Co. of North America (1964)]. in full force and effect even when they are
temporarily unloaded or stored in transit, unless
D.2. ACTUAL OR CONSTRUCTIVE the shipper or owner has made use of the right
DELIVERY of stoppage in transitu [Art. 1737].
The extraordinary responsibility of the common
carrier ends when, subject to Art. 1738, the General rule: Extraordinary diligence over the
goods are delivered actually or constructively by goods remains even when the goods are
the carrier to: temporarily unloaded or stored in transit.
(1) The consignee; or
(2) The person who has a right to receive them Exception: The duty to observe such diligence
(Art. 1736), such as agents, brokers, and the ceases when shipper or owner made use of the
like. right of stoppage in transitu.
Stoppage in transitu is the act by which the
Art. 1738 provides that the extraordinary liability unpaid vendor of goods stops their progress
of the common carrier continues to be operative and resumes possession of them constructively
even during the time the goods are stored in a while they are in the course of transit from him
warehouse of the carrier at the place of to the purchaser, and not yet actually delivered
destination, until the consignee has: to the latter [Agbayani (1987)].
(1) Been advised of the arrival of the goods;
and Basis: Under Art. 1530, when the buyer of the
(2) Had reasonable opportunity thereafter to goods becomes insolvent, the unpaid seller who
remove them or otherwise dispose of them. has parted with the possession of the goods at
any time while they are in transit, may resume
Delivery of the cargo to the customs authorities the possession of the goods as he would have
is not delivery to the consignee or to the person had if he had never parted with the possession.
who has a right to receive them as
contemplated in Art. 1736 because in such case When the right of stoppage in transitu is
the goods are still in the hands of the exercised, the common carrier holds the goods
government and the owner cannot exercise in the capacity of an ordinary bailee or
dominion over them. However, the parties may warehouseman upon the theory that the
agree to limit the liability of the carrier exercise of the right of stoppage in transitu
considering that the goods still have to go terminates the contract of carriage. Hence, only
through the inspection of the customs ordinary diligence is required [Agbayani (1987)].
authorities before they are actually turned over
to the consignee. This is a situation where it
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E. STIPULATION FOR LIMITATION OF those conditions such that he had fairly and
LIABILITY freely agreed to those conditions [Shewaram v.
There are two possible stipulations limiting the PAL (1966)].
liability of the common carrier:
(1) Stipulation limiting the common carriers While a passenger may not have signed the
liability as to the diligence required; and plane ticket, he is nevertheless bound by the
(2) Stipulation limiting the common carriers provision thereof; such provisions have been
liability as to the amount of liability. held to be part of the contract of carriage and
valid and binding upon the passenger
An agreement limiting the common carriers regardless of the latters lack of knowledge or
liability for delay on account of strikes or riots is assent to the regulation. It is what is known as a
also valid [Art. 1748]. contract of adhesion wherein one party imposes
a ready-made form of contract on the other. The
one who adheres to the contract is in reality free
E.1. AS TO DILIGENCE REQUIRED
to reject it entirely. A contract limiting liability
A stipulation between the common carrier and
upon an agreed valuation does not offend
the shipper or owner limiting the liability of the
against the policy of the law forbidding one
former for the loss, destruction, or deterioration
from contracting against his own negligence
of the goods to a degree less than extraordinary
[Ong Yiu v. CA (1979)].
diligence shall be valid, provided it be:
1. In writing, signed by the shipper or
owner;
E.3. EFFECT OF STIPULATIONS
2. Supported by a valuable consideration The effect of these stipulations is subject to the
other than the service rendered by the following provisions:
common carrier; and (1) An agreement limiting the common carriers
3. Reasonable, just and not contrary to liability may be annulled by the shipper or
owner if the common carrier refused to carry
public policy [Art. 1744].
the goods unless the former agreed to such
stipulation [Art. 1746].
E.2. AS TO AMOUNT OF LIABILITY
(2) If the common carrier, without just cause,
A stipulation that the common carriers liability
delays the transportation of the goods or
is limited to the value of the goods appearing in
changes the stipulated or usual route, the
the bill of lading, unless the shipper or owner
contract limiting the common carriers
declares a greater value, is binding [Art. 1749].
liability cannot be availed of in case of the
loss, destruction, or deterioration of the
A contract fixing the sum that may be recovered
goods [Art. 1747]. The limitation may be
by the owner or shipper for the loss, destruction
availed of if the delay or change of route
or deterioration of the goods is valid if:
was due to a just cause.
(1) It is reasonable and just under the
(3) The fact that the common carrier has no
circumstances; and
competitor along the line or route, or a part
(2) It has been fairly and freely agreed upon
thereof, to which the contract refers shall be
[Art. 1750].
taken into consideration on the question of
whether or not a stipulation limiting the
The fact that the conditions are printed at the
common carriers liability is reasonable, just
back of the ticket stub in letters so small that
and in consonance with public policy [Art.
they are hard to read would not warrant the
1751].
presumption that the [shipper] was aware of
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F.2. BAGGAGE IN POSSESSION OF (2) The common carrier cannot free himself
PASSENGERS from responsibility by posting notices to the
As to baggage other than checked-in baggage, effect that he is not liable for the articles
they are governed by Arts 1998, and 2000-2003, brought by the passenger.
concerning the responsibility of hotel-keepers (3) Any stipulation whereby the responsibility
[Art. 1754]. of the common carrier as set forth in Articles
Art. 1998, as applied by analogy, the baggage 1998-2001 is suppressed or diminished
of passengers in their personal custody or in shall be void [Art. 2003].
that of their employees, while being transported,
are regarded as necessary deposits. The
common carriers are responsible as depositaries,
III. Safety of Passengers
provided that:
(1) Notice was given to them, or to their A. LIABILITY, IN GENERAL
employees, of the effects brought by the Under Philippine law, the liability of the
passengers; and common carrier with respect to the safety of
(2) The passengers take the precautions which passengers, in general, are as follows:
the common carrier advised relative to the (1) A common carrier is bound to carry the
care and vigilance of their baggage. passengers safely as far as human care and
foresight can provide, using the utmost
In case of loss or injury to the baggage of diligence of very cautious persons, with a
passengers in their personal custody, or in that due regard for all the circumstances [Art.
of their employees, while being transported, the 1755].
carrier is liable if the loss or injury is caused by: (2) In case of death of or injuries to passengers,
(1) His servants; common carriers are presumed to have
(2) His employees; been at fault or to have acted negligently,
(3) Strangers [Art. 2000]; or unless they prove that they observed
(4) A thief or robber done without the use of extraordinary diligence [Art. 1756].
arms or irresistible force [Art. 2001].
B. VOID STIPULATIONS
The carrier is not liable if loss or injury is caused General rule: The responsibility of a common
by: carrier for the safety of passengers cannot be
(1) Force majeure [Art. 2000); dispensed with or lessened by stipulation by the
(2) Theft or robbery with the use of arms or posting of notices, by statements on tickets, or
irresistible force [Art. 2001); otherwise [Art. 1757].
(3) The acts of the passenger, his family,
servants, or visitors; Exception: When a passenger is carried
(4) The character of the baggage [Art. 2002). gratuitously, a stipulation limiting the common
carriers liability for negligence is valid.
The following provisions also figure in
determining the liability of the common carrier: Exception to the exception: Even when a
(1) The fact that passengers are constrained to passenger is carried gratuitously, a stipulation
rely on the vigilance of the common carrier limiting the common carriers liability for willful
shall be considered in determining the acts or gross negligence is invalid.
degree of care required of him [Art. 2000).
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The reduction of fare does not justify any (a) The right to remain on board;
limitation of the common carriers liability [Art. (b) If the delay is not due to a fortuitous
1758]. event or force majeure, with the right to
be furnished with food for the account
C. DURATION OF LIABILITY of the vessel;
As in the contract of carriage for goods, the (c) If the delay should exceed ten days:
perfection of the contract of carriage of (i) Passengers requesting the same
passengers does not necessarily coincide with shall be entitled to the return of the
the commencement of the duty of extraordinary fare; and
diligence. It may occur at the same time or later. (ii) If it is due exclusively to the fault of
the captain or ship agent, they may
Based on jurisprudence, the duty that the also demand indemnity for losses
carrier of passengers owes to its patrons and damages.
extends to persons boarding the cars as well as
those alighting therefrom [Del Prado v. Manila A vessel exclusively devoted to the
Railroad (1929)]. transportation of passengers must take them
directly to the port or ports of destination, no
This is also reflected in Art. 17, Warsaw matter what the number of passengers may be,
Convention, which applies to international air making all the stops indicated in its itinerary.
carriage. It provides that the liability of a
common carrier for injury to the passenger lasts C.1. WAITING FOR CARRIER OR
from embarkation to disembarkation, including BOARDING OF CARRIER
the period when the passenger is on board the As to the commencement of the duty of the
aircraft. common carrier, in Del Prado v. Manila Railroad
(1929), it was held that the duty extends to
In maritime commerce, Art. 698, Code of persons boarding the cars as well as those
Commerce relates to the period of the voyage: alighting therefrom.
(1) In case a voyage already begun should be Thus, it is the duty of common carriers of
interrupted: passengers to stop their conveyances at a
(a) The passengers shall be obliged to pay reasonable length of time in order to afford
the fare in proportion to the distance passengers an opportunity to board and enter,
covered; and and they are liable for injuries suffered by
(b) If the interruption is due to a fortuitous boarding passengers resulting from the sudden
event, without right to recover for losses starting up or jerking of their conveyances while
and damages; if caused by the captain they are doing so [Dangwa Transportation v. CA
exclusively, with a right to indemnity. (1991)).
(2) If the interruption should be caused by the In this connection, however, a person
disability of the vessel, and a passenger boarding a moving car must be taken to assume
should agree to await the repairs: the risk of injury from boarding the car under
(a) He may not be required to pay any the conditions open to his view, but he cannot
increased price of passage; but fairly be held to assume the risk that the
(b) His living expenses during the stay shall motorman, having the situation in view, will
be for his own account. increase the peril by accelerating the speed of
(3) In case of delay in the departure of the the car before he is planted safely on the
vessel, the passengers have: platform [Del Prado v. Manila Railroad (1929)].
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is not based on quasi-delict, but on culpa accord the latter a cause of action against the
contractual. However, there must be a carrier. The negligence for which a common
reasonable connection between the act and the carrier is held responsible is the negligent
contract of carriage. omission by the carriers employees to prevent
the tort from being committed when the same
Note: The employee must be on duty at the time could have been foreseen and prevented by
of the act. them. Further, when the violation of the
contract is due to the willful acts of strangers,
It is enough that the assault happens within the as in the instant case, the degree of care
course of the employees duty. It is no defense essential to be exercised by the common carrier
for the carrier that the act was done in excess of for the protection of its passenger is only that of
authority or in disobedience of the carriers a good father of a family [Pilapil v. CA (1989)].
orders. The carriers liability here is absolute in
the sense that it practically secures the D.3. MANUFACTURERS OF EQUIPMENT
passengers from assaults committed by its own While the carrier is not an insurer of the safety
employees. of the passengers, it should nevertheless be
held answerable for the flaws of its equipment,
Accordingly, it is the carriers strict obligation to if such flaws were discoverable. The rationale
select its drivers and similar employees with for the common carriers liability for
due regard not only to their technical manufacturing defects is the fact that the
competence and physical ability, but also, no passenger has neither choice nor control over
less important, to their total personality, the carrier in the selection and use of the
including their patterns of behavior, moral equipment and appliances in use by the carrier.
fibers, and social attitude [Maranan v. Perez Having no privity whatever with the
(1967)]. manufacturer or vendor of the defective
equipment, the passenger has no remedy
D.2. OTHER PASSENGERS AND against him [Necesito v. Paras (1958)].
STRANGERS
A common carrier is responsible for injuries E. CONTRIBUTORY NEGLIGENCE
suffered by a passenger on account of the The passenger must observe the diligence of a
willful acts or negligence of other passengers or good father of a family to avoid injury to himself
of strangers, if the common carriers employees [Art. 1762].
through the exercise of the diligence of a good
father of a family could have prevented or The contributory negligence of the passenger
stopped the act or omission [Art. 1763]. does not bar recovery of damages for his death
or injuries, if the proximate cause thereof is the
Note: The law speaks of injuries suffered by the negligence of the common carrier, but the
passenger but not death. However, there amount of damages shall be equitably reduced
appears to be no reason why the common [Art. 1762].
carrier should not be held liable under such
circumstances. The word injuries should be It is negligence per se for a passenger on a
interpreted to include death [Agbayani (1987)]. railroad to voluntarily or inadvertently protrude
his arm, hand, elbow, or any other part of his
Under Art. 1763, a tort committed by a stranger body through the window of a moving car
which causes injury to a passenger does not beyond the outer edge of the window or outer
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surface of the car, so as to come in contact with (1) In case the common carrier acted in good
objects or obstacles near the track; no recovery faith:
can be had for an injury which but for such (a) The natural and probable consequence
negligence would not have been sustained of the breach of the obligation; and
[Isaac v. A. L. Ammen Transportation (1975)]. In (b) Those which the parties have foreseen
this case, the negligence of the passenger was or could have reasonably foreseen at
not contributory, but was the proximate cause the time the obligation was constituted;
of the injury. (2) In case of fraud, bad faith, malice or wanton
attitude, all damages which may be
F. EXTENT OF LIABILITY FOR reasonably attributed to the non-
DAMAGES performance of the obligation.
Damages recoverable from common carriers,
both in cases of carriage of passengers and In the absence of a showing that common
goods, shall be awarded in accordance with carriers attention was called to the special
Title XVIII concerning Damages. circumstances requiring prompt delivery of a
passengers luggage, the common carrier
Art. 2206, on liability, in case of death, for loss cannot be held liable for the cancellation of
of earning capacity, support, and moral passengers contracts [for exhibition of films] as
damages for mental anguish, shall also apply to it could not have foreseen such an eventuality
the death of a passenger caused by the breach when it accepted the luggage for transit [Pan-
of contract by a common carrier [Art. 1764]. Am World Airways v. IAC (1988)].
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amounts to bad faith or fraud which entitles the litigation may be recovered in the following
passenger to the award of moral damages in cases:
accordance with Art. 2220 [Ortigas v. Lufthansa (1) When exemplary damages are awarded;
(1975)]. (2) When the common carriers act or omission
has compelled the plaintiff to litigate with
Willful and deliberate overbooking on the part third persons or to incur expenses to protect
of the airline carrier constitutes bad faith. Under his interest;
Section 3, Economic Regulations No. 7 of the (3) Where the common carrier acted in gross
Civil Aeronautics Board, overbooking, which and evident bad faith in refusing to satisfy
does not exceed ten percent, is not considered the plaintiffs valid, just and demandable
as deliberate and therefore does not amount to claim;
bad faith [United Airlines v. CA (2001)]. (4) In any other case where the court deems it
just and equitable that attorneys fees and
F.3. EXEMPLARY DAMAGES expenses of litigation should be recovered.
In a contract of carriage, exemplary damages
may be awarded if the common carrier acted in
wanton, fraudulent, reckless, oppressive, or
IV. Bill of Lading
malevolent manner [Art. 2232].
A. DEFINITION
F.4. NOMINAL, TEMPERATE, AND Bill of lading a written acknowledgement,
LIQUIDATED DAMAGES signed by the master of a vessel or other
Nominal damages are adjudicated in order that authorized agent of the carrier, that he has
a right of the plaintiff, which has been violated received the described goods from the shipper,
by the defendant, may be vindicated or to be transported on the expressed terms to the
recognized, not for the purpose of indemnifying described place of destination, and to be
the plaintiff for any loss suffered by him [Art. delivered there to the designated consignee or
2221]. It may be awarded in case of breach of parties [70 Am. Jur. 2d 924].
contract of carriage and in every case where any
property right has been invaded [Art. 2222]. It is not, however, indispensable for the creation
of a contract of carriage. [Cia. Maritima v. Ins.
Temperate or moderate damages, which are Co. of North America (1964)].
more than nominal but less than compensatory
damages, may be recovered when some In the absence of a bill of lading, disputes shall
pecuniary loss has been suffered but its amount be determined by the legal proofs which the
cannot, from the nature of the case, be proved parties may present in support of their
with certainty [Art. 2224]. respective claims, according to the general
provisions established in the Code of Commerce
Liquidated damages are those damages agreed for commercial contracts [Art. 354, Code of
upon by the parties to a contract, to be paid in Commerce].
case of breach thereof [Art. 2226].
The bill of lading becomes effective usually
F.5. ATTORNEYS FEES upon its delivery to and acceptance by the
Under Art. 2208, as applicable to a contract of shipper [Aquino, Essentials of Transportation &
carriage, attorneys fees and expenses of Public Utilities Law (2011)].
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In case of dispute as to the condition of the channels before it could be finalized and
goods, the same shall be examined by experts endorsed by the institution to the claims
appointed by the parties, and the third one, in department of the shipping company.
case of disagreement, appointed by the judicial
authority. No claim whatsoever shall be admitted against
If the persons interested should not agree with the carrier with regard to the condition in which
the report, said judicial authority shall order the the goods transported were delivered:
deposits of the merchandise in a safe (1) After the periods mentioned have elapsed;
warehouse, and the parties interested shall or
make use of their rights in the proper manner. (2) After the transportation charges have been
[Art. 367, Code of Commerce]. paid.
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transfer is a contract of affreightment (time or vessel [Litonjua Shipping Co., Inc. v. National
voyage charter party) or not a charter party at Seamen Board (1989)].
all.
B. LIABILITY OF SHIP OWNERS AND
Although a charter party may transform a SHIPPING AGENTS
common carrier into a private one, the same, The ship owner has possession, control and
however, is not true in a contract of management of the vessel and the consequent
affreightment on account of the distinctions right to direct her navigation and receive freight
between a contract of affreightment and a earned and paid, while his possession
demise or bareboat charter [Puromines, Inc. v. continues; he is the person who is primarily
CA (1993)]. liable for damages sustained in the operation of
the vessel, based on the provisions of the Code
Note: In a bareboat or demise charter, the of Commerce.
common carrier is converted to private carrier.
A ship agent is the person entrusted with the
The charterer, to whom the owner of the vessel provisioning of a vessel, or who represents her
relinquishes, completely and exclusively, the in the port in which she happens to be [Art. 595,
possession, command and navigation of the Code of Commerce].
vessel, by virtue of a demise charter, is
considered the owner pro hac vice. He mans The ship agent, even though he is not the owner,
and equips the vessel and assumes all is liable in every way to the creditor for losses
responsibility for navigation, management and and damages, without prejudice to his right
operation. He thus acts as the owner of the against the owner, the vessel and its equipment
vessel in all important aspects during the and freight [Aquino (2011)].
duration of the charter [Puromines, Inc. v. CA
(1993)].
B.1. LIABILITY FOR ACTS OF CAPTAIN
(1) The owner of a vessel and the agent shall be
A.2. TIME CHARTER civilly liable for the acts of the captain and
Time charter a contract for the use of a vessel for the obligations contracted by the latter
for a specified period of time or for the duration to repair, equip, and provision the vessel
of one or more specified voyages. [Art. 586, Code of Commerce].
(2) The captain shall be liable to the agent, and
In this case, the owner of a time-chartered the latter to third persons:
vessel retains possession and control through (a) For all the damages suffered by the
the master and crew, who remain his employees. vessel and his cargo by reason of want
What the time charterer acquires is the right to of skill or negligence on his part;
utilize the carrying capacity and facilities of the (b) For all the thefts committed by the crew,
vessel and to designate her destinations during reserving his right of action against the
the term of the charter [Litonjua Shipping Co., guilty parties;
Inc. v. National Seamen Board (1989)]. (c) For the losses, fines, and confiscations
imposed on account of violation of the
A.3. VOYAGE OR TRIP CHARTER laws and regulations of customs, police,
In a voyage charter, the vessel is leased for a health, and navigation;
single or particular voyage. The master and (d) For the losses and damages caused by
crew remain the employ of the owner of the mutinies on board the vessel, or by
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part owner may exempt himself from this C. ACCIDENTS AND DAMAGES IN
liability by the abandonment before a MARITIME COMMERCE
notary of the part of the vessel belonging to
C.1. AVERAGES
him [Art. 590, Code of Commerce].
The following shall be considered averages:
(3) In case of collision, the liability of the ship
(1) All extraordinary or accidental expenses
owner shall be understood as limited to the
incurred during the navigation for the
value of the vessel with all her
preservation of the vessel or cargo, or both;
appurtenances and all the freight earned
(2) All damages or deterioration the vessel may
during the voyage [Art. 837, Code of
suffer from the time she puts to sea from
Commerce].
the port of departure until she casts anchor
(4) If the vessel and her freight should be
in the port of destination, and those
totally lost, by reason of capture or wreck,
suffered by the merchandise from the time
all rights of the crew to demand any wages
it is loaded in the port of shipment until it is
whatsoever shall be extinguished, as well as
unloaded in the port of consignment [Art.
the agent for the recovery of the advances
806, Code of Commerce].
made [Art. 643, Code of Commerce].
There are two kinds of averages:
If the ship owner or agent may in any way be
(1) Particular or simple average; and
held civilly liable at all for injury to or death of
(2) Gross or general average.
passengers arising from the negligence of the
captain in cases of collisions or shipwrecks, his
I. SIMPLE AVERAGE
liability is merely co-extensive with his interest
Particular or simple averages shall include all
in the vessel such that a total loss thereof
damages and expenses caused to the vessel or
results in its extinction. This is based on the
cargo that did not inure to the common benefit
exclusively real and hypothecary nature of
and profit of all persons interested in the vessel
maritime law, which operates to limit such
and her cargo [Art. 809, Code of Commerce].
liability to the value of the vessel, or to the
insurance thereon, if any. [Yangco v. Laserna
The owner of the goods which gave rise to the
(1941)]
expense or suffered the damage shall bear this
average [Art. 810, Code of Commerce].
Exceptions:
(1) Claims under the Workmens Compensation
Act [Abueg v. San Diego];
II. GENERAL AVERAGE
(2) Expenses for repairing, provisioning and General or gross averages shall include all the
equipping the vessel; damages and expenses which are deliberately
(3) There is an actual finding of negligence on caused in order to save the vessel, her cargo, or
the part of the vessel owner or agent both at the same time, from a real and known
[Aboitiz Shipping v. General Accident Fire risk [Art. 811, Code of Commerce].
and Life Assurance Corp. (1993)];
(4) Vessel is insured, to the extent of the 1. REQUISITES
insurance proceeds [Vasquez v. CA (1985)]; (1) There must be a common danger. This
(5) There was no total loss; means, that both the ship and the cargo,
(6) Collision between two negligent vessels. after it has been loaded, are subject to the
same danger, whether during the voyage, or
in the port of loading or unloading, that the
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danger arises from the accidents of the sea, port or roadstead, and the damage
dispositions of the authority, or faults of resulting therefrom to the goods removed
men, provided that the circumstances or transferred;
producing the peril should be ascertained (5) The damage suffered by the goods of the
and imminent or may rationally be said to cargo through the opening made in the
be certain and imminent. This last vessel in order to drain her and prevent her
requirement excludes measures undertaken sinking;
against a distant peril; (6) The expenses caused through floating a
(2) That for the common safety, part of the vessel intentionally stranded for the
vessel or of the cargo or both is sacrificed purpose of saving her;
deliberately; (7) The damage caused to the vessel which it is
(3) That from the expenses or damages caused necessary to break open, scuttle, or smash
follows the successful saving of the vessel in order to save the cargo;
and cargo; (8) The expenses of curing and maintaining the
(4) That the expenses or damages should have members of the crew who may have been
been incurred or inflicted after taking wounded or crippled in defending or saving
proper legal steps and authority the vessel;
[Magsaysay, Inc. v. Agan [1955]]. (9) The wages of any member of the crew
detained as hostage by enemies, privateers,
The gross or general average shall be borne by or pirates, and the necessary expenses
those who benefited from the sacrifice. These which he may incur in his imprisonment,
include the ship owner and the owners of the until he is returned to the vessel or to his
cargoes that were saved. Contribution may also domicile, should he prefer it;
be imposed on the insurers of the vessel or (10) The wages and victuals of the crew of a
cargoes that were saved, as well as lenders on vessel chartered by the month during the
bottomry or respondentia. time it should be embargoed or detained by
force majeure or by order of the
2. CASES OF GENERAL AVERAGE Government, or in order to repair the
(1) The goods or cash invested in the damage caused for the common good;
redemption of the vessel or cargo captured (11) The loss suffered in the value of the goods
by enemies, privateers, or pirates, and the sold at arrivals under stress in order to
provisions, wages, and expenses of the repair the vessel because of gross average;
vessel detained during the time the (12) The expenses of the liquidation of the
arrangement or redemption is taking place; average [Art. 811, Code of Commerce];
(2) The goods jettisoned to lighten the vessel, (13) If in lightening a vessel on account of a
whether they belong to the vessel, to the storm, in order to facilitate her entry into a
cargo, or to the crew, and the damage port or roadstead, part of her cargo should
suffered through said act by the goods kept; be transferred to lighters or barges and be
(3) The cables and masts which are cut or lost, the owner of said part shall be entitled
rendered useless, the anchors and the to indemnity, as if the loss has originated
chains which are abandoned in order to from a gross average [Art. 817, Code of
save the cargo, the vessel, or both; Commerce];
(4) The expenses of removing or transferring a (14) If, as a necessary measure to extinguish a
portion of the cargo in order to lighten the fire in a port; roadstead; creek, or bay, it
vessel and place her in condition to enter a should be decided to sink any vessel, this
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loss shall be considered gross average, to actual contact [A. Urrutia & Co. v. Baco
which the vessels saved shall contribute. River Plantation Co. (1913)].
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jointly responsible for the losses and convenient manner for the voyage, or by
damages suffered by their cargoes [Art. 828, reason of some erroneous order of the
Code of Commerce]; captain; or
(4) When it is due to a fortuitous event, each (4) Malice, negligence, want of foresight, or
vessel and its cargo shall bear its own lack of skill on the part of the captain is the
damages [Art. 830, Code of Commerce]; reason for the act causing the damage [Art.
(5) When, by reason of fortuitous event, a vessel 820, Code of Commerce].
properly anchored and moored collides with
another, the injury occasioned shall be C.4. SHIPWRECKS
looked upon as particular average to the Shipwreck denotes loss or wreck of a vessel at
vessel run into [Art. 832, Code of sea as a consequence of running against
Commerce]; another vessel or thing at sea or on coast where
(6) When a third vessel at fault, the owner of the vessel is rendered incapable of navigation.
the third vessel shall indemnify the losses
and damages caused, the captain thereof If the wreck was due to malice, negligence or
being civilly liable to said owner [Art. 831, lack of skill of the captain, the owner of the
Code of Commerce]. vessel may demand indemnity from said
captain. [Art. 841, Code of Commerce].
C.3. ARRIVAL UNDER STRESS
Arrival under stress is the arrival of a vessel at C.5. SALVAGE
the nearest and most convenient port instead of Salvage is defined as the service which one
the port of destination, if during the voyage the person renders to the owner of a ship or goods,
vessel cannot continue the trip to the port of by his own labor, preserving the goods or the
destination. ship which the owner or those entrusted with
the care of them have either abandoned in
It is lawful when the inability to continue voyage distress at sea, or are unable to protect and
is due to lack of provisions, well-founded fear of secure.
seizure, privateers, pirates, or accidents of the
sea disabling it to navigate [Art. 819, Code of It is founded on equity and is compensation for
Commerce]. actual services rendered.
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D. CARRIAGE OF GOODS BY SEA ACT should file the claim with the carrier within
(COGSA) three days from delivery.
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but only if the amount so declared is the real A carriage to be performed by several successive
value of goods [Aquino (2011)]. air carriers is deemed, for the purposes of the
Convention, to be one undivided carriage, if it
The Civil Code does not limit the liability of the has been regarded by the parties as a single
common carrier to a fixed amount per package. operation, whether it had been agreed upon
In all matters not regulated by the Civil Code, under the form of a single contract or of a series
the right and the obligations of common of contracts [Art. 1(3), Warsaw Convention].
carriers shall be governed by the Code of
Commerce and special laws. Thus, the COGSA, The carrier is liable for damages for:
which is suppletory to the provisions of the Civil (1) Death or injury of a passenger if the
Code, supplements the latter by establishing a accident causing it took place:
statutory provision limiting the carriers liability (a) On board the aircraft;
in the absence of a shippers declaration of a (b) In the course of the operations of
higher value in the bill of lading. [Belgian embarking or disembarking; or
Overseas v. Philippine First Ins. Co. (2002)]. (c) When there was delay [Art. 17 and 19,
Warsaw Convention];
(2) Destruction, loss, or damage to any
VI. The Warsaw Convention baggage or goods that are checked in, if
A. APPLICABILITY damage occurred:
The Warsaw Convention applies to: (a) During the transportation by air; or
(1) All international carriage of persons, (b) When there was delay [Section 18 and
baggage, or cargo performed by aircraft for 19, Warsaw Convention];
reward; (3) Delay in the transport by air of passengers,
(2) Gratuitous carriage by aircraft performed by baggage or goods.
an air transport undertaking [Art. 1(1),
Warsaw Convention]. The carriage by air contemplated comprises the
period in which the baggage or goods are in
International air carriage or international air charge of the carrier, whether in an airport or on
transport means transportation by air between board an aircraft, or, in the case of a landing
points of contact of two high contracting parties, outside an airport, in any place whatsoever [Art.
or those countries that have acceded to the 18, Warsaw Convention].
Warsaw Convention, wherein the place of
departure and the place of destination are B. LIMITATION OF LIABILITY
situated: With respect to the following limitations of
(1) Within the territories of two high liability, Art. 23, Warsaw Convention provides
contracting parties, regardless of whether that any provision tending to relieve the carrier
or not there be a break in the transportation of liability or to fix a lower limit than that which
or a transshipment; or is laid down shall be null and void, but the
(2) Within the territory of a single high nullity of any such provision does not involve the
contracting party, if there is an agreed nullity of the whole contract.
stopping place within a territory subject to
the sovereignty, mandate or authority of Also, under Art. 25, Warsaw Convention:
another power, even though the power is (1) The carrier shall not be entitled to avail
not a party to the Convention [Art. 1(2), himself of the provisions which exclude or
Warsaw Convention]. limit his liability, if the damage is caused by
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MERCANTILE LAW
CORPORATION CODE
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implied from its existence, and those governing boards by any name other than as
reasonably necessary to accomplish its board of trustees [Sec. 138].
purposes. In turn, a corporation exercises said
powers through its BOD and/or its duly
authorized officers and agents.
C. OTHER CORPORATIONS
II. Classes of C.1. PUBLIC CORPORATION
Public corporation one formed or organized
Corporations for the government of a portion of the state. Its
purpose is for the general good and welfare
[Sec. 3, Act 1456].
A. STOCK CORPORATION
Stock corporations corporations which have
Polytechnic University of the Phils. v. CA (2001):
capital stock divided into shares AND are
Beyond cavil, a GOCC has a personality of its
authorized to distribute to the holders of such
own, distinct and separate from that of the
shares dividends or allotments of the surplus
government, and the intervention in a
profits on the basis of shares held [Sec. 3]. It is
transaction of the Office of the President
organized for profit.
through the Executive Secretary does not
change the independent existence of a
The governing body of a stock corporation is
government entity as it deals with another
usually the BOD (except in certain instances,
government entity.
e.g. close corporations).
Boy Scouts of the Philippines v. COA (2011): Not
Note: A corporation is deemed to have the
all corporations which are not GOCC are ipso
power to declare dividends. Thus, so long as
facto to be considered private corporations as
the corporation has capital stock and there is
there exists another distinct class of
no prohibition in its Articles of Incorporation or
corporations or chartered institutions which
in its by-laws for it to declare dividends, such
are otherwise known as public corporations.
corporation is a stock corporation [Sec. 43].
These corporations are treated by law as
agencies or instrumentalities of the
B. NON-STOCK CORPORATION government which are not subject to the tests
All other corporations are non-stock of ownership or control and economic viability
corporations [Sec. 3]. but to different criteria relating to their public
purposes/interests or constitutional policies
Non-stock corporation One where no part of and objectives and their administrative
the income is distributable as dividends to its relationship to the government or any of its
members, trustees, or officers, subject to the Departments or Offices.
provisions of the Code on dissolution [Sec. 87].
Not organized for profit.
C.2. PRIVATE CORPORATION
Private corporation One formed for some
Its governing body is usually the Board of
private purpose, benefit, aim or end [Sec. 3, Act
Trustees (BOT). However, non-stock
1456]; it may be either stock or non-stock,
corporations may, through their articles of
government-owned or controlled or quasi-
incorporation or their by-laws, designate their
public.
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Baluyot v. Holganza (2000): The test to presiding elder but by the nationality of its
determine whether GOCC or private members constituting the sect in the
corporation: if a corporation is created by its Philippines. Thus, the Roman Catholic Church
own charter for the exercise of a public can acquire lands in the Philippines even if it is
function, then GOCC; if by incorporation under headed by the Pope.
the general corporation law, then private
corporation. II. CORPORATION AGGREGATE
Corporation aggregate is a religious
C.3. CLOSE CORPORATION corporation incorporated by more than one
Close corporation - One whose articles of person.
incorporation provide that:
(1) All issued stock, exclusive of treasury C.6. ELEEMOSYNARY CORPORATION
shares, shall be held by persons not Eleemosynary corporation One organized for
exceeding 20; a charitable purpose.
(2) All issued stock shall be subject to one or
more specified restrictions on transfer; and C.7. DOMESTIC CORPORATION
(3) The corporation shall not list in any stock Domestic corporation One formed, organized,
exchange or make any public offering of or existing under the laws of the Philippines.
any of its stock of any class.
C.8. FOREIGN CORPORATION
Notwithstanding the foregoing, a corporation Foreign corporation One formed, organized
shall not be deemed a close corporation when or existing under any laws other than those of
at least 2/3 of its voting stock or voting rights the Philippines and whose law allows Filipino
is owned or controlled by another corporation citizens and corporations to do business in its
which is not a close corporation. [Sec. 96] own country and state [Sec. 123].
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directors thus controlling its management (1) There is an apparently valid statute under
policies. which the corporation may be formed;
(2) There has been colorable compliance with
Holding company a parent company which the legal requirements in good faith; and
has no other business aside from the holding (3) There has been user of corporate powers,
of the shares of its subsidiaries, which it i.e. the transaction of business as if it were
controls. a corporation [Campos].
Investment company a parent company
which holds shares in other corporations not Hall v. Piccio (1950): An association of
for the purpose of controlling them but merely persons cannot claim to be a corporation if
to invest therein. it has not been issued a certificate of
incorporation since it cannot claim good
C.12 CORPORATION DE JURE faith compliance with the requirements of
Corporation de jure A corporation organized the law.
in accordance with the requirements of the law.
C.14 CORPORATION BY ESTOPPEL
C.13. DE FACTO CORPORATION Corporation by estoppel Where a group of
De facto corporation A corporation where persons misrepresent themselves as a
there exists a flaw in its incorporation. corporation, they are subsequently estopped
from claiming lack of corporate life in order to
I. RULE ON DE FACTO CORPORATIONS avoid liability; also, a 3rd party who had dealt
The due incorporation of any corporation with an unincorporated association as a
claiming in good faith to be a corporation corporation is precluded from denying its
under this Code, and its right to exercise corporate existence on a suit brought by the
corporate powers, shall not be inquired into alleged corporation on the contract.
collaterally in any private suit to which such
corporation may be a party. Such inquiry may I. EFFECTS
be made by the Solicitor General in a quo As to liability
warranto proceeding [Sec. 20]. All persons who assume to act as a corporation
knowing it to be without authority to do so
Grant of juridical personality is an exercise of shall be liable as general partners for all debts,
State power and not a matter of private affair. liabilities and damages incurred or arising as a
Consequently, under the de facto corporation result thereof [Sec. 21].
doctrine, the defect in the juridical personality
of a corporation cannot be inquired into by As to the defense of lack of corporate
private individuals, much less used as a personality
defense to avoid claims, except in quo warranto When such ostensible corporation is sued, it is
proceedings brought on behalf of the State precluded from raising the defense of lack of
where the main action is to question the corporate personality [Sec. 21].
validity or existence of such juridical
personality [Villanueva]. International Express Travel v. CA (2000): The
doctrine of estoppel applies to a 3rd party only
II. REQUISITES OF DE FACTO when he tries to escape liability on a contract
CORPORATION: from which he has benefited on the ground of
defective incorporation. It does not apply to a
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For stocks to be deemed owned and held by Sec. 2. All covered corporations shall, at all
Philippine citizens or Philippine nationals, mere times, observe the constitutional or statutory
legal title is not enough to meet the required ownership requirement. For purposes of
Filipino equity. Full beneficial ownership of the determining compliance therewith, the
stocks, coupled with appropriate voting rights is required percentage of Filipino ownership shall
essential. Thus, stocks, the voting rights of be applied to both
which have been assigned or transferred to (1) the total number of outstanding shares of
aliens cannot be considered held by Philippine stock entitled to vote in the election of
citizens or Philippine nationals. directors; AND
(2) the total number of outstanding shares of
Gamboa v. Teves, (2012): [SC reversed its 2011 stock, whether or not entitled to vote in the
ruling] election of directors.
The term capital is not limited to voting
shares since the constitutional requirement of C. GRANDFATHER RULE
at least 60 % Filipino ownership applies not Method used when a domestic corporation has
only to voting control of the corporation, but both domestic and foreign stockholders to
also to the beneficial ownership of the determine whether or not said corporation is
corporation. It is therefore imperative that such qualified to engage in a partially nationalized
requirement apply uniformly and across the business [Campos].
board to all classes of shares, regardless of
nomenclature and category, comprising the SEC Opinion re: Silahis Intl Hotel (1987): It
capital of a corporation. involves the computation of Filipino ownership
of a corporation in which another corporation
Preferred shares, denied the right to vote in the of partly Filipino and partly foreign equity owns
election of directors, are anyway still entitled to capital stock. The percentage of shares held
vote on the eight specific corporate matters by the second corporation in the first is
under Sec. 6. of the Corporation Code. multiplied by the latters own Filipino equity,
and the product of these percentages is
Thus, the 60-40 ownership requirement in determined to be the ultimate Filipino
favor of Filipino citizens must apply separately ownership of the subsidiary corporation.
to each class of shares, whether common,
preferred non-voting, preferred voting or any The Grandfather Rule must be applied to
other class of shares. accurately determine the actual participation,
both direct and indirect, of foreigners in a
SEC Memorandum Circular No. 8 dated 20 May corporation engaged in a nationalized activity
2013 or business.
Sec. 1. Covered corporations: All corporations
engaged in identified areas of activities or Redmont Consolidated Mines, Corp v. McArthur
enterprises specifically reserved, wholly or Mining, Inc., et al. (2010): Compliance with the
partly, to Philippine Nationals by the constitutional limitation[s] on engaging in
Constitution, the FIA and other existing laws, nationalized activities must be determined by
amendments thereto and IRRs of said laws ascertaining if 60% of the investing
except as may otherwise be provided therein. corporations outstanding capital stock is
owned by Filipino citizens, or as interpreted,
by natural or individual Filipino citizens. If such
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legitimate issues either to promote or to shield (2) the parent and subsidiary corporations
unfair objectives to cover up an otherwise have common directors or officers;
blatant violation of the prohibition against (3) the parent corporation finances the
forum shopping. subsidiary;
(4) the parent corporation subscribes to all the
Seaoil vs Autocorp Group (2008): capital stock of the subsidiary or otherwise
IIs a corporation liable for the individual acts of causes its incorporation;
its stockholders or members? Is there an (5) the subsidiary has grossly inadequate
exception to the general rule? capital;
(6) the parent corporation pays the salaries
It is settled that a corporation has a personality and other expenses or losses of the
separate and distinct from its individual subsidiary;
stockholders or members, and is not affected (7) the subsidiary has substantially no
by the personal rights, obligations and business except with the parent
transactions of the latter. The corporation may corporation or no assets except those
not be held liable for the obligations of the conveyed to or by the parent corporation;
persons composing it, and neither can its (8) in the papers of the parent corporation or
stockholders be held liable for its obligation. in the statements of its officers, the
Of course, this Court has recognized subsidiary is described as a department or
instances when the corporations separate division of the parent corporation or its
personality may be disregarded. However, we business or financial responsibility is
have also held that the same may only be done referred to as the parent corporations
in cases where the corporate vehicle is being own;
used to defeat public convenience, justify (9) the parent corporation uses the property of
wrong, protect fraud, or defend crime. the subsidiary as its own;
Moreover, the wrongdoing must be clearly and (10)the directors or executives of the subsidiary
convincingly established. It cannot be do not act independently in the interest of
presumed. the subsidiary but take their orders from
the parent corporation in the latters
B.2. TEST IN DETERMINING interest; and
APPLICABILITY (11) the formal ledger requirements of the
General rule: the mere fact that a corporation subsidiary are not observed.
owns all or substantially all of the stocks of
another corporation is not sufficient to justify
their being treated as one entity.
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by the required vote of the stockholders subscribed and at least 25% of such has
or members been fully paid in cash or property
(3) Bank certificate covering the paid-up
The following items are amendable under Sec. capital
16: (4) [Note: Current SEC rules no longer require
(1) Change of name of the Corporation this if payment for shares is made in cash]
(2) Adding to or changing the purpose/s (5) Letter authority authorizing the SEC to
(3) Change of principal office examine the bank deposit and other
(4) Change in the number of directors or corporate books and records to determine
trustees the existence of paid-up capital
(5) Increase or decrease in authorized capital (6) Undertaking to change the corporate name
stock [subject to Sec. 38] in case there is another person or entity
with same or similar name that was
F.4. NON-AMENDABLE ITEMS previously registered
The following items state accomplished facts, (7) Certificate of authority from proper
therefore, cannot be amended: government agency whenever appropriate
(1) The names, nationalities and residences of like BSP for banks and Insurance
the incorporators. Commission for insurance corporations.
Otherwise, an amendment would go [Sundiang and Aquino]
against the definition of incorporators in
Sec. 5 G.2. ISSUANCE OF CERTIFICATE OF
(2) Treasurer-in-trust INCORPORATION BY SEC
(3) First set of directors or trustees Effect: Commencement of corporate existence
(4) Original stock subscriptions and paid-in and juridical personality [Sec. 19]
capital
(5) Place and date of execution Revocation of certificate of incorporation: If
(6) Witnesses [De Leon] incorporators are found guilty of fraud in
procuring the same after due notice and
Note: Articles of Incorporation must be hearing [Sec. 6(i), PD 902-A]
accompanied by Treasurers sworn statement
of compliance with Sec. 13 on amount of capital G.3. GROUNDS FOR DISAPPROVING THE
to be subscribed and paid for the purposes of ARTICLES OF INCORPORATION:
incorporation; otherwise, SEC shall not accept Does not substantially comply with form
the Articles of Incorporation [Sec. 14]. prescribed
Purpose is patently unconstitutional, illegal,
G. REGISTRATION AND ISSUANCE immoral, contrary to government rules and
OF CERTIFICATE OF regulations
INCORPORATION Treasurers Affidavit concerning the amount
G.1. REGISTRATION OF THE ARTICLES of capital subscribed and or paid is false
OF INCORPORATION Required percentage of ownership of Filipino
DOCUMENTS TO BE FILED WITH SEC: citizens has not been complied with. [Sec. 17]
(1) Articles of Incorporation
(2) Treasurers Affidavit certifying that 25% of
the total authorized capital stock has been
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REMEDY in case of rejection - petition for with the SEC and the election of directors and
review in accordance with the Rules of Court officers [Campos].
[Sec. 6, last par., PD 902-A]
H.1. NATURE AND FUNCTIONS OF BY-
SEC shall give the incorporators reasonable LAWS
time to correct or modify objectionable Nature: It is a product of agreement of the
portions of the articles or amendment [Sec. 17]. stockholders or members [Campos].
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(2) Any dissenting shareholders shall have (2) Payable in cash, in property, or in stock to
appraisal right all shareholders on the basis of
(3) Where the investment is reasonably outstanding stock held by them
necessary to accomplish the corporations (3) Any cash dividend due on delinquent stock
primary purpose, the approval of the shall first be applied to the unpaid balance
shareholders/ members is not necessary on the subscription plus costs and
expenses
NOTES: (4) Stock dividends shall be withheld from the
If it is for the same purpose, or incidental, or delinquent stockholder until his unpaid
related to its PRIMARY purpose, the board can subscription is fully paid
invest the corporate fund WITHOUT the (5) Should be approved by 2/3 of shareholders
consent of the stockholders. No appraisal right. representing the outstanding capital stock
at a regular/special meeting called for that
If the investment is in another corporation of purpose
different business or purpose BUT in (6) Stock corporations- prohibited from
pursuance of the SECONDARY purpose, the retaining surplus profits in excess of 100%
affirmative vote of majority of the board of their paid-in capital stock, except:
consented by stockholders/ members is (a) When justified by definite corporate
required. expansion projects or programs
approved by the BOD
If the investment is OUTSIDE the purpose/s for (b) When the corporation is prohibited
which the corporation was organized, Articles under any loan agreement with any
of Incorporation must be amended first, financial institution or creditor from
otherwise it will be an Ultra Vires act. declaring dividends without its consent,
and such consent has not yet been
De La Rama v. Ma-ao Sugar Central Co. (1969): secured
A private corporation, in order to accomplish (c) When it can be clearly shown that such
its purpose as stated in its articles of retention is necessary under special
incorporation, and subject to the limitations circumstances obtaining in the
imposed by the Corporation Law, has the corporation
power to acquire, hold, mortgage, pledge or
dispose of shares, bonds, securities, and other Nielson and Co. v. Lepanto Consolidated
evidences of indebtedness of any domestic or Mining (1968):
foreign corporation. Such an act, if done in Stock dividends cannot be issued to a person
pursuance of the corporate purpose, does not who is not a stockholder in payment of services
need the approval of the stockholders; but rendered.
when the purchase of shares of another A corporation may legally issue shares of
corporation is done solely for investment and stock in consideration of services rendered to it
not to accomplish the purpose of its by a person not a stockholder, or in payment of
incorporation, the vote of approval of the its indebtedness. A share of stock issued to pay
stockholders is necessary. for services rendered is equivalent to a stock
issued in exchange of property, because
B.7. DECLARE DIVIDENDS [SEC. 43] services is equivalent to property. It is the
(1) Out of unrestricted retained earnings shares of stock that are originally issued by the
corporation and forming part of the capital
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fairly be considered within the charter powers. is contrary to law, morals, or public policy or
The test to be applied is whether the act in public duty, and are, like similar transactions
question is in direct and immediate between the individuals void. They cannot
furtherance of the corporations business, fairly serve as basis of a court action, nor require
incident to the express powers and reasonably validity. Ultra Vires acts on the other hand, or
necessary to their exercise. If so, the those which are not illegal and void ab initio,
corporation has the power to do it; otherwise, but are not merely within the scope of the
not. articles of incorporation, are merely voidable
and may become binding and enforceable
ii. CONSEQUENCES OF ULTRA VIRES when ratified by the stockholders.
ACTS
(1) Executed contract courts will not set Remedies in Case of Ultra Vires Acts
aside or interfere with such contracts; (1) State
(2) Executory contracts no enforcement even (a) Dissolution of the corporation thru a
at the suit of either party (void and quo warranto proceeding
unenforceable); (b) Injunction
(3) Partly executed and partly executory (c) Suspension or revocation of the
principle of no unjust enrichment at certificate of registration by the SEC
expense of another shall apply; (2) Stockholders
(4) Executory contracts apparently authorized (a) Injunction
but Ultra Vires the principle of estoppel (b) Derivative suit
shall apply. (c) Ratification (except when a 3rd party is
prejudiced or the act is illegal)
Ultra Vires Acts Illegal Acts (3) Creditors
Not necessarily Unlawful; against (a) Nullification of contract in fraud of
unlawful, but outside law, morals, public creditors
the powers of the policy, and public
corporation order C. HOW (CORPORATE POWERS)
Can be ratified Cannot be ratified EXERCISED
Can bind the parties if Cannot bind the
wholly or partly parties C.1. BY THE SHAREHOLDERS
executed
i. CORPORATE ACTS REQUIRING
Seaoil vs. Autocorp Group (2008, Nachura): APPROVAL OF STOCKHOLDERS OR
An Ultra Vires act is distinguished from illegal MEMBERS (VOTING AND NON-VOTING
act, the former being voidable which may be SHARES)
enforced by performance, ratification, or
estoppel, while the latter is void and cannot be
General Rule: Vote necessary to approve a
validated.
particular corporate act as provided in this
Code shall be deemed to refer only to stocks
Pirovano v. De La Rama Steamship Co. (1954): with voting rights [Sec. 6]
A distinction should be made between
corporate acts or contracts which are illegal Exceptions [Sec. 6]
and those which are merely Ultra Vires. The Voting and non-voting shares shall be entitled
former contemplates the doing of an act which to vote in the following cases:
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(c) Their act must be supported by a considered as a corporate office. Thus, the
MAJORITY OF THE QUORUM duly creation of an office pursuant to or under a by-
assembled (Exception: Election of officers Law enabling provision is not enough to make
requires a vote of majority of ALL the a position a corporate office. Guerrea v.
members of the board) Lezama (1958), the first ruling on the matter,
(d) The act must be within the powers held that the only officers of a corporation were
conferred to the Board. those given that character either by
the Corporation Code or by the By-Laws; the
C.3. BY THE OFFICERS rest of the corporate officers could be
considered only as employees or subordinate
Corporate Officer Corporate Employee officials.
Position is provided Employed through the A different interpretation can easily leave
for in the by-laws or action of the managing the way open for the BOD to circumvent the
under the officer of the constitutionally guaranteed security of tenure
Corporation Code corporation of the employee by the expedient inclusion in
RTC has jurisdiction NLRC has jurisdiction the By-Laws of an enabling clause on the
in case of labor in case of labor creation of just any corporate officer position.
dispute disputes
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(1) Convicted by final judgment of an offense to which creditors have a right to look for
punishable by imprisonment for a period satisfaction of their claims."
exceeding 6 years
(2) Convicted by final judgment of a violation Ong Yong v. Tiu (2003):
of the Corporation Code committed within "The Trust Fund Doctrine, first enunciated by
5 years prior to the date of his election or this Court in the 1923 case of Philippine Trust
appointment. This includes violations of Co. v. Rivera' provides that subscriptions to the
rules and regulations issued by the SEC to capital stock of a corporation constitute a fund
implement the provisions of the to which the creditors have a right to look for
Corporation Code. the satisfaction of their claims.
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(2) In case of a contracted manager which may lodged in the board, subject to the articles of
be an individual, a partnership, or another incorporation, by-laws, or relevant provisions
corporation of law. In the absence of authority from the
Note: In case the contracted manager is BOD, no person, not even its officers, can
another corporation, the special rule in Sec. validly bind a corporation.
44 applies. However, just as a natural person may
(3) In case of close corporations, the authorize another to do certain acts for and on
stockholders may manage the business of his behalf, the BOD may validly delegate some
the corporation rather than by a BOD, if of its functions and powers to its officers,
the Articles of Incorporation so provide committees or agents. The authority of these
[Sec. 97] individuals to bind the corporation is generally
derived from law, corporate by-laws or
Spouses Constantine Firme v. Bukal Enterprises authorization from the board, either expressly
and Development Corporation (2003): or impliedly by habit, custom or acquiescence
The power to purchase real property is vested in the general course of business.
in the BOD or trustees. While a corporation
may appoint agents to negotiate for the i. REQUISITES OF A VALID CORPORATE
purchase of real property needed by the ACT BY THE BOD
corporation, the final say will have to be with (a) The Board must act as a BODY in a
the board, whose approval will finalize the meeting.
transaction. (b) There must be a VALIDLY constituted
meeting.
Great Asian Sales Center Corp v. CA, (2002): (c) There act must be supported by a
The Corporation Code of the Philippines vests MAJORITY OF THE QUORUM duly
in the BOD the exercise of the corporate assembled (Exception: Election of officers
powers of the corporation, save in those requires a vote of majority of ALL the
instances where the Code requires members of the board)
stockholders approval for certain specific acts. (d) The act must be within the powers
conferred to the Board.
Gamboa v. Teves, (2011):
Indisputably, one of the rights of a stockholder ii. LIMITATIONS ON POWERS OF
is the right to participate in the control or BOD/TRUSTEES
management of the corporation. This is (1) Limitations imposed by the Constitution,
exercised through his vote in the election of statutes, articles of incorporation or by-
directors because it is the BOD that controls or laws;
manages the corporation. (2) Certain acts of the corporation that require
joint action of the stockholders and BOD:
Banate v. Philippine Countryside Rural Bank, (a) Removal of director [Sec. 28]
(2010): (b) Amendments of Articles of
Sec. 23 of the Corporation Code expressly Incorporation [Sec. 16]
provides that the corporate powers of all (c) Fundamental changes [Sec. 6]
corporations shall be exercised by the BOD. (d) Declaration of stock dividends [Sec. 43]
The power and the responsibility to decide (e) Entering into management contracts
whether the corporation should enter into a [Sec. 44]
contract that will bind the corporation are
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Peoples Aircargo v. CA, (1998): Sec. 23 embodies the essence of the Business
Under Sec 23, the power and the responsibility Judgment Rule, that unless otherwise
to decide whether the corporation should enter provided in the Code, all corporate powers and
into a contract that will bind the corporation is prerogatives are vested directly in the BOD.
lodged in the board, subject to the articles of Consequently:
incorporation, by-laws, or relevant provisions (1) The resolution, contracts and transactions
of law. However, just as a natural person may of the board cannot be overturned or set
authorize another to do certain acts for and on aside by the stockholders or members and
his behalf, the BOD may validly delegate some not even by the courts under the principle
of its functions and powers to officers, that the business of the corporation has
committees or agents. The authority of such been left to the hands of the board
individuals to bind the corporation is generally (2) Directors and duly authorized officers
derived from law, corporate by-laws or cannot be held personally liable for acts or
authorization from the board, either expressly contracts done with the exercise of their
or impliedly by habit, custom or acquiescence business judgment.
in the general course of business,.
Exceptions:
B. BUSINESS JUDGMENT RULE (1) When the Corporation Code expressly
provides otherwise
General Rule: Directors cannot be held liable (2) When the Directors or officers acted with
for mistakes or errors in the exercise of their fraud, gross negligence or in bad faith (Sec.
business judgment as long as they acted in 31).
good faith, with due care and prudence. (3) When Directors or officers act against the
Contracts entered into by the BOD are binding corporation in conflict of interest situation
upon the corporation and courts will not (Villanueva).
interfere.
Remedies in case of Mismanagement
Exceptions: (1) Removal of directors pursuant to Sec. 28
(1) If the contracts are so unconscionable and (2) Derivative suit or complaint filed with the
oppressive as to amount to a wanton SEC (now the RTC) (PD 902-A)
destruction of the rights of the minority; (3) Receivership
(2) if they violate their duties under Sec. 31 (4) Injunction if the act has not yet been done
(director willfully and knowingly assents to (5) Dissolution if abuse amounts to a ground
patently unlawful acts of the corporation, for quo warranto but Solicitor General
Refuses to act
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the law does not permit him to seize the who, having knowledge thereof, does not
opportunity even if he will use his own funds in forthwith express his objection in writing and
the venture. [Sundiang and Aquino] file the same with the corporate secretary shall
be solidarily liable with the stockholder
NOTE: concerned to the corporation and its creditors
Differences between Sec. 31 and Sec. 34: for the difference in value [Sec. 65]
(1) First, while both involve the same subject
matter (business opportunity) they concern iii. PERSONAL LIABILITIES
different personalities; Sec. 34 is
applicable only to directors and not to GENERAL RULE
officers, whereas Sec. 31 applies to
directors, trustees and officers. Price v. Innodata Phils., Inc. (2008):
(2) Second, Sec. 34 allows a ratification of a Members of the Board, who purport to act in
transaction by a self-dealing director by good faith for and in behalf of the corporation
vote of stockholders representing at least within the lawful scope of their authority, are
2/3 of the outstanding capital stock. not liable for the consequences of their acts.
[Villanueva] When the acts are of such nature and done
under those circumstances, they are attributed
H.2. LIABILITIES to the corporation alone and no personal
liability is incurred.
i. SOLIDARY LIABILITY FOR DAMAGES The provisions on seizing corporate
opportunity and disloyalty [Secs. 31 and 34]
(1) Willfully and knowingly voting for and shall also apply to corporate officers.
assenting to patently unlawful acts of the
corporation; [Sec. 31] NOTE:
(2) Gross negligence or bad faith in directing Members of the BOD who are also officers are
the affairs of the corporation; [Sec. 31] held to a more stringent liability because they
(3) Acquiring any personal or pecuniary are in-charge of day-to-day activities [Campos]
interest in conflict of duty; [Sec. 31]
(4) Consenting to the issuance of watered Doctrine Of Limited Doctrine Of Immunity
stocks, or, having knowledge thereof, Liability
failing to file objections with secretary; [Sec. Shields the corporators Protects a person
65] from corporate liability acting for and in
(5) Agreeing or stipulating in a contract to beyond their agreed behalf of the
hold himself liable with the corporation; or contribution to the corporation from
(6) By virtue of a specific provision of law capital or shareholding being himself
in the corporation. personally liable for
ii. LIABILITY FOR WATERED STOCKS his authorized
Watered Stocks stocks issued for a actions
consideration less than its par or issued value
or for a consideration in any form other than Tramat Mercantile, Inc. vs. CA, (1994),
cash, valued in excess of its fair value. reiterated in Atrium Management Corp. v. CA,
(2001): Liability of Director, Trustee or Officer
Any director or officer of a corporation (Asked in 96 and 97)
consenting to the issuance of watered stocks or
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Personal liability of a corporate director, Special Facts Doctrine: Conceding the absence
trustee or officer along (although not of a fiduciary relationship in the ordinary case,
necessarily) with the corporation may so validly courts nevertheless hold that where special
attach, as a rule, only when: circumstances or facts are present which make
(1) He assents (a) to a patently unlawful act of it inequitable for the director to withhold
the corporation, or (b) for bad faith or gross information from the stockholder, the duty to
negligence in directing its affairs, or (c) for disclose arises and concealment is fraud.
conflict of interest, resulting in damages to [Strong v. Repide, 1909]
the corporation, its stockholders or other
persons; I. RESPONSIBILITY FOR CRIMES
(2) He consents to the issuance of watered
stocks or who, having knowledge thereof, Since a corporation as a person is a mere legal
does not forthwith file with the corporate fiction, it cannot be proceeded against
secretary his written objection thereto; criminally because it cannot commit a crime in
(3) He agrees to hold himself personally and which personal violence or malicious intent is
solidarily liable with the corporation; or required.
(4) He is made, by a specific provision of law,
to personally answer for his corporate West Coast Life Ins. Co. v. Hurd (1914); Time Inc.
action v. Reyes (1971):
Criminal action is limited to the corporate
iv. Special Facts Doctrine agents guilty of an act amounting to a crime
Strong v. Repide (1909): and never against the corporation itself.
Even though a director may not be under the Since the BOD is the repository of corporate
obligation of a fiduciary nature to disclose to a powers and acts as the agent of the
shareholder his knowledge affecting the value corporation, the directors may be held
of the shares, that duty may exist in special criminally liable.
cases.
Ong v. CA (2003):
General Rule: The Trust Receipts Law recognizes the
Majority view: Directors only owe its duty to the impossibility of imposing the penalty of
corporation. They owe no fiduciary duty to imprisonment on a corporation. Hence, if the
stockholders but they may deal with each other entrustee is a corporation, the law makes the
at fair and reasonable terms, as if they were officers or employees or other persons
unrelated. No duty to disclose facts known to responsible for the offense liable to suffer the
the director or officer. [Taylor v. Wright, 1945] penalty of imprisonment. The reason is
obvious: corporations, partnerships,
NOTE: Minority View (Realistic View) recognizes associations and other juridical entities cannot
the directors obligation to the stockholders be put to jail. Hence, the criminal liability falls
individually as well as collectively, and refuses on the human agent responsible for the
to permit him to profit at the latters expense violation of the Trust Receipts Law.
by the use of information obtained as a result
of official position and duties. J. INSIDE INFORMATION
Exception:
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The fiduciary position of insiders 1 , directors, (b) That the vote of such director or trustee
and officers prohibits them from using was not necessary for the approval of the
confidential information relating to the contract;
business of the corporation to benefit (c) That the contract is fair and reasonable
themselves or any competitor corporation in under the circumstances; and
which they may have a mere substantial (d) That in case of an officer, the contract has
interest. been previously authorized by the BOD.
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The eleemosynary nature of every non-stock (2) Signed by the stockholder or member of
corporation defines the characteristic of record; and
membership therein as being essentially (3) Filed with the corporation before the
personal in character and therefore essentially scheduled meeting with the Corporate
non-transferable in nature. Secretary
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Exceptions
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(1) Where a stockholder/s representing the 5. Granting compensation other than per diems
same interest of both the managing and to directors (Sec. 30)
the managed corporations own or control
more than one-third (1/3) of the total Compensation other than per diems may be
outstanding capital stock entitled to vote granted to directors by the vote of the
of the managing corporation; or stockholders representing at least a majority of
(2) Where a majority of the members of the the outstanding capital stock
managing corporations BOD also
constitute a majority of the managed 6. Consideration for no-par shares (Sec. 62)
corporations BOD
When the Articles of Incorporation or the BOD
Requires at least 2/3 votes of the outstanding does not provide for the value of no-par shares,
capital stock/membership of the managed the value of such shares shall be determined
corporation. by the stockholders representing at least a
majority of the outstanding capital stock
BUT only majority vote is required for the
managing corporation. ii. By a Two-Thirds Vote
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4. Increasing/decreasing capital stock (Sec. 38) 8. Investment of funds in another business (Sec.
42)
Requires approval by a majority vote of the
BOD and approval by at least 2/3 of the Requires approval by a majority vote of the
outstanding capital stock. BOD/BOT and approval by at least 2/3 of the
outstanding capital stock/membership.
Includes all stockholders with or without voting
rights Includes all stockholders with or without voting
rights
5. Incurring, creating, increasing bonded
indebtedness (Sec. 38) 9. Dividend declaration (Sec. 43)
Requires approval by a majority vote of the No stock dividend shall be issued without the
BOD and approval by at least 2/3 of the approval of stockholders representing not less
outstanding capital stock. than 2/3 of the outstanding capital stock.
Includes all stockholders with or without voting 10. Power to enter into management contracts
rights (Sec. 44)
6. Issuance of shares not subject to pre-emptive Please see discussion under By a Majority Vote
right (Sec. 39)
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11. Removal of directors or trustees (Sec. 28) His act may be ratified by a vote of the
stockholders owning or representing at least
Any director or trustee may be removed from 2/3 of the outstanding capital stock.
office by a vote of the stockholders holding or
representing at least 2/3 of the outstanding 14. Stockholders approval of the plan of merger
capital stock/membership. or consolidation (Sec. 77)
12. Ratifying contracts with respect to dealings Requires approval by majority of each of the
with directors/ trustees (Sec. 32) BOD/BOT of the constituent corporations of
the plan of merger or consolidation and
A contract of the corporation with one or more approval by at least 2/3 of the outstanding
of its directors is voidable, at the option of such capital stock/membership of each corporation
corporation, unless all the following conditions at separate corporate meetings duly called.
are present:
(1) The directors presence in the BOD Amendments to the plan of merger or
meeting in which the contract was consolidation also requires approval by
approved was not necessary to constitute a majority vote of each of the BOD and 2/3 vote
quorum of the outstanding capital stock/membership
(2) The vote of such director was not necessary of each corporation voting separately.
for the approval of the contract
(3) The contract is fair and reasonable under Includes all stockholders with or without voting
the circumstances rights
(4) In case of an officer, the contract has been
previously authorized by the BOD. 15. Distribution of assets in non-stock
corporations (Sec. 95)
Where any of the first two conditions is absent,
in the case of a contract with a director, such The BOT shall, by majority vote, adopt a
contract may be ratified by the vote of the resolution recommending a plan of distribution
stockholders representing at least 2/3 of the which shall be approved by at least 2/3 of the
outstanding capital stock provided that the members with voting rights.
contract is fair and reasonable under the
circumstances. 16. Incorporation of a religious society (Sec. 116)
13. Ratifying acts of disloyalty of a director (Sec. Any religious society or religious order, or any
34) diocese, synod, or district organization of any
religious denomination, sect or church, unless
General Rule forbidden by the constitution, rules,
Where a director, by virtue of his office, regulations, or discipline of the religious
acquires for himself a business opportunity denomination, sect or church of which it is a
which should belong to the corporation, part, or by competent authority, may, upon
thereby obtaining profits, he must account to written consent and/or by an affirmative vote
the corporation for all such profits by refunding at a meeting called for the purpose of at least
it. 2/3 of its membership, incorporate for the
administration of its temporalities or for the
Exception
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management of its affairs, properties and (2) Stock dividends, even if already declared,
estate. may be revoked prior to actual issuance
since these are not distributions but merely
17. Voluntary dissolution of a corporation (Sec. representations of changes in the capital
118-119) structure.
Requires a resolution adopted by a majority Note:
vote of the BOD/BOT, and by a resolution duly Right to dividends vests upon declaration so
adopted by the affirmative vote of the whoever owns the stock at such time also owns
stockholders owning at least 2/3 of the the dividends. Subsequent transfer of stock
outstanding capital stock/membership at a would not carry with it right to dividends
meeting to be held upon call for such purpose. UNLESS agreed upon by the parties.
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vote was taken for payment of the fair ii. Records/Books to be Kept (Sec. 74)
value of his shares (failure to make (1) Books that record all business transactions
demand within such period shall be of the corporation which shall include
deemed waiver of the appraisal right). contract, memoranda, journals, ledgers,
(3) Stockholder must submit his certificates of etc;
stock to the corporation for notation within (2) Minute book for meetings of the
10 days after demand for payment. stockholders/members;
Otherwise, right to appraisal may be (3) Minute book for meetings of the
terminated at the option of corporation. board/trustees;
(4) Stock and transfer book
iii. Effect of demand (Sec. 83)
ALL rights accruing to such shares, including Stock transfer agent - One engaged principally
voting and dividend rights, shall be suspended in the business of registering transfers of
stocks in behalf of a stock corporation (licensed
EXCEPT the right of such stockholder to by the SEC).
receive payment of the fair value thereof
The corporate secretary is the one duly
Immediate RESTORATION of voting and authorized to make entries in the stock and
dividend rights if the dissenting stockholder is transfer book.
not paid the value of his shares within 30 days
after the award. It is the corporate secretary's duty and
obligation to register valid transfers of stocks
iv. Extinguishment of appraisal right (Sec. 84) and if said corporate officer refuses to comply,
(1) Withdrawal of demand by the stockholder the transferor-stockholder may rightfully bring
WITH CONSENT of the corporation suit to compel performance. [Torres et al v. CA
(2) Abandonment of the proposed action (1997)]
(3) Disapproval by SEC of the proposed action
iii. Financial Statements (Sec. 75)
C.3. RIGHT TO INSPECT Within 10 days from written request, the
corporation shall furnish its most recent
i. Basis of Right
financial statement (balance sheet and profit
As the beneficial owners of the business, the
or loss statement as of last taxable year)
stockholders have the right to know the
financial condition and management of
At a regular meeting, the Board shall present a
corporate affairs.
financial report of the operations of the
corporation for the preceding year, which shall
A stockholders right of inspection is based on
include financial statements duly signed and
his ownership of the assets and property of the
certified by an independent CPA.
corporation. Therefore, it is an incident of
ownership of the corporate property, whether Exception
this ownership or interest is termed an If the paid-up capital is less than P50,000
equitable ownership, a beneficial ownership, or the financial statements may be certified under
quasi-ownership. Such right is predicated upon oath by the treasurer or any responsible officer
the necessity of self-protection. [Gokongwei Jr. of the corporation (instead of an independent
v. SEC (1979)] CPA).
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iv. Requirements for the exercise of the right of purpose in making his demand." [Gonzales v.
inspection (Sec. 74) PNB (1983)]
(1) It must be exercised at reasonable hours
on business days and in the place where Directors of a corporation have the unqualified
the corporation keeps all its records (i.e., right to inspect the books and records of the
principal office). corporation at all reasonable times. The right
(2) The stockholder has not improperly used of inspection is not to be denied on the ground
any information he secured through any that the director or shareholder is on unfriendly
previous examination. terms with the officers of the corporation
(3) Demand is made in good faith or for a whose records are sought to be inspected. A
legitimate purpose. If the corporation or director or stockholder can make copies,
its officers contest such purpose or contend abstracts, and memoranda of documents,
that there is evil motive behind the books, and papers as an incident to the right of
inspection, the burden of proof is with the inspection, but cannot, without an order of a
corporation or such officer to show the court, be permitted to take books from the
same. office of the corporation. However, a director or
stockholder does not have any absolute right
TEST to determine whether the purpose is to secure certified copies of the minutes of the
legitimate A legitimate purpose is one which corporation until these minutes have been
is germane to the interests of the stockholder written up and approved by the directors.
as such and not contrary to the interests of the [Veraguth v. Isabela Sugar (1932)]
corporation. [Gokongwei v. SEC (1979)]
A stockholder of a sequestered company has
Among the changes introduced in the new the right to inspect and/or examine the records
Code with respect to the right of inspection of the corporation pursuant to Sec. 74 of the
granted to a stockholder are the following: Corporation Code. [Africa v. PCGG (1992)]
(1) The records must be kept at the
principal office of the corporation;
(2) The inspection must be made on v. Remedies when inspection is refused
business days; (1) Mandamus
(3) The stockholder may demand a copy of (2) Injunction
the excerpts of the records or minutes; (3) Action for damages
(4) The refusal to allow such inspection (4) File an action under Sec. 144 to impose
shall subject the erring officer or agent a penal offense by fine and/or
of the corporation to civil and criminal imprisonment
liabilities.
However, while seemingly enlarging the right Refusal to allow inspection is a criminal
of inspection, the new Code has prescribed offense. Such refusal, when done in violation of
limitations to the same. It is now expressly Sec 74(4) of the Corporation Code, properly
required as a condition for such examination falls within the purview of Sec. 144 of the same
that the one requesting it must not have been code and thus may be penalized as an offense.
guilty of using improperly any information [Yujuico and Sumbilla v Quiambao and Pilapil
through a prior examination, and that the (2014)]
person asking for such examination must be
"acting in good faith and for a legitimate Because the obligations provided for in Sec. 74
fall on the corporation, violation of the same is
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done by the corporation; thus criminal action intention is to include it in its application. (SEC
based on such violation can only be Opinion, 14 January 1993).
maintained against corporate officers or other
such persons acting on behalf of the A pre-emptive right is a right claimed against
corporations. the corporation on unissued shares of its
capital stock, and likewise on treasury shares
C.4. PRE-EMPTIVE RIGHT held by the corporation; while the right of first
refusal is a right exercisable against another
i. Definition and Distinguished from Right of stockholder on his shares of stock. [Villanueva]
First Refusal
Basis of Preemptive Right: to preserve the
Pre-emptive right is an option privilege of an existing proportional rights of the stockholders
existing stockholder to subscribe to a [Campos]
proportionate part of shares subsequently
issued by the corporation before the same can ii. Limitations to exercise of pre-emptive right
be disposed of in favor of others; this right (Sec. 39)
includes all issues and disposition of shares of
any class. It is a common law right and may be Such pre-emptive right shall NOT extend
exercised by stockholders even without legal to shares to be issued in compliance with
provision. On the other hand, a right of first laws requiring stock offerings or minimum
refusal arises only by virtue of contract stock ownership by the public;
stipulations, by which the right is strictly It shall also NOT extend to shares to be
construed against the right of person to issued in good faith with the approval of
dispose or deal with their property. the stockholders representing 2/3 of the
outstanding capital stock, in exchange for
Stockholders of a corporation shall enjoy pre- property needed for corporate purposes or
emptive right to subscribe to ALL ISSUES OR in payment of a previously contracted debt
DISPOSITIONS OF SHARES OF ANY CLASS, in It shall not take effect if denied in the
proportion to their respective shareholdings. Articles of Incorporation or an amendment
The purpose is to enable the shareholder to thereto.
retain his proportionate control in the If one shareholder does not want to
corporation and to retain his equity in the exercise his pre-emptive right, the other
surplus. shareholders are not entitled to purchase
the corresponding shares of the
Note: shareholder who declined. But if nobody
The broad phrase all issues or disposition of purchased the same and later on the board
shares of any class is construed to include not re-issued the shares, the pre-emptive right
only new shares issued in pursuance of an applies. [Sundiang and Aquino]
increase in capital stock or from the unissued
shares which form part of the ACS, but also iii. Remedies in case of unwarranted denial
covers treasury shares. Treasury shares
would come under the term disposition. Injunction
Likewise considering that it is not included Mandamus
among the exceptions enumerated therein, The suit should be individual and not
where pre-emptive right shall not extend, the derivative because the wrong done is to the
stockholders individually
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E.3. LIABILITY FOR WATERED STOCKS On the issue of the solidary obligation of the
(SEC. 65) corporate officers impleaded vis--vis the
i. Definition corporation for Mapuas illegal dismissal, "[i]t
These are shares issued as fully paid when in is hornbook principle that personal liability of
truth no consideration is paid, or the corporate directors, trustees or officers
consideration received is known to be less than attaches only when: (a) they assent to a
the par value or issued value of the shares. (Sec. patently unlawful act of the corporation, or
65) when they are guilty of bad faith or gross
negligence in directing its affairs, or when
These include the following: there is a conflict of interest resulting in
Issued without consideration (bonus share) damages to the corporation, its stockholders or
Issued as fully paid when the corporation other persons; (b) they consent to the issuance
has received less sum of money than its of watered down stocks or when, having
par or issued value (discounted share) knowledge of such issuance, do not forthwith
Issued for consideration other than actual file with the corporate secretary their written
cash (i.e., property or services), the fair objection; (c) they agree to hold themselves
valuation of which is less than its par or personally and solidarily liable with the
issued value corporation; or (d) they are made by specific
Issue stock dividend when there are no provision of law personally answerable for their
sufficient retained earnings or surplus corporate action. [SPI Technologies Inc. v
profit to justify it. Mapua (2014)]
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E.5. LIABILITY FOR ASSUMING TO ACT owners, unless there is a written proxy,
AS A CORPORATION KNOWING IT TO BE signed by all the co-owners(Sec. 56)
WITHOUT AUTHORITY Any one of the joint owners of shares
owned in an "and/or" capacity or a proxy
All persons who assume to act as a corporation thereof(Sec. 56)
knowing it to be without authority to do so
shall be liable as general partners for all debts, F.1. REGULAR OR SPECIAL
liabilities and damages incurred or arising as a
result thereof. i. When and Where
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(2) After the submission of the Articles of Labor performed for or services actually
Incorporation to the SEC. rendered to the corporation;
Amounts transferred from unrestricted
II. POST-INCORPORATION retained earnings to stated capital
SUBSCRIPTION (declaration of stock dividends); and
It is entered into after incorporation. Outstanding shares exchanged for stocks
in the event of reclassification or
A. 4. INTEREST ON UNPAID conversion;
SUBSCRIPTION Previously incurred indebtedness of the
General Rule corporation;
Stockholder is NOT liable to pay interest on his
unpaid subscription. B. 2. LIMITATIONS ON CONSIDERATION
Stocks shall NOT be issued:
Exception for a consideration less than the par or
If so required by the by-laws issued price thereof
in exchange for promissory notes or future
RATE: that fixed in the by-laws, otherwise, the service
legal rate (Sec. 66)
NOTES
NOTES Promissory notes and future service may be
Shareholders are NOT creditors of the used as consideration provided that certificates
corporation with respect to their shareholdings of stock will be issued ONLY AFTER actual
thereto and the principle of compensation or encashment of promissory note or
set-off has no application. performance of such services.
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In any view of the matter, however, the privileges or restrictions, as stated in the
creditors right of action to compel the making Articles of Incorporation.
good of the representation as to the
corporations capital is based on fraud, and the Classification of shares:
trust fund doctrine is only another way of (1) Common shares
expressing the same underlying idea. [De Leon] (2) Preferred shares
(a) Preference as to dividends
Despite the view of foreign authors that the (i) Participating and non-
fraud theory is the prevailing view, it would participating
seem that in the Philippine jurisdiction, the (ii) Cumulative and non-
trust fund doctrine on watered stock prevails. cumulative
(3) Par value shares
Philippine Trust Corp. v. Rivera (1923): It is (4) No-par value shares
established doctrine that subscription to the (5) Founders shares
capital of a corporation constitute a fund to (6) Redeemable shares
which creditors have a right to look for (7) Treasury shares
satisfaction of their claims and that the (8) Convertible shares
assignee in insolvency can maintain an action (9) Non-voting shares
upon any unpaid stock subscription in order to
realize assets for the payment of its debts General Rule
(citing Velasco v. Poizat, 1918). A corporation No share may be deprived of voting rights (Sec.
has no power to release an original subscriber 6)
to its capital stock from the obligation of
paying for his shares, without a valuable Exceptions
consideration for such release; and as against Preferred or
creditors a reduction of the capital stock can Redeemable shares,
take place only in the manner and under the Provided by the Code (e.g., Treasury
conditions prescribed by the statute or the shares)
charter or the articles of incorporation.
Moreover, strict compliance with the statutory There shall always be a class/series of shares
regulations is necessary. which have COMPLETE VOTING RIGHTS (Sec.
6)
C. 5. SITUS OF THE SHARES OF STOCK
Chua Guan v. Samahang Magsasaka, Inc. (1935): Doctrine of Equality of Shares
It is a general rule that for purposes of Each share shall be EQUAL in ALL respects to
execution, attachment and garnishment, it is every other share, except as otherwise
not the domicile of the owner of a certificate provided in the Articles of Incorporation and
but the domicile of the corporation which is stated in the certificate of stock (Sec. 6)
decisive.
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vote) of the corporation and to equal pro-rata (a) Cumulative - regardless of lack of
division of profits after preference. It profits in any given year, and lack of
represents a residual ownership interest in the declaration of dividends, the arrears for
corporation. such year have to be paid to the
preferred stocks in a subsequent year
II. PREFERRED SHARES (once profits are made) before any
Stocks which are given preference by the dividends can be paid to the common
issuing corporation in dividends, or in the stocks.
distribution of assets of the corporation in case (b) Non-Cumulative entitlement to
of liquidation, or both, or such other receipt of dividends essentially
preferences as may be stated in the Articles of depends on declaration of such; types:
Incorporation which do not violate the (i) Discretionary right to dividends in
Corporation Code. a particular year depends on the
discretion of the board, even if the
Unless the right to vote is clearly withheld, a corporation has profits.
preferred stockholder would have such right as (ii) Mandatory a positive duty is
it is an incident to stock ownership. imposed to declare preferred
dividends every year that profits
Limitations: are earned.
Preferred shares can only be issued with (iii) Earned cumulative or dividend credit
par value. board with discretion not to
Preferred shares must be stated in the declare dividends even if there
Articles of Incorporation and in the were profits in a certain year;
certificate of stock. however, once the board decides
The BOD may fix the terms and conditions that dividends will be declared, the
only when so authorized by the Articles of preferred stockholders have a right
Incorporation and such terms and to arrears in dividends for the years
conditions shall be effective upon filing a when there were profits but no
certificate thereof with the SEC. dividend was declared.
(c) In the absence of any express
Preference as to dividends: stipulation, preferred stocks are
(1) Participating and Non-participating deemed cumulative.
(a) Participating - those which, after
getting their fixed dividend preference, III. PAR VALUE SHARES
share with common stocks the rest of These are shares with a stated value set out in
the dividends. the Articles of Incorporation. This remains the
(b) Non-participating - those which, after same regardless of the profitability of the
getting their fixed dividend preference, corporation. This gives rise to financial
have no more right to share in the stability and is the reason why banks, trust
remaining dividends with the common corporations, insurance companies and
stocks. building and loan associations must always be
(c) Unless otherwise provided, preferred organized with par value shares.
stocks are non-participating.
(2) Cumulative and Non-cumulative
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Par value is minimum issue price of such share V. FOUNDERS SHARES (SEC. 7)
in the Articles of Incorporation which must be These are shares, classified as such in the
stated in the certificate. Articles of Incorporation, which are given
certain rights and privileges not enjoyed by the
IV. NO-PAR VALUE SHARES owners of other stocks.
These are shares without a stated value.
Where exclusive right to vote and be voted for
A no par share does not purport to represent in the election of directors is granted, such
any stated proportionate interest in the capital right must be for a limited period not to exceed
stock measured by value, but only an aliquot 5 years subject to approval by SEC. The 5 year
part of the whole number of such shares of the period shall commence from date of approval
issuing corporation (Agbayani) by SEC.
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the nature of the relation of shareholder to the A transfer made pursuant to the foregoing has
corporation. the effect of delivery of a security in bearer
form or duly indorsed in blank representing the
E. 2. UNCERTIFICATED SHARES amount of security or right transferred,
Uncertificated Shares/Securities including the unrestricted negotiability of that
Security evidenced by electronic or similar security by reason of such delivery.
records (Sec. 3.14, Securities Regulation Code)
Valid as to corporation when the
Notwithstanding Sec. 63 of the Corporation transfer is recorded in the books of the
Code (certificate of stock and transfer of shares), corporation so as to show the names of
a corporation whose securities are registered the parties to the transfer and the
pursuant to the SRC or listed on securities number of shares transferred (Sec. 43,
exchange may: Securities Regulation Code).
If so resolved by the BOD and agreed by
a shareholder, investor or securities E. 3. NEGOTIABILITY
intermediary, issue shares to, or record Theory of Quasi-Negotiability
the transfer of some or all its shares
into the name of such shareholders, A stock certificate is regarded as quasi-
investors or, securities intermediary in negotiable only in the sense that it may be
the form of uncertified securities transferred by endorsement, coupled with
delivery.
The use of uncertified securities in these
circumstances shall be without prejudice to the De los Santos v. Republic (1955): This
rights of the securities intermediary notwithstanding, it is well-known that the
subsequently to require the corporation to instrument is non-negotiable, because the
issue a certificate in respect of any shares holder thereof takes it without prejudice to such
recorded in its name; and rights or defenses as the registered owner or
creditor may have under the law, except insofar
If so provided in its articles of as such rights or defenses are subject to the
incorporation and by-laws, issue all of limitations imposed by the principles
the shares of a particular class in the governing estoppel. Certificates of stock are
form of uncertificated securities and not negotiable instruments. Consequently, a
subject to a condition that investors transferee under a forged assignment acquires
may not require the corporation to no title which can be asserted against the true
issue a certificate in respect of any owner, unless the latters negligence has been
shares recorded in their name. such as to create an estoppel against him. If
the owner of the certificate has endorsed it in
Transfers of uncertificated securities, how made blank, and it is stolen from him, no title is
Valid as between parties - validly made acquired by on innocent purchaser for value.
and consummated by appropriate
book-entries in the securities I. REQUIREMENTS FOR VALID
intermediaries, or in the stock and TRANSFER OF STOCKS
transfer book held by the corporation For a valid transfer of stocks, the requirements
or the stock transfer agent. are as follows:
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(1) There must be delivery of the stock Ponce v. Alsons Cement Corp. (2002): The stock
certificate; and transfer book is the basis for ascertaining
(2) The certificate must be endorsed by the persons entitled to the rights and subject
the owner or his attorney-in-fact or to the liabilities of a stockholder. Where a
other persons legally authorized to transferee is not yet recognized as a
make the transfer; and stockholder, the corporation is under no
(3) Bitong v. CA (1998): To be valid against specific legal duty to issue stock certificates in
third parties, the transfer must be the transferees name.
recorded in the books of the - Citing Hager v. Bryan (1911): A mandamus
corporation. should not issue to compel the secretary
of a corporation to make a transfer of the
No shares of stock against which the stock on the books of the company,
corporation holds an unpaid claim shall be unless it affirmatively appears that he has
transferable in the books of the corporation failed or refused so to do, upon the
(Sec. 63). demand either of the person in whose
name the stock is registered, or of some
Republic v. Estate of Hans Menzi (2005): The person holding a power of attorney for
Corporation Code acknowledges that the that purpose from the registered owner of
delivery of a duly indorsed stock certificate is the stock.
sufficient to transfer ownership of shares of
stock in stock corporations. Such mode of Batangas Laguna Tayabas Bus Co. v. Bitangas
transfer is valid between the parties. In order (2001): A transfer of shares is not valid unless
to bind third persons, however, the transfer recorded in the books of the corporation. The
must be recorded in the books of the purpose of registration is two-fold: (a) to
corporation. Clearly then, the absence of a enable the transferee to exercise all the rights
deed of assignment is not a fatal flaw which of a stockholder, including the right to vote
renders the transfer invalid. and to be voted for, and (b) to inform the
- Requisites for a valid transfer per Sec. 63: corporation of any change in share ownership
(1) Between the parties: so that it can ascertain the persons entitled to
(a) Delivery the rights and subject to the liabilities of a
(b) Indorsement stockholder.
(2) To be valid as to third persons: - Until challenged in a proper proceeding,
(a) Recorded in the books of the a stockholder of record has a right to
corporation participate in any meeting; his vote can
be properly counted to determine
Rural Bank of Lipa City v. CA (2001): The whether a stockholders resolution was
execution of a deed of sale does not necessarily approved, despite the claim of the alleged
make the transfer effective. The delivery of the transferee. On the other hand, a person
stock certificate duly indorsed by the owner is who has purchased stock, and who
the operative act that transfers the shares. The desires to be recognized as a stockholder
absence of delivery is a fatal defect which is for the purpose of voting, must secure
not cured by mere execution of a deed of such a standing by having the transfer
assignment. recorded on the corporate books. Until
the transfer is registered, the transferee is
not a stockholder but an outsider.
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such place, then in a newspaper of general nor more than 60 days after the entry of
circulation in the Philippines. the order.
The resolution to dissolve must be A copy of the order shall be published at
approved by the majority of the BOD/BOT least once a week for 3 consecutive weeks
and approved by the stockholders in a newspaper of general circulation, or if
representing at least 2/3 of the there is no newspaper in the city or
Outstanding Capital Stock or 2/3 of municipality of the principal office, posting
members. for 3 consecutive weeks in 3 public places
o Non-voting shares are entitled to is sufficient.
vote in this matter [Sec. 6. Par 6(8)] A hearing shall be conducted 5 days after
A copy of the resolution shall be certified the lapse of the expiration of the time to
by the majority of the BOD/BOT and file objections.
countersigned by the secretary. If the objections are insufficient or the
The signed and countersigned copy will be material facts in the petition are true,
filed with the SEC and the latter will issue judgment shall be rendered dissolving the
the certificate of dissolution. corporation and directing the disposition of
assets. The judgment may include
Note: appointment of a receiver.
Daguhoy Enterprises v. Ponce (1954): Thus, o As long as 2/3 vote is obtained, no
except for the expiration of its term, no member/ stockholder can prevent
dissolution can be effective without some act such dissolution unless the
of the State. majority stockholders acted in bad
faith. The latter may be held liable
A.1.B. WHERE CREDITORS ARE for damages [Campos].
AFFECTED [SEC. 119] o Even where there are creditors of
A petition shall be filed with the SEC the corporation who may be
containing the following: prejudiced by the dissolution, it is
o signature by a majority of its BOD still possible for the corporation to
or BOT or other officers having terminate its existence prior to the
management of its affairs; expiration of its term, provided said
o verified by its president, or creditors are given the opportunity
secretary or one of its director or to present their claims and
trustees; objections so that their interests
o all claims and demands against may be protected [Campos].
the corporation; and
o resolved upon by affirmative vote A.1.C. BY SHORTENING OF CORPORATE
of the stockholders representing at TERM
least 2/3 of the Outstanding A voluntary dissolution may be effected by
Capital Stock or 2/3 of members; amending the Articles of Incorporation to
If the petition is sufficient in form and shorten the corporate term; and upon approval
substance, the SEC shall issue an order of the expired shortened term, the corporation
fixing the date on or before which shall be deemed dissolved without any further
objections to the petition may be filed. proceedings.
Such date shall not be less than 30 days
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The inherent power of Congress to make laws (3) Refusal to comply or defiance of any lawful
carries with it the power to amend or repeal order of the Commission restraining
them. Involuntary corporate dissolution may commission of acts which would amount to
be effected through the amendment or repeal a grave violation of its franchise
of the Corporation Code. [implied from Sec. 145, (4) Continuous inoperation for a period of at
De Leon] least five years
The limitations on the power to dissolve (5) Failure to file by-laws within the required
corporations by legislative enactment are as period
follows: (6) Failure to file required reports in
(1) Under the Constitution, the amendment, appropriate forms as determined by the
alteration, or repeal of the corporate Commission within the prescribed period
franchise of a public utility shall be made (7) Other grounds
only when the common good so requires;
(2) Under Sec. 145 of the Code, it is provided Other grounds:
that: No right or remedy in favor of or (a) Violation by the corporation of any
against any corporation, its stockholders, provision of the Corporation Code [Sec. 144
members, directors, trustees, or officers, BP 68]
nor any liability incurred by any such (b) In case of a deadlock in a close corporation,
corporation, stockholders, members, and the SEC deems it proper to order the
directors, trustees, or officers, shall be dissolution of the corporation as the only
removed or impaired either by the practical solution to the dispute (Sec. 104
subsequent dissolution of said corporation BP 68)
or by any subsequent amendment or
repeal of this Code or of any part thereof;
(3) While Congress may provide for the B. METHODS OF LIQUIDATION
dissolution of a corporation, it cannot Liquidation is the process by which all the
impair the obligation of existing contracts assets of the corporation are converted into
between the corporation and third persons, liquid assets (cash) in order to facilitate the
or take away the vested rights of its payment of obligations to creditors, and the
creditors. [De Leon] remaining balance if any is to be distributed to
the stockholders. It is a proceeding in rem.
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Alhambra Cigar and Cigarette Mfg. v. SEC Board of Liquidators v Kalaw (1967): Unless the
(1968): A corporation under liquidation may not trusteeship is limited in its duration by the
amend its articles of incorporation to extend its deed of trust, there is no time limit within
lifespan. When a corporation is liquidating which the trustee must finish liquidation.
pursuant to the statutory period of 3 years to
liquidate, it is only allowed to continue for the B.3. BY MANAGEMENT COMMITTEE OR
purpose of final closure of its business and no REHABILITATION RECEIVER
other purposes. In fact, within that period, the In SECs judgment dissolving the corporation
corporation is enjoined from continuing the and directing disposition of its assets as justice
business for which it was established. requires, it may appoint a receiver to collect
such assets and pay the debts of the
B.2. CONVEYANCE TO A TRUSTEE corporation [Sec. 119].
WITHIN A 3-YEAR PERIOD
In this method, the 3-year limitation does not Leyte Asphalt and Mineral Oil Co. Ltd., v. Block
apply, provided that the designation of the Johnston and Breenbrawn (1928): The mere
trustees is made within the period. appointment of a receiver, without anything
more, does not result in the dissolution of the
General rule corporation nor bar it from the exercise of its
There is no time limit within which the trustee corporate rights.
must finish the liquidation, and he may sue
and be sued as such even beyond the 3-year D.4. LIQUIDATION AFTER THREE YEARS
period. Phil. Veterans Bank v. Employees Union (2001):
Q: What is the difference between Liquidation
Exception and Rehabilitation?
The trusteeship is limited in its duration by the A: Liquidation is the winding up of a
deed of trust. corporation so that assets are distributed to
those entitled to receive them. It is the process
National Abaca v. Pore (1961): Trustees to whom of reducing assets to cash, discharging
the corporate assets have been conveyed liabilities and dividing surplus or loss. On the
pursuant to liquidation may sue and be sued other hand, rehabilitation contemplates a
as such in all matters connected with the continuance of corporate life and activities in
liquidation. an effort to restore and reinstate the
corporation to its former position of successful
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operation and solvency. Both cannot be corporate business either as directors, officers
undertaken at the same time. or other key men in management [Campos]
XVI. Other Corporations Dulay v CA (1993), the court did not look at Sec.
96 in concluding that the corporation involved
was a close corporation.
A. CLOSE CORPORATIONS
Also note that, even after satisfying the 3
General concept: mandatory provisions, a corporation shall not
Most characteristic feature is the identity of be deemed a close corporation when at least
stock ownership and active management, i.e., 2/3 of its voting stock or voting rights is owned
all or most of the stockholders are active in the or controlled by another corporation which is
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not a close corporation within the meaning of The stockholders themselves can directly
this Code. manage the corporation and perform the
functions of directors without need of election:
San Juan Structural and Steel Fabricators v. CA (1) When they manage, stockholders are liable
(1998): A narrow distribution of ownership does as directors;
not, by itself, make a close corporation. (2) There is no need to call a meeting to elect
When a corporations Articles of Incorporation directors;
does not contain the provisions enumerated (3) The stockholders active in the
under Sec. 96 of the Code, such corporation is management of the close corporation are
not a close corporation. It does not become personally liable for corporate torts unless
one either, just because only a few individuals the corporation has obtained reasonably
owned 99.866% of its subscribed capital stock. adequate liability insurance [Sec. 100(5)]
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stock, and if the certificate for such stock consented to by all the stockholders of the
conspicuously shows the qualifications of the close corporation, or if the close corporation
persons entitled to be holders of record thereof, has amended its articles of incorporation in
such person is conclusively presumed to have accordance with this Title.
notice of the fact of his ineligibility to be a The term "transfer", as used in this section, is
stockholder. not limited to a transfer for value.
If the articles of incorporation of a close The provisions of this section shall not impair
corporation states the number of persons, not any right which the transferee may have to
exceeding 20, who are entitled to be holders of rescind the transfer or to recover under any
record of its stock, and if the certificate for such applicable warranty, express or implied [Sec.
stock conspicuously states such number, and if 99]
the issuance or transfer of stock to any person
would cause the stock to be held by more than Summary:
such number of persons, the person to whom CONCLUSIVE PRESUMPTION OF
such stock is issued or transferred is NOTICE: Restriction conspicuously shown
conclusively presumed to have notice of this in stock certificate
fact. o that he is a person not eligible to be
a holder of stock of the corporation
If a stock certificate of any close corporation o that transfer of stock to him would
conspicuously shows a restriction on transfer of cause the stock of the corporation to
stock of the corporation, the transferee of the be held by more than the number of
stock is conclusively presumed to have notice of persons permitted by its articles of
the fact that he has acquired stock in violation incorporation to hold stock of the
of the restriction, if such acquisition violates the corporation
restriction. o that the transfer of stock is in
violation of a restriction on transfer
Whenever any person to whom stock of a close of stock
corporation has been issued or transferred has, EFFECTS OF CONCLUSIVE
or is conclusively presumed under this section PRESUMPTION:
to have, notice either (a) that he is a person not o GR: Corporation may, at its option,
eligible to be a holder of stock of the refuse to register the transfer of stock
corporation, or (b) that transfer of stock to him in the name of the transferee
would cause the stock of the corporation to be o Exceptions: Corporation may not
held by more than the number of persons refuse if
permitted by its articles of incorporation to Transfer is consented to by all
hold stock of the corporation, or (c) that the the stockholders
transfer of stock is in violation of a restriction Articles of Incorporation has
on transfer of stock, the corporation may, at its been amended to remove the
option, refuse to register the transfer of stock in restrictions
the name of the transferee.
A.4. WHEN BOARD MEETING IS
The provisions of subsection (4) shall not be
UNNECESSARY OR IMPROPERLY HELD
applicable if the transfer of stock, though
When Unnecessary
contrary to subsections (1), (2) of (3), has been
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Any action by the directors of a close or in payment of corporate debts, UNLESS the
corporation without a meeting shall articles of incorporation provide otherwise [Sec.
nevertheless be deemed valid if: 102].
(1) Before or after such action is taken, written A.6. AMENDMENT OF ARTICLES OF
consent thereto is signed by all the INCORPORATION
directors; or Amendment to the Articles of Incorporation
(2) All the stockholders have actual or implied which seeks to:
knowledge of the action and make no (1) delete or remove any provision
prompt objection thereto in writing; or required to be contained in the Articles
(3) The directors are accustomed to take of Incorporation of Close Corporations
informal action with the express or implied (under the Title on Close Corporations);
acquiescence of all the stockholders; or or
(4) All the directors have express or implied (2) to reduce a quorum or voting
knowledge of the action in question and requirement stated in said Articles of
none of them makes prompt objection Incorporation
thereto in writing [Sec. 101] Requires the affirmative vote of at least 2/3 of
the outstanding capital stock, whether with or
Manuel R. Dulay Enterprises v. CA (1993): In a without voting rights, or of such greater
close corporation, a board resolution proportion of shares as may be specifically
authorizing the sale or mortgage of the subject provided in the Articles of Incorporation at a
property is not necessary to bind the meeting duly called.
corporation for the action of its president. At
any rate, corporate action taken at a board A.7. DEADLOCKS
meeting without proper call or notice in a close Requisites:
corporation is deemed ratified by the absent (1) The directors or stockholders are so divided
director unless the latter promptly files his respecting the management of the
written objection with the secretary of the corporation's business and affairs
corporation after having knowledge of the (2) The votes required for any corporate action
meeting. cannot be obtained that the business and
affairs of the corporation can no longer be
When Improperly Held conducted to the advantage of the
When a directors meeting is held without stockholders generally
proper call or notice, an action taken therein Powers of the SEC in case of Deadlock in Close
within the corporate powers is deemed ratified Corporations
by a director who failed to attend. (1) Cancel or alter any provision in the articles
of incorporation or by-laws
UNLESS he promptly files his written objection (2) Cancel, alter or enjoin any resolution of the
with the secretary of the corporation after corporation
having knowledge thereof [Sec. 101] (3) Direct or prohibit any act of the corporation
(4) Require the purchase at their fair value of
A.5. PRE-EMPTIVE RIGHT shares of any stockholder either by any
The pre-emptive right of stockholders in close stockholder or by the corporation
corporations shall extend to all stock to be regardless of the availability of
issued, including reissuance of treasury shares, unrestricted retained earnings.
whether for money, property or personal services, (5) Appoint a provisional director
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CLOSE CORPORATIONS REGULAR CORPORATIONS
1. Management / Board Authority
There can be classification of directors into one
or more classes, each of whom may be voted for There are no classification of BOD
and elected solely by a particular class of stock;
and
The articles of incorporation of a close
corporation may provide that the business of the
corporation shall be managed by the
stockholders of the corporation rather than by a Corporate Powers devolved upon BOD whose
BOD. So long as this provision continues in powers are executed by officers. Cannot provide
effect: that it be managed by stockholders
Unless the context clearly requires otherwise, Stockholders of a corporation are separate and
the stockholders of the corporation shall be distinct from directors
deemed to be directors for the purpose of
applying the provisions of this Code.
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thereto in writing. Express ratification may consist of a Board
Resolution to that effect
If a director's meeting is held without proper call
or notice, an action taken therein within the Implied ratification may consist of acceptance of
corporate powers is deemed ratified by a benefits from said unauthorized act while having
director who failed to attend, unless he promptly knowledge of said act
files his written objection with the secretary of
the corporation after having knowledge thereof. Failure to give notice would render a meeting
voidable.
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3. Voting / Quorum
No share may be deprived of voting rights, except
Preferred or Redeemable shares, unless otherwise
provided by the Code
The Articles of Incorporation may provide for a
classification of directors into one or more There shall always be a class/series of shares
classes, each of which may be voted for and which have COMPLETE VOTING RIGHTS
elected solely by a particular class of stock.
EACH SHARE SHALL BE EQUAL IN ALL
RESPECTS TO EVERY OTHER SHARE, except as
otherwise provided in the Articles of Incorporation
For BOD, the by-laws or Articles of Incorporation
The Articles of Incorporation may provide for a can provide for a greater majority in quorum
greater quorum or voting requirements in
meetings of stockholders or directors than those For stockholders, the Articles of Incorporation can
provided in this Code. provide for a different percentage in quorum
4. Pre-emptive Right
Limitations on the exercise of pre-emptive right:
Such pre-emptive right shall not extend to shares
to be issued in compliance with laws requiring
The pre-emptive right of stockholders in close stock offerings or minimum stock ownership by the
corporations shall extend to all stock to be public;
issued, including reissuance of treasury shares, Not extend to shares to be issued in good faith
whether for money, property or personal with the approval of the stockholders representing
services, or in payment of corporate debts, 2/3 of the outstanding capital stock, in exchange
unless the articles of incorporation provide for property needed for corporate purposes or in
otherwise. payment of a previously contracted debt
Shall not take effect if denied in the Articles of
Incorporation or an amendment thereto.
5. Transferability
Restrictions on the right to transfer shares must
appear in the Articles of Incorporation and in the
by-laws as well as in the certificate of stock Restrictions on the right to transfer not allowed
otherwise the same shall not be binding on any
purchaser thereof in good faith
6. Appraisal Right
Any stockholder of a close corporation may, for Stockholders may require the corporation to buy-
any reason, compel the said corporation to back their shares at fair value when the
purchase his shares at their fair value, which Corporation has Unrestricted Retained Earnings:
shall not be less than their par or issued value, (a) In case of any amendment to the articles of
when the corporation has sufficient assets in its incorporation which has the effect of:
books to cover its debts and liabilities exclusive (i) changing or restricting the rights of
of capital stock any stockholder or class of shares, or
(ii) authorizing preferences in any respect
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Any stockholder of a close corporation may, by superior to those of outstanding shares
written petition to the SEC, compel the of any class, or
dissolution of such corporation whenever: (iii) extending or shortening the term of
(a) Any of acts of the directors, officers or corporate existence
those in control of the corporation is (b) In case of sale, lease, exchange, transfer,
illegal, or fraudulent, or dishonest, or mortgage, pledge or other disposition of all or
oppressive or unfairly prejudicial to the substantially all of the corporate property and
corporation or any stockholder, or assets as provided in the Code; and
(b) Corporate assets are being misapplied (c) In case of merger or consolidation
or wasted. (d) Investment of corporate funds in another
corporation or business
(e) Diversion of funds of corporation from primary
purpose to secondary purpose (Sec. 41)
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Procedure for the Plan for Distribution the articles of incorporation of a corporation
BOT, by majority vote in a resolution, shall sole. But Sec. 109 allows the application to
adopt a plan for distribution of the assets of the religious corporations of the general provisions
corporation governing non-stock corporations.
For non-stock corporations, the power
Written notice for a meeting must be sent to all to amend its Articles of Incorporation
members entitled to vote, stating the time and lies in its members. The code requires
place of such meeting and the purpose thereof two-thirds of their votes for the approval
of such an amendment. So how will this
At such meeting, the plan must be approved by requirement apply to a corporation sole
2/3 votes of the members having the right to that has technically but one member (the
vote, who are present or represented by proxy head of the religious organization) who
[Villanueva] holds in his hands its broad corporate
powers over the properties, rights, and
C. RELIGIOUS CORPORATIONS interests of his religious organization?
Although a non-stock corporation has a
CORPORATION SOLE (SEC. 110) personality that is distinct from those of
A special form of corporation, usually its members who established it, its
associated with clergy and consists of one Articles of Incorporation cannot be
person only and his successors, who are amended solely through the action of its
incorporated by law to give some legal BOT. The amendment needs the
capacities and advantages. concurrence of at least two-thirds of its
membership. If such approval
A registered corporation sole can acquire land if mechanism is made to operate in a
its members constitute at least 60% Filipinos corporation sole, its one member in whom
[SEC Opinion, 8 August 1994]. all the powers of the corporation
technically belongs, needs to get the
NATIONALITY concurrence of two-thirds of its
Roman Catholic Apostolic Church v. Land membership. The one member is but a
Registration Commission (1957): A corporation trustee of its membership.
sole does not have any nationality but for There is no point to dissolving the
purposes of applying our nationalization laws, corporation sole of one member to
nationality is determined by the nationality of enable the corporation aggregate to
the members. emerge from it. The one member, with
the concurrence of two-thirds of the
RELIGIOUS SOCIETIES membership of the organization for
Non-stock corporation formed by a religious whom he acts as trustee, can self-will
society, group, diocese, synod, or district of any the amendment. He can, with
religious denomination, sect, or church after membership concurrence, increase the
getting the approval of 2/3 of its members. technical number of the members of the
corporation from sole or one to the
Iglesia Evangelica Metodista En Las Filipinas greater number authorized by its
(Corporation Sole) Inc., et al v. Bishop Nathanael amended articles.
Lazaro, et al (2010): The Corporation Code
provides no specific mechanism for amending
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MERCANTILE LAW
SECURITIES
REGULATIONS CODE
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The SRC treats investment contracts as Although the proponents must establish all
securities that have to be registered with the four elements, the US Supreme Court stressed
SEC before they can be distributed and that the Howey Test embodies a flexible
sold. An investment contract is a contract, rather than a static principle, one that is
transaction, or scheme where a person invests capable of adaptation to meet the countless
his money in a common enterprise and is led to and variable schemes devised by those who
expect profits primarily from the efforts of seek the use of the money of others on the
others. promise of profits.
Apart from the definition which the IRR After Howey came the 1973 US case of SEC v.
provides, Philippine jurisprudence has so far Glenn W. Turner Enterprises, Inc. et al. In this
not done more to add to the same. Of course, case, the 9th Circuit of the US Court of Appeals
the United States Supreme Court, grappling ruled that the element that profits must come
with the problem, has on several occasions solely from the efforts of others should not
discussed the nature of investment be given a strict interpretation. It held that a
contracts. That courts rulings, while not literal reading of the
binding in the Philippines, enjoy some degree requirement solely would lead to unrealistic
of persuasiveness insofar as they are logical results. It reasoned out that its flexible reading
and consistent with the countrys best is in accord with the statutory policy of
interests. affording broad protection to the public. Our
RA 8799 (SRC) appears to follow this flexible
The US SC held in Securities and Exchange concept for it defines an investment contract
Commission v. W.J. Howey Co. (1946) that, for as a contract, transaction or scheme whereby a
an investment contract to exist, the following person invests his money in a common
elements, referred to as the HOWEY TEST must enterprise and is led to expect profits not
concur: solely but primarily from the efforts of others.
(1) a contract, transaction, or scheme;
(2) an investment of money; Thus, to be a security subject to regulation by
(3) investment is made in a common the SEC, an investment contract in our
enterprise; jurisdiction must be proved to be: (1) an
(4) expectation of profits; and investment of money, (2) in a common
(5) profits arising primarily from the efforts of enterprise, (3) with expectation of profits,
others. (4) primarily from efforts of others.
Thus, to sustain the SEC position in this case,
PCIs scheme or contract with its buyers must
have all these elements.
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(ii) By entering an order or orders for the (e) To effect, either alone or others, any series
purchase or sale of such security with of transactions for the purchase and/or
the knowledge that a simultaneous sale of any security traded in an Exchange
order or orders of substantially the for the purpose of pegging, fixing or
same size, time and price, for the sale stabilizing the price of such security; unless
or purchase of any such security, has or otherwise allowed by this Code or by rules
will be entered by or for the same or of the Commission (Sec. 24.1)
different parties; or
(iii) By performing similar act where there B. SHORT SALES
is no change in beneficial ownership. The SEC is regulating transactions wherein
the seller does not yet own or have the
(b) To affect, alone or with others, securities or securities he is selling. He is required to
transactions in securities that: show that he has made arrangements to
(i) Raises their price to induce the effect delivery of such securities on
purchase of a security, whether of the settlement date; otherwise, the sale will
same or a different class of the same not be allowed.
issuer or of controlling, controlled, or
commonly controlled company by (a) No person shall use or employ, in
others; or connection with the purchase or sale of
(ii) Creates active trading to induce such a any security any manipulative or
purchase or sale through manipulative deceptive device or contrivance.
devices such as marking the close,
painting the tape, squeezing the float, (b) No short sale shall be effected nor any
hype and dump, boiler room stop-loss order be executed in
operations and such other similar connection with the purchase or sale of
devices. any security except if allowed by the
SEC (Sec. 24.2)
(c) To circulate or disseminate information
that the price of any security listed in an NOTE: The SEC may allow certain acts or
Exchange will or is likely to rise or fall transactions under Sec. 24 (on
because of manipulative market Manipulation of Security Prices and Short
operations of any one or more persons Sales), for public interest and protection of
conducted for the purpose of raising or investors (Sec. 24.3)
depressing the price of the security for the
purpose of inducing the purchase or sale of C. FRAUDULENT TRANSACTIONS
such security.
It shall be unlawful for any person, directly or
(d) To make false or misleading statement indirectly, in connection with the purchase or
with respect to any material fact, which he sale of any securities to:
knew or had reasonable ground to believe
was so false or misleading, for the purpose (a) Employ any device, scheme, or artifice
of inducing the purchase or sale of any to defraud; (Sec. 26.1)
security listed or traded in an Exchange.
(b) Obtain money or property by means of
any untrue statement of a material fact
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The coverage of the mandatory tender offer (b) In writing (Sec. 20.2)
rule covers not only direct acquisition but also (c) Signed by the stockholder or his duly
indirect acquisition or any type of authorized representatives (Sec. 20.2)
acquisition. (d) Filed before the scheduled meeting
[Case at bar: The indirect acquisition by with the corporate secretary (Sec. 20.2)
CEMCO Holdings of 36% of UCC shares (e) Valid only for the meeting for which it
through the acquisition of the non-listed UCHC is intended unless otherwise provided
shares is covered by the mandatory tender in the proxy (Sec. 20.3)
offer rule.]
NOTE: No proxy shall be valid and
The legislative intent of Section 19 of the effective for a period longer than five
Securities Regulation Code is to regulate (5) years at one time (Sec. 20.3)
activities relating to acquisition of control of
the listed company and for the purpose of A broker or dealer shall:
protecting the minority stockholders of a listed (a) Not give any proxy, consent or any
corporation. Whatever may be the method by authorization, in respect of any security
which control of a public company is obtained, carried for the account of the customer, to
either through the direct purchase of its stocks a person other than the customer, without
or through an INDIRECT means, mandatory written authorization of such customer
tender offer applies. (Sec. 20.4)
(b) If he holds or acquires the proxy for at least
What is decisive is the determination of the ten percent (10%) or such percentage as
power of control. The legislative intent behind the Commission may prescribe of the
the tender offer rule makes clear that the type outstanding share of such issuer, submit a
of activity intended to be regulated is the report identifying the beneficial owner
acquisition of control of the listed company within ten days after such acquisition, for
through the purchase of shares. Control may its own account or customer, to the issuer
[be] effected through a direct and indirect of security, to the exchange where the
acquisition of stock, and when this takes place, security is traded and to the Commission
irrespective of the means, a tender offer must (Sec. 20.5)
occur. The bottom line of the law is to give the
shareholder of the listed company the C. DISCLOSURE RULE
opportunity to decide whether or not to sell in Issuers, equity holders, and insiders are
connection with a transfer of control. required to disclose certain information to the
SEC.
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(b) Such other periodical reports for one hundred (100) shares is
interim fiscal periods and current reduced to less than one
reports on significant hundred (100) (Sec. 17.2)
developments of the issuer as the
Commission may prescribe as PHILIPPINE VETERANS BANK v. CALLANGAN
necessary to keep current (2011):
information on the operation of the The ISSUE in this case is whether the Phil.
business and financial condition of Veterans Bank qualifies as a public company
the issuer (Sec. 17.1) under Section 17.2 of the Securities Regulation
Code (SRC) in relation with Rule 3(1)(m) of the
NOTE: Under this Section, issuer Amended Implementing Rules and
includes: Regulations of the SRC, required to comply
(a) An issuer which has sold a class of with the reportorial requirements set forth in
its securities pursuant to a Section 17.1 of the SRC.
registration under section 12
hereof. Under Rule 3(1)(m) of the Amended
BUT the requirement shall be Implementing Rules and Regulations of the
suspended for any fiscal year SRC, a public company is defined as any
after the year such registration corporation with a class of equity securities
became effective if such issuer, listed on an Exchange or with assets in excess
as of the first day of any such of P50,000,000.00 and having 200 or more
fiscal year, has less than one holders, at least 200 of which are holding at
hundred (100) holder of such least 100 shares of a class of its equity
class of securities or such other securities.
number as the Commission
shall prescribe and it notifies It is clear that a public company, as
the Commission of such; contemplated by the SRC, is not limited to a
(b) An issuer with a class of securities company whose shares of stock are publicly
listed for trading on an Exchange; listed; even companies like the Bank, whose
and shares are offered ONLY to a specific group of
(c) An issuer with assets of at least people, are considered a public company,
Fifty million pesos PROVIDED they meet the requirements
(50,000,000.00) or such other enumerated [under Sections 17.1 and 17.2 of
amount as the Commission shall the SRC and/or under the Amended IRR of the
prescribe, and having two hundred SRC].
(200) or more holders each
holding at least one hundred (100) (2) To the equity holders
share of a class of its equity An annual report shall be furnished
securities. by every issuer which has a class of
The obligation of such issuer to equity securities satisfying any of
file report shall be terminated the requirements in Subsection
ninety (90) days after 17.2 to each holder of such equity
notification to the Commission security (Sec. 17.5)
by the issuer that the number
of its holders holding at least C. 2. DISCLOSURE BY EQUITY HOLDERS
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to the issuer or the security that is company, and the Philippine Stock
not generally available to the Exchange (if the company is listed
public (Sec. 27.1) there).
An INSIDER means:
(a) The issuer; VI. Civil Liability
(b) A director or officer (or any person
performing similar functions) of, or
a person controlling the issuer; A. CIVIL LIABILITIES ON
gives or gave him access to ACCOUNT OF FALSE REGISTRATION
material information about the STATEMENT (SEC. 56)
issuer or the security that is not
generally available to the public; Civil liabilities arise when the registration
(c) A government employee, director, statement or any part thereof contains on
or officer of an exchange, clearing its effectivity:
agency and/or self-regulatory (1) An untrue statement of a material
organization who has access to fact; or
material information about an (2) Omission to state a material fact
issuer or a security that is not required to be stated therein or
generally available to the public; or necessary to make such
(d) A person who learns such statements not misleading
information by a communication
from any foregoing insiders (Sec. Who may be liable?
3.8) (a) Issuer and every person who signed
the registration statement;
Material non-public information (b) Director of/partner in the issuer at
means: the time of the filing of the
(a) It has not been generally disclosed registration statement or any part,
to the public and would likely supplement or amendment thereof;
affect the market price of the (c) One who is named in the
security after being disseminated registration statement as being or
to the public and the lapse of a about to become and whose written
reasonable time for the market to consent thereto is filed with the
absorb the information; or registration statement;
(b) Would be considered by a (d) Auditor/auditing firm named as
reasonable person important having certified any financial
under the circumstances in statements used in connection with
determining his course of action the registration statement or
whether to buy, sell or hold a prospectus;
security (Sec. 27.2) (e) One who, with his written consent
filed with the registration statement,
A beneficial owner of 10% of a has been named as having prepared
public company becomes a or certified any part of the
principal shareholder required to registration statement/any report or
disclose his interest to the SEC, the valuation which is used in
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G. 3. LIABILITY OF AIDER/ABETTOR
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Defense: No knowledge of
untruth or omission,
despite the exercise of
reasonable care (Sec. 57.1).
In Connection With Prospectus, Any person who shall make or Purchaser or seller of security
Communications and cause to be made any who purchased or sold at a
Reports (Sec. 57) statement in any report, or price which was affected by
B. Liability of Makers of False document filed pursuant to this such statement knowing that
Misleading Statements Code or any rule or regulation such statement was false or
thereunder, which statement misleading, and relying upon
as at the time and in the light such statement may sue for
of the circumstances under damages caused by such
which it was made false or reliance (Sec. 57.2).
misleading with respect to any
material fact
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Manipulation of Security Prices Any person who willfully Any person who shall purchase
(Sec. 59) participates in any act or or sell any security at a price
transaction in Section 24 which was affected by such act
(Manipulation of Security or transaction
Prices).
With Respect to Commodity Any person who engages in any Any person sustaining damages
Futures Contracts and Pre- act or transactions in willful as a result of such act or
need Plans (Sec. 60) violation of any rule or transaction (Sec. 60.1)
regulation promulgated by the
Commission under Section 11
(on Commodity Future
Contracts) or 16 (on Pre-Need
Plans) (Sec. 60.1)
On Account of Insider Trading (a) Any insider who violates Any investor who,
Subsection 27.1; contemporaneously with the
A. Liability for non-disclosure (b) and any person in the case purchase or sale of securities
of a tender offer who violates that is the subject of the
Subsection 27.4 (a)(I), or any violation, purchased or sold
rule or regulation thereunder, securities of the same class
by purchasing or selling a unless such insider, or such
security while in possession of person in the case of a tender
material information not offer, proves that such investor
generally available to the knew the information or would
public (Sec. 61.1) have purchased or sold at the
same price regardless of
disclosure of the information to
him (Sec. 61.1)
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MERCANTILE LAW
BANKING LAWS
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a) The New Central Bank Act [RA 7653] (e) BSP can't acquire shares, including by
b) Law on Secrecy of Bank Deposits [RA 1405] collateral, nor participate in neither
c) General Banking Law of 2000 [RA 8791] ownership nor management of
d) Philippine Deposit Insurance Corporation enterprises, nor engage in development
Act* [RA 3591, as amended] banking or financing [Sec. 128, NCBA]
e) Foreign Currency Deposit Act* [RA 6426]
*Not in 2015 SC Bar Syllabus C. CREATION OF THE BANGKO
SENTRAL NG PILIPINAS (BSP)
I. The New Central Bank Act There is hereby established an independent
[RA 7653] central monetary authority, which shall be a
body corporate known as the Bangko Sentral ng
Pilipinas [Sec. 2, NCBA].
A. STATE POLICIES
The State shall maintain a central monetary
C.1. NATURE OF THE BSP
authority that shall function and operate as an
(1) A central monetary authority;
independent and accountable body corporate in
(2) An independent and accountable body; and
the discharge of its mandated responsibilities
(3) A government-owned corporation but
concerning money, banking and credit. [Sec. 1]
enjoys fiscal and administrative autonomy.
[Secs. 1 & 2, NCBA]
B. SALIENT FEATURES
(1) Assurance of BSP independence by
C.2. CAPITALIZATION
providing for the majority of the members of
The BSP shall have a capitalization of P50B to
the Monetary Board to come from the
be fully subscribed by the Government. [Sec. 2,
private sector. [Sec. 6, NCBA]
NCBA]
(2) The BSP may now concentrate on monetary
policy, and will phase out its fiscal agency
functions and its responsibilities in respect D. RESPONSIBILITY AND PRIMARY
of finance companies without quasi- OBJECTIVE
banking functions, which in the past, had D.1. PRIMARY OBJECTIVES
distracted it from its primary function. The (1) To maintain price stability conducive to
latter has been assumed by the Securities balanced and sustainable economic growth.
and Exchange Commission. [Secs. 3, 129, & (2) To promote and maintain monetary stability
130, NCBA] and the convertibility of the peso.
(3) Provides safeguards to ensure that unlike
the old Central Bank which sustained huge D.2. OTHER RESPONSIBILITIES
losses, the BSP would have a positive net (1) To provide policy directions in the areas of
income position by the following provisions: money, banking, and credit
(a) Capitalization of P50B; [Sec.2, NCBA] (2) To supervise operations of banks
(b) Maintenance of positive net foreign (3) Regulates finance companies and non-bank
asset position; [Sec.71, NCBA] financial institutions performing quasi-
(c) Charging interests on all loans and banking functions [Sec. 3, NCBA]
advances to banks; [Sec. 85, NCBA]
(d) Authority to collect interests on loans
and advances to closed financial
institutions; [Sec. 85, NCBA] and
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VI. CLOSE NOW, HEAR LATER SCHEME (c) Decide on other issues as may be
Sec. 29 of the Central Bank Act does not material to implement the liquidation
contemplate prior notice and hearing before a plan
bank may be directed to stop operations and (3) The receiver shall convert the assets of the
placed under receivership. It is enough that institutions to money, dispose of the same
such action is made subject of a subsequent to creditors and other parties, for the
judicial review. When the law provides for the purpose of paying the debts of such
filing of a case within 10 days after the receiver institution in accordance with the rules on
takes charge of the assets of the bank, it is concurrence and preference of credit under
unmistakable that the assailed actions should the Civil Code. [Sec. 30, NCBA]
precede the filing of the case. The legislature
could not have intended to authorize no prior III. SUITS BY RECEIVER
notice and hearing in the banks closure and at The receiver may institute actions to collect and
the same time allow a suit to annul it on the recover assets or defend actions against the
basis of absence thereof [Central Bank vs. CA institution, with the assistance of counsel as he
and Triumph Savings Bank, GR No. 76118, March may retain. [Sec. 30, NCBA]
30, 1993]
IV. ASSETS ARE UNDER CUSTODIA LEGIS
F.4. LIQUIDATION The assets of the institution under receivership
I. NOTICE and liquidation shall be deemed in custodia
Should the determination be that the institution legis and shall be exempt from any order of
cannot be rehabilitated or permitted to resume garnishment, levy, attachment, or execution.
business, the MB shall notify in writing the [Sec. 30, NCBA]
board of directors of the institution of its
findings and direct the receiver to proceed with V. DISPOSITIONS
the liquidation of the institution. [Sec. 30, After payment of the cost of proceedings,
NCBA] including reasonable expenses and fees of the
receiver to be allowed by the court, the receiver
II. PROCEDURE shall pay the debts of such institution, under
(1) The receiver shall file ex parte with the order of the court, in accordance with the rules
proper RTC, and without requirement of on concurrence and preference of credit in the
prior notice or any other action, a petition Civil Code. [Sec. 31, NCBA]
for assistance in the liquidation of the
institution pursuant to the liquidation plan All revenues and earnings realized by the
adopted by the PDIC. Special rule: if quasi- receiver in winding up the affairs and
bank, liquidation plan adopted by the MB; administering the assets of any bank or quasi-
(2) Upon acquiring jurisdiction, the court shall, bank shall be used to pay the costs of
upon motion by the receiver after due proceedings, salaries of such personnel whose
notice: employment is rendered necessary in the
(a) Adjudicate disputed claims against the discharge of the liquidation together with other
institution; additional expenses caused thereby. The
(b) Assist the enforcement of individual balance of revenues and earnings, after the
liabilities of the stockholders, directors, payment of all said expenses, shall form part of
and officers; and the assets available to creditors. [Sec. 32. NCBA]
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given bank account. [China Banking Corporation government or of any party seeking to enforce
v. Ortega, 1973] those exceptions and inquire into bank deposits.
C. PROHIBITED ACTS If there are doubts in upholding the absolutely
(1) Examination, inquiry, or looking into confidential nature of bank deposits against
deposits by persons, government officials, affirming the authority to inquire into such
bureaus, or offices; [Sec. 2, RA 1405] accounts, then such doubts must be resolved in
(2) Disclosure by banking institutions' officials favor of confidentiality. [Republic v. Eugenio,
or employees to unauthorized persons 2008]
regarding information about covered
accounts. [Sec. 3, RA 1405] Zones of Privacy
Under the RA 1405, bank deposits are
D. DEPOSITS COVERED statutorily protected or recognized zones of
General rule: All deposits of whatever nature privacy. [People v. Estrada, G.R. No. 164368,
with banks or banking institutions in the April 2, 2009; Marquez v. Desierto, G.R. No.
Philippines are considered as of an absolutely 135882, June 27, 2001, 359 SCRA 772; Ople v.
confidential nature. [Sec. 2, RA 1405] Torres, G.R. No. 107737. October 1, 1999, 316
SCRA 43]
Investment in bonds issued by the Government
of the Philippines, its political subdivisions and It is conceded that while the fundamental law
its instrumentalities, are included. [Sec. 2] has not bothered with the triviality of
specifically addressing privacy rights relative to
Special rule: The confidentiality of foreign- banking accounts, there, nevertheless, exists in
currency deposits is governed by the Foreign our jurisdiction a legitimate expectation of
Currency Deposit Act. privacy governing such accounts. The source of
this right of expectation is statutory, and it is
Exclusions: found in R.A. No. 1405, otherwise known as the
Money-market placement is not covered by RA Bank Secrecy Act of 1955. [BSB Group, Inc., v.
1405 because it is not deposited in the bank. Go, 2010]
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property in anti-graft cases. The inquiry Where the plaintiff is fishing for information
into illegally acquired property or so it can determine the culpability of private
property not "legitimately acquired" respondent and the amount of damages it
extends to cases where such property is can recover from the latter. It does not seek
concealed by being held by or recorded recovery of the very money contained in the
in the name of other persons. [Banco deposit. The subject matter of the dispute
Filipino v. Purisima, 1988] may be the amount of P999,000.00 that
petitioner seeks from private respondent as
(d) Those under the AMLA [RA 9160, the a result of the latter's alleged failure to
Anti-Money Laundering Act of 2001] inform the former of the discrepancy; but it
when there is probable cause that the is not the P999,000.00 deposited in the
deposits or investments involved are in drawer's account. By the terms of RA 1405,
any way related to an unlawful activity the money deposited itself should be the
or a money laundering offense. [Sec. 11, subject matter of the litigation. [Union Bank
AMLA as amended] v. Court of Appeals, 1999]
Exceptions to the court requirement:
cases involving: A civil case by Mellon Bank for the recovery
(i) Kidnapping for Ransom [RPC] of amounts converted by the Javiers after a
(ii) Dangerous Drugs [2002 bank erroneously transferred $1M instead of
Comprehensive Dangerous Drugs $1k necessarily involved inquiring into the
Act] whereabouts of the illegally-acquired
(iii) Hijacking and other violations of RA amount extends to whatever is concealed by
6235, being held or recorded in the name of
(iv) Destructive arson and murder persons other than the perpetrators.
Therefore, this falls under the exceptions to
(4) In cases where the money deposited or bank secrecy under RA 1405. [Mellon Bank,
invested is the subject matter of litigation N.A. v. Magsino, 1990]
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convention or agreement. [Sec. 6(F), NIRC, jurisdiction. The bank personnel and the
as amended by RA 10021] account holder must be notified to be present
(2) BSP inquiry or examination in the course of during the inspection, and such inspection may
its periodic or special examination of the cover only the account identified in the pending
bank. [Sec. 11, AMLA] case.
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These banks are mandated to make needed Deposit substitutes funds obtained from the
credit available and readily accessible in the public, other than deposits, through the
rural areas on reasonable terms and which are issuance, endorsement, or acceptance of
primarily governed by the Rural Banks Act of deposit-substitute instruments for the
1992 [RA 7353]. borrower's own account, for the purpose of
relending or purchasing of receivables and
(5) Cooperative Banks other obligations. It includes bankers
acceptances, promissory notes, participations,
A cooperative bank is one organized for the certificates of assignment and similar
primary purpose of providing a wide range of instruments with recourse, and repurchase
financial services to cooperatives and their agreements. [Sec. 95, NCBA]
members. [Art. 23(i), Philippine Cooperative
Code as Amended, RA 6938] Trust Entities a stock corporation or a person
duly authorized by the Monetary Board to
It may perform any or all of the services offered engage in trust business. [Sec. 79, GBL]
by a rural bank, including the operation of an
FCDU subject to certain conditions. [Morales, A Trust Business is any activity resulting from
The Philippine General Banking Law] trusteeship involving the appointment of a
trustee by a trustor for the administration,
(6) Islamic Banks holding, management of funds and/or
properties of the trustor by the trustee for the
These are banks the business dealings and use, benefit or advantage of the trustor or of
activities of which are subject to the basic beneficiaries.
principles and rulings of Islamic Sharia. The Al
Amanah Islamic Investment Bank of the
Philippines, created by RA 6848, is the only
Islamic bank in the country at this time.
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(4) Accepting or creating demand deposits box is not given to the renters. The prevailing
rule is that the relation between the bank
General rule: Only a UB KB can accept or create renting out and the renter is that of bailor and
demand deposits [Sec. 33, GBL] bailee the bailment being for hire and mutual
benefit. [CA Agro-industrial Dev. Corp. v. CA,
Exception: Banks other than a UB or KB with 1983]
prior approval of, and subject to such conditions
and rules as may be prescribed by the Monetary (5) Receiving other types of deposits and deposit
Board [Sec. 33, GBL] substitutes
Types of Deposits:
Fixed, savings, and current deposits of money in 1. Time Deposit - Interest rate stipulated
banks and similar institutions shall be governed depending on the number of days. During
by the provisions concerning simple loan. [Art. this period, the money deposited may not
1980, NCC] be withdrawn without incurring penalty.
High interest rates.
Presumption of ownership of deposits 2. Savings Deposit - Bank pays an interest
It is presumed that money deposited in a bank rate, but not as high as time deposits.
account belongs to the person in whose name 3. Demand Deposits/Current Accounts - No
the deposit account is opened. interest is paid by the bank because the
depositor can take out his funds any time. It
A depositor is presumed to be the owner of is called demand deposit because the
funds standing in his name in a bank deposit; depositor can withdraw the money he
and where a bank is not chargeable with notice deposited on the very same day when he
that the money deposited in such account is the deposited it or at any time thereafter.
property of some other person than the [VILLANUEVA, Commercial Law Review]
depositor, the bank is justified in paying out the 4. Negotiable Order of Withdrawal Accounts
money to the depositor or upon his order, and Interest-bearing deposit accounts that
cannot be liable to any other person as the true combine the payable on demand feature of
owner. [Fultron Iron Works Co. v. China Banking checks and investment feature of savings
Corporation, 1930] accounts [Sec. X223, Manual of Regulations
for Banks]
No duty to set-off
A bank is under no duty or obligation to make (6) Buying and selling foreign exchange and gold
an application or set-off against the deposit or silver bullion
accounts of a borrower. To apply the deposit to
the payment of a loan is a privilege, a right of (7) Acquiring marketable bonds and other debt
set-off which the bank has the option [but not securities
the obligation] to exercise. [BPI v. CA and
Eastern Plywood, 1994] (8) Extending credit
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The bank may demand from its credit General rule: Shall not exceed
On security
applicants a statement of their assets and 75% of the appraised value of
of chattels
liabilities and of their income and expenditure the security, and such loans
and
and such information as may be prescribed by and other credit
intangible
law or by rules and regulations of MB to enable accommodations may be made
properties
the bank to properly evaluate the credit to the title-holder of the
(patents,
application which includes the corresponding chattels and intangible
trademarks,
financial statements submitted for taxation properties or his assignees
trade
purposes to the BIR. [Sec. 40, GBL] Exception: The Monetary Board
names, and
otherwise prescribes [Sec. 38,
copyrights)
Credit enhancement GBL]
If the borrower is less than creditworthy, third
persons may enhance his credit by providing Grant of loans
guarantees and other security devices in favor of (1) Only in amounts and for the periods of time
the bank. [Morales, The Philippine General essential for the effective completion of the
Banking Law, opinion] operations to be financed; and
(2) Consistent with safe and sound banking
A bank cannot lend pesos to a non-resident practices. [Sec. 39, GBL]
[BSP Circular No. 22; Sec. 22, Manual of
Regulations on Foreign Exchange Transactions]. Purpose of loans
[Morales, The Philippine General Banking Law] The purpose shall be stated in the application
and in the contract between the bank and the
Material misrepresentation borrower. [Sec. 39, GBL]
If there is material misrepresentation, bank
(1) May terminate any loan or other credit Effect of usage of loan proceeds for purposes
accommodation granted on the basis of other than those agreed upon with the bank
said statements; and The bank shall have the right to terminate the
(2) Shall have the right to demand immediate loan or other credit accommodation and
repayment or liquidation of the obligation demand immediate repayment of the
[Sec. 40, GBL] obligation. [Sec. 39, GBL]
Limit on loans, credit accommodations and Amortization on loans and other credit
guarantees accommodations
General rule: Shall not exceed (1) Loans and other credit accommodations
75% of the appraised value of with maturities of more than 5 years
the respective real estate Requirement: Provisions must be made for
security, plus 60% of the periodic amortization payments, but such
appraised value of the insured payments must be made at least annually.
Against improvements, and such loans Special rule: That when the borrowed funds
Real estate may be made to the owner of are to be used for purposes which do not
the real estate or to his initially produce revenues adequate for
assignees regular amortization payments therefrom,
Exception: Where the Monetary the bank may permit the initial amortization
Board otherwise prescribes payment to be deferred until such time as
[Sec. 37, GBL] said revenues are sufficient for such
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purpose. Exception to the special rule: In no importance such that the appropriate standard
case shall the initial amortization date be of diligence must be very high, if not the highest
later than 5 years from the date on which degree of diligence. [Far East Bank and Trust
the loan or other credit accommodation is Company v. Tentmakers, 2012]
granted.
(2) In case of loans and other credit The degree of diligence required of banks is
accommodations to microfinance sectors more than that of a good father of a family
The schedule of loan amortization shall where the fiduciary nature of their relationship
take into consideration the projected cash with their depositors is concerned. [PNB v. Tria,
flow of the borrower and adopt this into the 2012]
terms and conditions formulated by banks.
[Sec. 44, GBL] Banks assume a degree of diligence higher than
that of a good father of a family. Its fiduciary
All are subject to such rules as the Monetary duty imposes upon it a higher level of
Board may promulgate. [Sec. 29, GBL] accountability than that expected of a
depositor.[Philippine Banking Corporation vs.
E. DILIGENCE REQUIRED OF BANKS CA, G.R. No. 127469, January 15, 2004]
The banking industry is impressed with public
interest. As such, the highest degree of The General Banking Law of 2000 requires of
diligence is expected, and high standards of banks the highest standards of integrity and
integrity and performance are even required. performance. The banking business is
Banks must treat depositors accounts with impressed with public interest. Of paramount
meticulous care and always to have in mind the importance is the trust and confidence of the
fiduciary nature of its relationship with them. public in general in the banking industry.
[Metrobank v. Rosales, 2014; Comsavings Bank v. Consequently, the diligence required of banks is
Sps. Capistrano, 2013; Equitable Banking v. more than that of a Roman pater familias or a
Special Steel Products, 2012] good father of a family. The highest degree of
diligence is expected. [Philippine Commercial
The Rural Bank of Cabadbaran should not have Bank vs. Balmaceda, G.R. No. 158143, September
simply relied on the face of SPAs since its 21, 2011]
undertaking to lend P200k as a banking
institution requires a greater degree of Notwithstanding the degree of diligence
diligence. [RBCI v. Melecio-Yap, 2014] required, a bank is not expected to be infallible
[Prudential Bank vs. CA, 2000].
The fiduciary nature of banking requires banks
to assume a degree of diligence higher than FIDUCIARY DUTY
that of a good father of a family. [People v. Go, (1) Failure on the part of the bank to satisfy the
2014; Metrobank v. Centro Development, 2012] degree of diligence required of banks may
warrant the award of damages.
Banks are required to observe a higher standard (2) Under Sec. 2, the degree of diligence is
of diligence. [Land Bank v. Poblete, 2013] high standards of integrity and
performance and no longer highest
The banking business is so impressed with degree of diligence as was decided prior to
public interest where the trust and confidence the effectivity of the General Banking Law of
of the public in general is of paramount 2000 but also [mistakenly] even thereafter.
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In numerous cases, the Supreme Court has such as the failure to duly credit him his
held that the highest degree of diligence deposits as soon as they are made, can cause
and care is expected from banks [Simex the depositor not a little embarrassment if not
International v. CA [1990]; Philippine Bank of financial loss and perhaps even civil and
Commerce v. CA [1997]; Westmont Bank v. criminal litigation [Simex International v. CA,
Ong [2002]; Solidbank v. Spouses Tan 1990].
[2003]; Samsung Construction v. FEBTC
[2004]; Citibank, N.A. v. Spouses This fiduciary relationship means that the
Cabamongan [2006]; Philippine Savings banks obligation to observe high standards of
Bank v. Chowking Food Corporation [2008]; integrity and performance is deemed written
Bank of America NT &SA v. Philippine Racing into every deposit agreement between a bank
Club [2009]. and its depositor [Philippine Banking
Corporation vs. CA, G.R. No. 127469, January 15,
The fiduciary nature of banking requires banks 2004].
to assume a degree of diligence higher than
that of a good father of a family. [People v. Go, Banks are expected to exercise the highest
2014; Metrobank v. Centro Development, 2012] degree of diligence in the selection and
supervision of their employees [PCI Bank v. CA,
The degree of diligence required of banks is 2001].
more than that of a good father of a family
where the fiduciary nature of their relationship It cannot be over emphasized that the banking
with their depositors is concerned. [PNB v. Tria, business is impressed with public interest. Of
2012] paramount importance is the trust and
confidence of the public in general in the
The laws policy recognizes the fiduciary nature banking industry. Consequently, the diligence
of banking. [Sps. Serfino v. FEBTC, 2012] required of banks is more than that of a Roman
pater familias or a good father of a family. The
As a business affected with public interest and highest degree of diligence is expected [Phil.
because of the nature of its functions, the bank Savings Bank v. Chowking Food Corporation,
is under obligation to treat the accounts of its 2008].
depositors with meticulous care, always having
in mind the fiduciary nature of their The banking business is so impressed with
relationship. public interest where the trust and confidence
of the public in general is of paramount
In every case, the depositor expects the bank to importance such that the appropriate standard
treat his account with the utmost fidelity, of diligence must be a high degree of diligence,
whether such account consists only of a few if not the utmost diligence [Bank of America
hundred pesos or of millions. The bank must NT&SA v. Phil. Racing Club, 2009].
record every single transaction accurately, down
to the last centavo, and as promptly as possible. Under the doctrine of last clear chance, a bank
This has to be done if the account is to reflect at may be held liable for loss despite the
any given time the amount of money the negligence of a depositor. Examples of these
depositor can dispose as he sees fit, confident cases are the following:
that the bank will deliver it as and to whomever
he directs. A blunder on the part of the bank,
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(1) For disbursing funds to a dishonest Money deposited is commingled with other
employee despite the employees failure to money constituting a common fund.
strictly abide with the banks internal
procedure. [PBC v. CA, 1997] G. STIPULATION ON INTERESTS
(2) Allowing the execution of a mortgage on The Monetary Board may prescribe the
parcels of land as security for a loan not maturities, as well as related terms and
owned by the prospective borrower. [Canlas conditions for various types of bank loans and
v. Court of Appeals, 2000] other credit accommodations.
(3) Crediting the deposit in favor of another
depositor, a check where the signature of Any change by the Board in the maximum
the drawer was forged. [Westmont Bank v. maturities shall apply only to loans and other
Ong, 2002] credit accommodations made after the date of
such action.
F. NATURE OF BANK FUNDS AND
BANK DEPOSITS The Monetary Board shall regulate the interest
The relationship between a depositor and a imposed on micro finance borrowers by lending
bank is that of a creditor and debtor in relation investors and similar lenders such as, but not
to the banks deposit functions [Gullas vs. PNB, limited to, the unconscionable rates of interest
G.R. No. L-43191, November 13, 1935] and not collected on salary loans and similar credit
that of depositor and depositary. accommodations [Sec. 43, GBL]
The contract between the bank and its H. GRANT OF LOANS AND SECURITY
depositor is governed by the provisions of the REQUIREMENTS (PRUDENTIAL
NCC on simple loan [Consolidated Bank and MEASURES)
Trust Corporation vs. CA, G.R. No. 138569,
H.1. RATIO OF NET WORTH TO TOTAL
September 11, 2003].
RISK ASSETS
Concept: The minimum ratio which the net
Bank deposits are in the nature of irregular
worth of a bank must bear to its total risk assets
deposits [Serrano vs. Central Bank, G.R. No. L-
which may include contingent accounts [i.e. net
30511, February 14, 1980]. Therefore, Art. 1287 of
worth: total risk assets] [Sec. 34, GBL]
the Civil Code, which prohibits compensation
when one of the debts arises from depositum,
General rule: A bank must conform to the risk-
does not apply.
based capital ratio prescribed by the MB
Current and savings deposits are loans to a
Excpetions: The MB may alter or suspend
bank because the bank can use the same and
compliance with such ratio whenever necessary
they earn interest [BPI vs. CA, G.R. No. 104612,
for a maximum period of 1 year.
May 10, 1994].
(1) In case of a bank merger or consolidation;
OR
The relationship being contractual in nature,
(2) When a bank is under rehabilitation under a
mandamus is therefore not an available remedy
program approved by the BSP; [Sec. 34]
since mandamus does not lie to enforce the
performance of contractual obligations
[Maclaring Lucman vs. Alimatar Malawi, G.R. No.
159794, December 19, 2006]
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The equity investment of a Universal Bank in or permit any lawful examination into its
(1) Financial Allied Enterprises Up to 100% of affairs [Sec. 34, NCBA]
the equity in a thrift bank, rural bank, or (a) Fine: Not less than Fifty thousand pesos
financial allied enterprise. A publicly-listed nor more than One hundred thousand
UB or KN may own up to 100% of the voting pesos; or
stock of only one other UB or KB. [Sec. 25, (b) Imprisonment: Not less than one year
GBL] nor more than five years; or
(2) Non-Financial Allied Enterprises Up to (c) Both fine and imprisonment: in the
100% of the equity of that enterprise [Sec. discretion of the Court.
26, GBL]
(3) Non-Allied Enterprises Not exceeding (2) Willful making of a false or misleading
35% of the total equity in a single non-allied statement on a material fact to the
enterprise not shall it exceed 35% of the Monetary Board or to the BSP examiners
voting stock in that enterprise. This extends [Sec. 35, NCBA]
to investments by the UBs wholly or (a) Fine: Not less than One hundred
majority-owned subsidiaries. [Sec 27 GBL] thousand pesos [P100,000] nor more
(4) Quasi-banks 40% of the equity of quasi- than One hundred thousand pesos; or
banks [Sec. 28, GBL] (b) Imprisonment: Not more than five years;
or
The equity investment of Commercial Banks in (c) Both fine and imprisonment, in the
(1) Financial Allied enterprises Up to 100% of discretion of the Court.
the equity of a thrift or rural bank. [Sec 31
GBL]. Special rule: Where the equity (3) Willful violation of the NCBA and other
investment of a KB is in other financial pertinent banking laws [including the GBL]
allied enterprises, including other KBs, such being enforced or implemented by the BSP
investment shall remain a minority holding or any order, instruction, rule or regulation
in that enterprise. [Sec. 31, GBL] issued by the MB [Sec. 36, NCBA]
(2) Non-Financial Allied enterprises Up to (a) Fine: Not less than Fifty thousand pesos
100% of the equity of said enterprises. [Sec. nor more than One hundred thousand
32, GBL] pesos; or
(3) Quasi-banks 40% of the equity of quasi- (b) Imprisonment: Not less than two years
banks. [Sec. 28, GBL] nor more than ten years; or
(c) Both fine and imprisonment, in the
I. PENALTIES FOR VIOLATION discretion of the Court.
I.1. GOVERNING LAWS
Violation of any of the provisions of the GBL I.3. ADMINISTRATIVE SANCTIONS
shall be subject to Sections 34, 35, 36 and 37 of [Sec 37, NCBA]
the New Central Bank Act, unless otherwise (1) Willful violation of its charter or by-laws;
provided under therein. willful delay in the submission of reports or
publications thereof as required by law,
I.2. CRIMINAL SANCTIONS rules and regulations; Criminal Acts in Nos.
(1) Refusal by an institution subject to 1 to 3 above; and/or conducting business in
examination and supervision by the an unsafe or unsound manner as may be
Monetary Board to file the required report determined by the Monetary Board
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MERCANTILE LAW
INTELLECTUAL
PROPERTY LAW
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(2) A patent office and the information The law merely requires that it be novel and
contained (1) in another application filed by industrially applicable. [Sec. 109.1, RA 8293]
the inventor and should not have been
disclosed by the office, or (2) in an A utility model registration shall expire,
application filed without the knowledge or without any possibility of renewal, at the end of
consent of the inventor by a third party the seventh year after the date of the filing of
which obtained the information directly or the application. [Sec. 109.3, RA 8293]
indirectly from the inventor
(3) A third party which obtained the Statutory Classes of Utility Models
information directly or indirectly from the A Utility Model may be, or may relate to:
inventor [Sec. 25, RA 8293] (1) A useful machine;
(2) An implement or tool;
(a) Inventive Step An invention involves (3) A product or composition;
an inventive step if, having regard to (4) A method or process; or
prior art, it is not obvious to a person (5) An improvement of any of the foregoing.
skilled in the art at the time of the [Rule 201, Rules and Regulations on Utility
filing date or priority date of the Models and Industrial Designs as
application claiming the invention. [Sec. amended]
26.1, RA 8293, as amended by RA
9502] Grounds for Cancellation of Utility Models
(1) That the claimed invention does not qualify
Cheaper Medicines Act In case of for registration as a utility model and does
drugs and medicines, there is no not meet the requirements of registrability;
inventive step if the invention results (2) That the description and the claims do not
from the mere discovery of a new form comply with the prescribed requirements;
or new property of a known substance (3) That any drawing which is necessary for
which does not result in enhancement the understanding of the invention has not
of the known efficacy of that substance, been furnished;
or the mere discovery of any new (4) That the owner of the utility model
property or new use of a known registration is not the inventor or his
substance or the mere use of a known successor in title [Sec 109.4, RA 8293]
process unless such known process
Industrial Design
results in a new product that employs
An industrial design is any composition of lines
at least one reactant. [Sec. 26.2, RA
or colors or any three-dimensional form,
8293 as amended by RA 9502]
whether or not associated with lines or colors:
Provided that such composition or form gives a
(b) Industrial Applicability An invention
special appearance to and can serve as pattern
that can be produced and used in any
for an industrial product or handicraft. [Sec.
industry shall be industrially applicable.
112.1, RA 8293 as amended by RA 9150]
[Sec. 27, RA 8293]
Lay-out Designs (Topographies) of Integrated
ii. Utility
Circuits
It is any technical solution of a problem in any
Integrated Circuitmeans a product, in its final
field of human activity which is new and
form, or an intermediate form, in which the
industrially applicable. Unlike an invention
elements, at least one of which is an active
patent, a utility model need not be inventive.
element and some or all of the
interconnections are integrally formed in
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and/or on a piece of material, and which is not apply to products and composition for
intended to perform an electronic function. use in any of these methods; [Sec. 22.3, RA
[Sec. 112.2, RA 8293 as amended by RA 9150] 8293]
(4) Plant varieties or animal breeds or
Layout-Design is synonymous with essentially biological process for the
'Topography' and means the three- production of plants or animals. This
dimensional disposition, however expressed, of provision shall not apply to micro-
the elements, at least one of which is an active organisms and non-biological and
element, and of some or all of the microbiological processes; [Sec. 22.4, RA
interconnections of an integrated circuit, or 8293]
such a three-dimensional disposition prepared (5) Aesthetic creations; [Sec. 22.5, RA 8293]
for an integrated circuit intended for (6) Anything which is contrary to public order
manufacture. [Sec. 112.3, RA 8293 as amended or morality. [Sec. 22.6, RA 8293]
by RA 9150]
Cheaper Medicines Act: In addition to
B. NON-PATENTABLE INVENTIONS discoveries, scientific theories and
The following shall be excluded from patent mathematical methods, the IP Code now
protection: includes, in case of drugs and medicines:
(1) Discoveries, scientific theories and (1) The mere discovery of a new form or new
mathematical methods, and in the case of property of a known substance which does
drugs and medicines, the mere discovery of not result in the enhancement of the
a new form or new property of a known known efficacy of that substance
substance which does not result in the (2) the mere discovery of any new property or
enhancement of the known efficacy of that new use of a known substance
substance, or the mere discovery of any (3) the mere use of a known process unless
new property or new use for a known such known process results in a new
substance, or the mere use of a known product that employs at least one reactant
process unless such known process results (Sec. 26.2, RA 8293 as amended by RA
in a new product that employs at least one 9502)
new reactant.
Salts, esters, ethers, polymorphs, metabolites, C. OWNERSHIP OF A PATENT
pure form, particle size, isomers, mixtures of
isomers, complexes, combinations, and other C.1. RIGHT TO A PATENT
derivatives of a known substance shall be General Rule: The right to patent belongs to
considered to be the same substance, unless the inventor, his heirs, or assigns. When two (2)
they differ significantly in properties with or more persons have jointly made an
regard to efficacy; [Sec. 22.1, RA 8293 as invention, the right to a patent shall belong to
amended by RA 9502] them jointly. (Sec.28, RA 8293)
(2) Schemes, rules and methods of performing Exception: Inventions created pursuant to a
mental acts, playing games or doing commission (Work for Hire Doctrine)
business, and programs for computers; (1) The employer has the right to the patent if
[Sec. 22.2, RA 8293] the invention is the result of the
(3) Methods for treatment of the human or performance of the employees regularly
animal body by surgery or therapy and assigned duties [Sec. 30.2, RA 8293]
diagnostic methods practiced on the (2) In case of inventions created pursuant to a
human or animal body. This provision shall commission, the person who commissions
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the work shall own the patent [Sec. 30.1, D. GROUNDS FOR CANCELLATION
RA 8293] OF A PATENT
Any interested person may, upon payment of
C.2. FIRST-TO-FILE RULE
the required fee, petition to cancel the patent
If two (2) or more persons have made the
or any claim thereof, or parts of the claim, on
invention separately and independently of
any of the following grounds:
each other, the right to the patent shall belong
(1) That what is claimed as the invention is not
to the person who filed an application for such
new or patentable;
invention, or where two or more applications
(2) That the patent does not disclose the
are filed for the same invention, to the
invention in a manner sufficiently clear and
applicant who has the earliest filing date or,
complete for it to be carried out by any
the earliest priority date. [Sec. 29, RA 8293]
person skilled in the art; or
C.3. INVENTIONS CREATED PURSUANT (3) That the patent is contrary to public order
TO A COMMISSION or morality. [Sec. 61.1, RA 8293]
Commission: Person who commissions the Where the grounds for cancellation relate to
work shall own the patent, unless otherwise some of the claims or parts of the claim,
provided in the contract [Sec. 30.1, RA 8293) cancellation may be effected to such extent
only. [Sec. 61.2, RA 8293]
Employment Contract: Patent belongs to the
D.1. REQUIREMENT OF THE PETITION
employee if the inventive activity is not a part
The petition for cancellation shall be in writing,
of his regular duties even if the employee uses
verified by the petitioner or by any person in his
the time, facilities and materials of the
behalf who knows the facts, specify the
employer. [Sec. 30.2 (a), RA 8293]
grounds upon which it is based, include a
statement of the facts to be relied upon, and
Patent belongs to the employer if the invention
filed with the Office. Copies of printed
is the result of the performance of his
publications or of patents of other countries,
regularly-assigned duties, unless there is an
and other supporting documents mentioned in
agreement, express or implied, to the contrary.
the petition shall be attached thereto, together
[Sec. 30.2 (b), RA 8293]
with the translation thereof in English, if not in
C.4. RIGHT OF PRIORITY English language. [Sec. 62, RA 8293]
An application for patent filed by any person
D.2. NOTICE OF HEARING
who has previously applied for the same
Upon filing of a petition for cancellation, the
invention in another country which by treaty,
Director of Legal Affairs shall forthwith serve
convention, or law affords similar privileges to
notice of the filing thereof upon the patentee
Filipino citizens, shall be considered as filed as
and all persons having grants or licenses, or
of the date of filing the foreign application:
any other right, title or interest in and to the
Provided, That: (a) the local application
patent and the invention covered thereby, as
expressly claims priority; (b) it is filed within
appears of record in the Office, and of notice of
twelve (12) months from the date the earliest
the date of hearing thereon on such persons
foreign application was filed; and (c) a certified
and the petitioner. Notice of the filing of the
copy of the foreign application together with
petition shall be published in the IPO Gazette.
an English translation is filed within six (6)
[Sec. 63, RA 8293]
months from the date of filing in the
Philippines. [Sec. 31, RA 8293]
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by the patent owner, or by any party enactment of this law; (Sec. 72.4, RA 8293
authorized to use the invention: Provided, as amended by RA 9502)
further, That the right to import the drugs
and medicines contemplated in this (5) Where the act consists of the preparation
section shall be available to any for individual cases, in a pharmacy or by a
government agency or any private third medical professional, of a medicine in
party; [Sec. 72.1, RA 8293 as amended by accordance with a medical shall apply
RA 9502] after a drug or medicine has been
introduced in the Philippines or anywhere
(2) Where the act is done privately and on a else in the world by the patent owner, or by
non-commercial scale or for a non- any party authorized to use the invention:
commercial purpose: Provided, That it Provided, further, That the right to import
does not significantly prejudice the the drugs and medicines contemplated in
economic interests of the owner of the this section shall be available to any
patent; [Sec. 72.2, RA 8293 as amended by government agency or any private third
RA 9502] party; (Sec. 72.5, RA 8293 as amended by
RA 9502)
(3) Where the act consists of making or using
exclusively for experimental use of the There shall be no infringement of trademarks
invention for scientific purposes or or tradenames of imported or sold drugs and
educational purposes and such other medicines allowed as well as imported or sold
activities directly related to such scientific off-patent drugs and medicines: Provided, That
or educational experimental use; [Sec. 72.3, said drugs and medicines bear the registered
RA 8293 as amended by RA 9502] marks that have not been tampered,
unlawfully modified, or infringed. (Sec.159.4
(4) In the case of drugs and medicines, where RA 8293 as amended by RA 9502)
the act includes testing, using, making or
G.1. PRIOR USER
selling the invention including any data
Notwithstanding Section 72 hereof, any prior
related thereto, solely for purposes
user, who, in good faith was using the
reasonably related to the development and
invention or has undertaken serious
submission of information and issuance of
preparations to use the invention in his
approvals by government regulatory
enterprise or business, before the filing date or
agencies required under any law of the
priority date of the application on which a
Philippines or of another country that
patent is granted, shall have the right to
regulates the manufacture, construction,
continue the use thereof as envisaged in such
use or sale of any product: Provided, That,
preparations within the territory where the
in order to protect the data submitted by
patent produces its effect. [Sec. 73.1, RA 8293]
the original patent holder from unfair
commercial use provided in Article 39.3 of
The right of the prior user may only be
the Agreement on Trade-Related Aspects
transferred or assigned together with his
of Intellectual Property Rights (TRIPS
enterprise or business, or with that part of his
Agreement), the Intellectual Property Office,
enterprise or business in which the use or
in consultation with the appropriate
preparations for use have been made. [Sec.
government agencies, shall issue the
73.2, RA 8293]
appropriate rules and regulations
necessary therein not later than one
hundred twenty (120) days after the
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G.2. USE BY THE GOVERNMENT infringing and not suitable for substantial non-
A Government agency or third person infringing. He is jointly and severally liable with
authorized by the Government may exploit the the infringer. [Sec. 76.6, RA 8293]
invention even without agreement of the
patent owner where: H.2. DOCTRINE OF PATENT
(1) The public interest, in particular, national EXHAUSTION
security, nutrition, health or the It espouses that the patentee who has already
development of other sectors, as sold his invention and has received all the
determined by the appropriate agency of royalty and consideration for the same will be
the government, so requires; [Sec. 74.1(a), deemed to have released the invention from
RA 8293] his monopoly. The invention thus becomes
(2) A judicial or administrative body has open to use of the purchaser without further
determined that the manner of restriction. [Adams v. Burke,in Notes on
exploitation, by the owner of the patent or Selected Commercial Laws, Catindig 2003 ed.]
his licensee, is anti-competitive. [Sec.
74.1(b), RA 8293]
H.3. TESTS IN PATENT INFRINGEMENT
i. Literal infringement
The use by the Government, or third person In using literal infringement as a test, resort
authorized by the Government shall be subject, must be had in the first instance to the words
mutatis mutandis, to the conditions set forth in of the claim. To determine whether the
Sections 95 to 97 and 100 to 102 on compulsory particular item falls within the literal meaning
licensing. [Sec. 74.2, RA 8293] of the patent claims, the court must juxtapose
the claims of the patent and the accused
All cases arising from the implementation of product within the overall context of the claims
this provision shall be cognizable by courts and specifications, to determine whether there
with appropriate jurisdiction provided by law. is exact identity of all material elements.
No court except the Supreme Court of the [Godinez v. CA (1993)]
Philippines, shall issue any temporary
restraining order or preliminary injunction or ii. Doctrine of equivalents
such other provisional remedies that will Under the doctrine of equivalents, an
prevent its immediate execution. [Sec. 74.3, RA infringement also occurs when a device
8293 as amended by RA 9502] appropriates a prior invention by incorporating
its innovative concept and, albeit with some
H. PATENT INFRINGEMENT modification and change, performs
It is the making, using, offering for sale, selling, substantially the same function in
or importing a patented product or a product substantially the same way to achieve
obtained directly or indirectly from a patented substantially the same result. [Godinez v. CA
process, or the use of a patented process (1993)]
without the authorization of the patentee. [Sec
76.1, RA 8293 as amended by RA 9502] In order to infringe a patent, a machine or
device must perform the same function, or
H.1. CONTRIBUTORY INFRINGER accomplish the same result by identical or
One who actively induces the infringement of a substantially identical means and the principle
patent or provides the infringer with a or mode of operation must be substantially the
component of a patented product or of a same. [Del Rosario v. CA (1996)]
product produced because of a patented
process knowing it to be especially adopted for
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indicated by the licensor; [Sec. 87.1, RA (12) Those which restrict the research and
8293] development activities of the licensee
(2) Those pursuant to which the licensor designed to absorb and adapt the
reserves the right to fix the sale or resale transferred technology to local conditions
prices of the products manufactured on the or to initiate research and development
basis of the license; [Sec. 87.2, RA 8293] programs in connection with new products,
(3) Those that contain restrictions regarding processes or equipment; (Sec. 87.12, RA
the volume and structure of production; 8293)
[Sec. 87.3, RA 8293] (13) Those which prevent the licensee from
(4) Those that prohibit the use of competitive adapting the imported technology to local
technologies in a non-exclusive technology conditions, or introducing innovation to it,
transfer agreement; [Sec. 87.4, RA 8293] as long as it does not impair the quality
standards prescribed by the licensor; (Sec.
(5) Those that establish a full or partial 87.13, RA 8293)
purchase option in favor of the licensor; (14) Those which exempt the licensor for
(Sec. 87.5, RA 8293) liability for non-fulfillment of his
(6) Those that obligate the licensee to transfer responsibilities under the technology
for free to the licensor the inventions or transfer arrangement and/or liability
improvements that may be obtained arising from third party suits brought
through the use of the licensed technology; about by the use of the licensed product or
(Sec. 87.6, RA 8293) the licensed technology; (Sec. 87.14, RA
(7) Those that require payment of royalties to 8293)
the owners of patents for patents which are (15) Other clauses with equivalent effects. (Sec.
not used; (Sec. 87.7, RA 8293) 87.15, RA 8293)
(8) Those that prohibit the licensee to export
the licensed product unless justified for the Effect of Non-compliance with any provisions of
protection of the legitimate interest of the Secs. 87 and 88
licensor such as exports to countries where The technology transfer arrangement shall
exclusive licenses to manufacture and/or automatically be rendered unenforceable,
distribute the licensed product(s) have unless said technology transfer arrangement is
already been granted; (Sec. 87.8, RA 8293) approved and registered with the
(9) Those which restrict the use of the Documentation, Information and Technology
technology supplied after the expiration of Transfer Bureau under the provisions of
the technology transfer arrangement, Section 91 on exceptional cases. [Sec. 92, RA
except in cases of early termination of the 8293]
technology transfer arrangement due to
Right of Licensor. Unless otherwise provided
reason(s) attributable to the licensee; (Sec.
in the technology transfer agreement, the
87.9, RA 8293)
licensor shall have the right to:
(10) Those which require payments for patents
(1) Grant further licenses to third person
and other industrial property rights after
(2) Exploit the subject matter of the
their expiration, termination arrangement;
technology transfer agreement [Sec. 89,
(Sec. 87.10, RA 8293)
RA 8293]
(11) Those which require that the technology
recipient shall not contest the validity of Right of the Licensee. To exploit the subject
any of the patents of the technology matter of the technology transfer agreement
supplier; (Sec. 87.11, RA 8293)
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during the whole term of the agreement. [Sec. (4) In case of public non-commercial use of
90, RA 8293] the patent by the patentee, without
satisfactory reason; [Sec. 93.4, RA 8293 as
Exceptional cases amended by RA 9502]
(1) In exceptional or meritorious cases where (5) If the patented invention is not being
substantial benefits will accrue to the worked in the Philippines on a commercial
economy, such as high technology content, scale, although capable of being worked,
increase in foreign exchange earnings, without satisfactory reason: Provided, That
employment generation, regional dispersal the importation of the patented article
of industries and/or substitution with or shall constitute working or using the
use of local raw materials patent; [Sec. 93.5, RA 8293 as amended by
(2) The case of BOI-registered companies with RA 9502]
pioneer status [Sec. 91, RA 8293] (6) Where the demand for patented drugs and
medicines is not being met to an adequate
I.2. COMPULSORY
extent and on reasonable terms, as
Compulsory Licensing is the grant of the
determined by the Secretary of the
Director of Legal Affairs of a license to exploit a
Department of Health. [Sec. 93.6, RA 8293
patented invention, even without the
as amended by RA 9502]
agreement of the patent owner, in favor of any
(7) If the invention protected by a patent,
person who has shown his capability to exploit
hereafter referred to as the "second
the invention. (Sec. 93, Ra 8293 as amended by
patent," within the country cannot be
RA 9502)
worked without infringing another patent,
i. Grounds hereafter referred to as the "first patent,"
The Director General of the Intellectual granted on a prior application or benefiting
Property Office may grant a license to exploit a from an earlier priority, a compulsory
patented invention, even without the license may be granted to the owner of the
agreement of the patent owner, in favor of any second patent to the extent necessary for
person who has shown his capability to exploit the working of his invention, subject to
the invention, under any of the following certain conditions. [Sec. 97, RA 8293]
circumstances: (8) Manufacture and export of drugs and
(1) National emergency or other medicines to any country having
circumstances of extreme urgency; [Sec. insufficient or no manufacturing capacity
93.1, RA 8293 as amended by RA 9502] in the pharmaceutical sector to address
(2) Where the public interest, in particular, public health problems: Provided, That, a
national security, nutrition, health or the compulsory license has been granted by
development of other vital sectors of the such country or such country has, by
national economy as determined by the notification or otherwise, allowed
appropriate agency of the Government, so importation into its jurisdiction of the
requires; [Sec. 93.2, RA 8293 as amended patented drugs and medicines from the
by RA 9502] Philippines in compliance with the TRIPS
(3) Where a judicial or administrative body has Agreement. [Sec. 93-A.2, RA 8293 as
determined that the manner of amended by RA 9502]
exploitation by the owner of the patent or
his licensee is anti-competitive; [Sec. 93.3,
RA 8293 as amended by RA 9502]
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ii. Period of filing a Petition for Compulsory (4) Use of the subject matter of the license
License shall be devoted predominantly for the
At any time after the grant of patent. However, supply of the Philippine market: Provided,
a compulsory license may not be applied for on that this limitation shall not apply where
the ground stated in Sec. 93.5 before the the grant of the license is based on the
expiration of a period of four (4) years from the ground that the patentee's manner of
date of filing of the application or three (3) exploiting the patent is determined by
years from the date of the patent whichever judicial or administrative process, to be
period expires last. [Sec. 94, RA 8293 as anti-competitive. ;[Sec. 100.4, RA 8293]
amended by RA 9502] (5) The license may be terminated upon
proper showing that circumstances which
iii. Requirement to Obtain a License on led to its grant have ceased to exist and are
Reasonable Commercial Terms unlikely to recur: Provided, That adequate
General Rule: The license will only be granted protection shall be afforded to the
after the petitioner has made efforts to obtain legitimate interest of the licensee; ; [Sec.
authorization from the patent owner on 100.5, RA 8293]
reasonable commercial terms and conditions (6) The patentee shall be paid adequate
but such efforts have not been successful remuneration taking into account the
within a reasonable period of time. [Sec. 95.1, economic value of the grant or
RA 8293 as amended by RA 9502] authorization, except that in cases where
the license was granted to remedy a
Exceptions: The requirement of authorization
practice which was determined after
shall not apply in the following cases:
judicial or administrative process, to be
(1) Where the petition for compulsory license
anti-competitive, the need to correct the
seeks to remedy a practice determined
anti-competitive practice may be taken
after judicial or administrative process to
into account in fixing the amount of
be anti-competitive;
remuneration. [Sec. 100.6, RA 8293]
(2) In situations of national emergency or
other circumstances of extreme urgency; J. ASSIGNMENT AND TRANSMISSION
(3) In cases of public non-commercial use.
OF RIGHTS
(4) In cases where the demand for the
J.1. ASSIGNMENT OF RIGHTS
patented drugs and medicines in the
The assignment may be of the entire patent or
Philippines is not being met to an
a portion thereof, or be limited to a specified
adequate extent and on reasonable terms,
territory. [Sec. 104, RA 8293]
as determined by the Secretary of the
Department of Health. [Sec. 95.2, RA 8293 J.2. TRANSMISSION OF RIGHTS
as amended by RA 9502] Patents or applications for patents and
iv. Terms and Conditions of Compulsory License invention to which they relate, shall be
(1) The scope and duration of such license protected in the same way as the rights of
shall be limited to the purpose for which it other property under the Civil Code. [Sec. 103.1,
was authorized; [Sec. 100.1, RA 8293] RA 8293]
(2) The license shall be non-exclusive; [Sec.
100.2, RA 8293] Inventions and any right, title or interest in and
(3) The license shall be non-assignable, to patents and inventions covered thereby,
except with that part of the enterprise or may be assigned or transmitted by inheritance
business with which the invention is being or bequest or may be the subject of a license
exploited; ; [Sec. 100.3, RA 8293] contract. (Sec. 103.2, RA 8293)
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A. DEFINITION OF MARKS,
J.3. REQUIREMENTS FOR RECORDING
COLLECTIVE MARKS, TRADE NAMES
OF ASSIGNMENT
A.1. MARKS
(1) It must be in writing and accompanied by
Any visible sign capable of distinguishing the
an English translation, if it is in a language
goods (trademark) or services (service mark) of
other than English or Filipino
an enterprise and shall include a stamped or
(2) It must be notarized
marked container of goods (Sec. 121.1, RA 8293)
(3) It must be accompanied by an
appointment of a resident agent, if the
Trademark Service Mark
assignee is not residing in the Philippines
(4) It must identify the letters patent involved Any visible sign Any visible sign capable
by number and date and give the name of which is adopted and of distinguishing the
the owner of the patent and the title of the used to identify the services of an enterprise
invention. In the case of an application for source of origin of from the service of other
a patent, it should state the application goods, and which is enterprises.
number and the filing date of the capable of
application and give the name of the distinguishing them
applicant and the title of the invention. If from goods
the assignment was executed concurrently emanating from a
with or subsequent to the execution of the competitor.
application but before the application is
Protection
filed or before its application number is
ascertained, it should adequately identify Is not limited to similar marks but also products
the application by its date of execution, the that may case insidious damage.
name of the applicant, and the title of the
Collective Marks
invention.
Any visible sign designated as such in the
(5) It must be accompanied by the required
application for registration and capable of
fees. [Sec. 105; Rules and Regulations on
distinguishing the origin or any other common
Inventions, Rule 1200]
characteristic, including the quality of goods or
J.4. EFFECT OF NON-RECORDING OF services of different enterprises which use the
ASSIGNMENT WITH THE IPO sign under the control of the registered owner of
The non-recording will not affect the binding the collective mark. (Sec. 121.2, RA 8293)
agreement between the assignor and assignee.
Trade Name
However, such registration would be necessary
The name or designation identifying or
to bind third parties. An assignment would be
distinguishing an enterprise (Sec. 121.3, RA
void as against any subsequent purchaser or
8293).
mortgagee for valuable consideration and
without notice unless recorded in the IPO
Any individual name or surname, firm name,
within 3 months from the date of the
device or word used by manufacturers,
assignment or prior to the subsequent
industrialists, merchants, and others to identify
purchase or mortgage. (Sec. 106, RA 8293)
their businesses, vocations or occupations.
[Converse Rubber Corp. v. Universal Rubber
Products, Inc. (1980)]
III. Trademarks A.2. FUNCTIONS OF A TRADEMARK
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(1) To point out distinctly the origin or enterprise or part thereof identified by that
ownership of the goods and to which it is name. [Sec. 165.4, RA 8293]
affixed;
(2) To secure him, who has been instrumental D. NON-REGISTRABLE MARKS
in bringing into the market a superior A mark cannot be registered if it:
article of merchandise, the fruit of his (1) Consists of immoral, deceptive or
industry and skill; scandalous matter, or matter which may
(3) To assure the public that they are disparage or falsely suggest a connection
producing the genuine article; with persons, living or dead, institutions,
(4) To prevent fraud and imposition; and beliefs, or national symbols, or bring them
(5) To protect the manufacturer against into contempt or disrepute; [Sec 123.1(a),
substitution and sale of an inferior and RA 8293]
different article as its product [Mirpuri v. (2) Consists of flags, coat of arms or other
CA (1998)] insignia of the Philippines or any foreign
country; [Sec 123.1(b), RA 8293]
B. ACQUISITION OF OWNERSHIP OF (3) Consists of a name, portrait or signature
MARK identifying a particular living individual
The rights to a mark shall be acquired through except by his written consent, or of a
registration made validly in accordance with deceased President of the Philippines,
law. [Sec. 122, RA 8293] during the life of his widow, except by
written consent of the widow; [Sec 123.1(c),
A certificate of registration shall remain in RA 8293]
force for 10 years (Sec. 145, RA 8293) and may (4) Is identical with a registered mark of
be renewed for periods of 10 years at its another or a mark with an earlier filing or
expiration upon payment of the prescribed fee priority date, in respect of:
and upon filing of a request. [Sec 146, RA 8293] (a) The same goods or services, or
(b) Closely related goods or services, or
C. ACQUISITION OF OWNERSHIP OF (c) If it nearly resembles such a mark as to
TRADE NAME be likely to deceive or cause confusion;
Notwithstanding any laws or regulations [Sec 123.1(d), RA 8293]
providing for any obligation to register trade (5) Is identical with, or confusingly similar to,
names, such names shall be protected, even or constitutes a translation of a well-
prior to or without registration, against any known mark, whether or not registered in
unlawful act committed by third parties. [Sec. the Philippines, and used for identical or
165.2 (a), RA 8293) The ownership of a trade similar goods or services; [Sec 123.1(e), RA
name is acquired through adoption and use. 8293]
(6) Is identical with, or confusingly similar to,
A name or designation may not be used as a or constitutes a translation of a well-
trade name if by its nature or the use to which known mark which is registered in the
such name or designation may be put, it is Philippines, and used for goods or services
contrary to public order or morals and if, in which are not similar; [Sec 123.1(f), RA
particular, it is liable to deceive trade circles or 8293]
the public as to the nature of the enterprise (7) Likely to mislead the public, particularly as
identified by that name. [Sec. 165.1, RA 8293] to the nature, quality, characteristics or
geographical origin of the goods or
Any change in the ownership of a trade name services; [Sec 123.1(g), RA 8293]
shall be made with the transfer of the
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(8) Consists exclusively of signs that are The nature of the goods to which the mark is
generic for the goods or services that they applied will not constitute an obstacle to
seek to identify; [Sec 123.1(h), RA 8293] registration. [Sec 123.3, RA 8293]
(9) Consists exclusively of signs or of
indications that have become customary or
usual to designate the goods or services in E. PRIOR USE OF MARK AS A
everyday language or in a bona fide and REQUIREMENT
established trade practice; [Sec 123.1(i), RA
8293] E.1. USE OF MARK AS A REQUIREMENT
(10) Consists exclusively of signs or of The applicant or the registrant shall file a
indications that may serve in trade to declaration of actual use of the mark with
designate the kind, quality, quantity, evidence to that effect, as prescribed by the
intended purpose, value, geographical Regulations within three (3) years from the
origin, time or production of the goods or filing date of the application. Otherwise, the
rendering of the services, or other application shall be refused or the mark shall
characteristics of the goods or services; be removed from the Register by the Director.
[Sec 123.1(j), RA 8293] [Sec. 124.2, RA 8293]
(11) Consists of shapes that may be
necessitated by technical factors or by the For the requirement of actual use in
nature of the goods themselves or factors commerce in the Philippines before one may
that affect their intrinsic value; [Sec 123.1(k), register a trademark, trade name and service
RA 8293] mark under the law pertains to the territorial
(12) Consists of color alone, unless defined by a jurisdiction of the Philippines and is not only
given form; [Sec 123.1(l), RA 8293] confined to a certain region, province, city or
(13) Is contrary to public order or morality. [Sec barangay. [McDonalds Corporation v. MacJoy
123.1(m), RA 8293] Fastfood (2007)]
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(3) Use of a mark in connection with one or The dominancy test considers the dominant
more of the goods/services belonging to features in the competing marks in
the class in which the mark is registered. determining whether they are confusingly
[Sec. 152.3, RA 8293] similar. Under the dominancy test, courts give
(4) The use of mark by a company related to greater weight to the similarity of the
the applicant or registrant appearance of the product arising from the
(5) The use of mark by a person controlled by adoption of the dominant features of the
the registrant. [Sec. 152.4, RA 8293] registered mark, disregarding minor
differences. Courts will consider more the
The use of a mark by a company related with aural and visual impressions created by the
the registrant or applicant shall inure to the marks in the public mind, giving little weight to
latter's benefit, and such use shall not affect factors like prices, quality, sales outlets and
the validity of such mark or of its registration: market segments.[McDonalds Corporation v.
Provided, that such mark is not used in such L.C. Big Mak Burger, Inc., et al. (2004)]
manner as to deceive the public. [Sec.152.4, Ra
8293] F.3. AS TO THE GOODS OR SERVICES IN
CONNECTION WITH WHICH THE MARKS
F. TESTS TO DETERMINE ARE USED (DOCTRINE OF RELATED
CONFUSING SIMILARITY BETWEEN GOODS/SERVICES)
MARKS (1) Goods are related when they belong to the
F.1. DOMINANCY TEST same class or have the same descriptive
Infringement is determined by the test of properties or physical attributes, or they
dominancy rather than by differences or serve the same purpose or flow through
variations in the details of one trademark and the same channel of trade.
of another. Similarity in size, form and color, (2) The use of identical marks on non-
while relevant is not conclusive. If the competing but related goods may likely
competing trademark contains the main or cause confusion.
essential or dominant features of another, and (3) Corollarily, the use of identical marks on
confusion is likely to result, infringement takes non-competing and unrelated goods is not
place. [Asia Brewery v. CA and San Miguel likely to cause confusion.
(1993)]
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G.1. DETERMINANTS (NEED NOT accordance with the Sec. 123.1 (e), which is
CONCUR) registered in the Philippines with respect to
(1) The duration, extent and geographical goods or services which are not similar to those
area of any use of the mark; with respect to which registration is applied for.
(2) The market share in the Philippines and [Sec 123.1(f), RA 8293]
other countries of the goods/services to
Priority Right
which the mark applies;
An application for registration of a mark filed
(3) The degree of the inherent or acquired
in the Philippines by a person referred to in
distinction of the mark;
Section 3, and who previously duly filed an
(4) The quality-image or reputation acquired
application for registration of the same mark in
by the mark;
one of those countries, shall be considered as
(5) The extent to which the mark has been
filed as of the day the application was first filed
registered in the world;
in the foreign country. [Sec. 131.1, RA 8293]
(6) The exclusivity of the registration attained
by the mark in the world;
No registration of a mark in the Philippines by
(7) The extent of use of the mark in the world;
a person described in this section shall be
(8) The exclusivity of use in the world;
granted until such mark has been registered in
(9) The commercial value attributed to the
the country of origin of the applicant. [Sec.
mark in the world;
131.2, RA 8293]
(10) The record of successful protection of the
rights in the mark;
Significance of Priority Right
(11) The outcome of litigations dealing with the
A Philippine application filed by another
issue of whether the mar is well-known;
applicant after the priority date but earlier
and
than the foreign applicants actual filing may
(12) The presence or absence of identical or
be refused registration if it is identical to the
similar test marks validly registered or
mark with a priority date. [The Law on
used on other similar goods [Rule 102, Rule
Trademark, Infringement and Unfair
on Trademarks]
Competition, Agpalo]
G.2. PROTECTION EXTENDED TO WELL-
G.3. RIGHTS CONFERRED BY A WELL-
KNOWN MARKS
KNOWN MARK
i. If not registered in the Philippines
(1) Right to be protected whether or not it is
A mark cannot be registered if it is identical
registered in the Philippines;
with or confusingly similar to, or constitutes a
(2) If registered under Sec 123.1(e), extension
translation of a mark which is considered by
of protection to goods and services which
the competent authority of the Philippines to
are not similar to those in respect of which
be well-known internationally and in the
the mark is registered, provided that:
Philippines, whether or not it is registered here,
(a) The use of the mark in relation to
as being already the mark of a person other
unrelated or dissimilar goods or
than the applicant for registration and used for
services would indicate a
identical goods or services. [(Sec 123.1(e), RA
connection between those goods
8293]
or services and the owner of the
mark; and
ii. If registered in the Philippines
(b) The interests of the owner of the
A mark cannot be registered if it is identical
registered mark are likely to be
with or confusingly similar to, or constitutes a
translation of a mark considered well-known in
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damaged by such use. [Sec. 147.2, the business using the mark. [Sec. 149.1,
RA 8293] RA 8293]
(2) Such assignment or transfer shall, however,
be null and void if it is liable to mislead the
H. RIGHTS CONFERRED BY public, particularly as regards the nature,
REGISTRATION source, manufacturing process,
Except in cases of importation of drugs and characteristics, or suitability for their
medicines allowed under Section 72.1 of this purpose, of the goods or services to which
Act and of off-patent drugs and medicines, the the mark is applied. [Sec. 149.2, RA 8293]
owner of a registered mark shall have the (3) The assignment of the application for
exclusive right to prevent all third parties not registration of a mark, or of its registration,
having the owner's consent from using in the shall be in writing and require the
course of trade identical or similar signs or signatures of the contracting parties.
containers for goods or services which are Transfers by mergers or other forms of
identical or similar to those in respect of which succession may be made by any document
the trademark is registered where such use supporting such transfer. [Sec. 149.3, RA
would result in a likelihood of confusion. In 8293]
case of the use of an identical sign for identical (4) Assignments and transfers of registrations
goods or services, a likelihood of confusion of marks shall be recorded at the Office on
shall be presumed. [Sec. 147.1, RA 8293 as payment of the prescribed fee; assignment
amended by RA 9502] and transfers of applications for
registration shall, on payment of the same
H.1. LIMITATIONS ON SUCH RIGHTS fee, be provisionally recorded, and the
(1) Duration (except that, inasmuch as the mark, when registered, shall be in the
registration of a trademark could be name of the assignee or transferee. [Sec.
renewed every 10 years, a trademark could 149.4, RA 8293]
conceivably remain registered forever); (5) Assignments and transfers shall have no
(2) Territorial (except well-known marks). effect against third parties until they are
recorded at the Office. [Sec. 149.5, RA
Registration of the mark shall not confer on
8293]
the registered owner the right to preclude third
parties from using bona fide their names, Any license contract concerning the
addresses, pseudonyms, a geographical name, registration of a mark, or an application
or exact indications concerning the kind, therefor, shall provide for effective control by
quality, quantity, destination, value, place of the licensor of the quality of the goods or
origin, or time of production or of supply, of services of the licensee in connection with
their goods or services: Provided, That such use which the mark is used. If the license contract
is confined to the purposes of mere does not provide for such quality control, or if
identification or information and cannot such quality control is not effectively carried
mislead the public as to the source of the out, the license contract shall not be valid. [Sec.
goods or services. [Sec. 148, RA 8293] 150.1, RA 8293]
H.2. ASSIGNMENT AND TRANSFER OF H.3. PROTECTION LIMITED TO GOODS
APPLICATION AND REGISTRATION SPECIFIED IN REGISTRATION
(1) An application for registration of a mark, or CERTIFICATE
its registration, may be assigned or The certificate of registration can confer upon
transferred with or without the transfer of the petitioner the exclusive right to use its own
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symbol only to those goods specified in the A crucial issue in any trademark infringement
certificate, subject to any conditions a case is the likelihood of confusion, mistake or
limitations stated therein. One who has deceit as to the identity, source or origin of the
adopted and used a trademark on his goods goods or identity of the business as a
does not prevent the adoption and use of the consequence of using a certain mark.
same trademark by others for products which Likelihood of confusion is admittedly a relative
are of a different description. [Faberge, Inc. v. term, to be determined rigidly according to the
IAC and Co Beng Kay (1992)] particular (and sometimes peculiar)
circumstances of each case. In determining
I. USE BY THIRD PARTIES OF NAMES, likelihood of confusion, the court must
ETC. SIMILAR TO REGISTERED MARK consider: (a) the resemblance between the
The IPC deems unlawful any subsequent use of trademarks; (b) the similarity of the goods to
the trade name by a third party, whether as a which the trademarks are attached; (c) the
trade name or a mark or collective mark, or any likely effect on the purchaser; and (d) the
such use of a similar trade name or mark, likely registrants express or implied consent and
to mislead the public. [Sec. 165.2 (b), RA 8293] other fair and equitable considerations.
[Mighty Corporation v. E. & J. Gallo Winery
J. INFRINGEMENT AND REMEDIES (2004)]
J.1. TRADEMARK INFRINGEMENT
Any person who shall, without the consent of To establish trademark infringement, the
the owner of the registered mark: following elements must be shown: (1) the
(1) Use in commerce any reproduction, validity of the mark; (2) the plaintiffs
counterfeit, copy, or colorable imitation of ownership of the mark; and (3) the use of the
a registered mark or the same container or mark or its colorable imitation by the alleged
a dominant feature thereof in connection infringer results in likelihood of confusion. Of
with the sale, offering for sale, distribution, these, it is the element of likelihood of
advertising of any goods or services confusion that is the gravamen of trademark
including other preparatory steps infringement. Two types of confusion arise
necessary to carry out the sale of any from the use of similar or colorable imitation
goods or services on or in connection with marks, namely, confusion of goods (product
which such use is likely to cause confusion, confusion) and confusion of business (source or
or to cause mistake, or to deceive; [Sec. origin confusion). While there is confusion of
155.1, RA 8293] goods when the products are competing,
(2) Reproduce, counterfeit, copy or colorably confusion of business exists when the products
imitate a registered mark or a dominant are non-competing but related enough to
feature thereof and apply such produce confusion or affiliation. [McDonalds
reproduction, counterfeit, copy or colorable Corporation v. L.C. Big Mak Burger, Inc., et al.,
imitation to labels, signs, prints, packages, (2004)]
wrappers, receptacles or advertisements
intended to be used in commerce upon or In order to bring a civil action for infringement,
in connection with the sale, offering for it is not required that there is an actual sale of
sale, distribution, or advertising of goods the goods or services using the infringing
or services on or in connection with which material. [Sec. 155.2, RA 8293] Infringement
such use is likely to cause confusion, or to takes place upon the mere use or reproduction
cause mistake, or to deceive. [Sec. 155.2, of the registered mark.
RA 8293]
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No article of imported merchandise which shall Any goods marked or labeled in contravention
copy or simulate the name of any domestic of the provisions of this Section shall not be
product, or manufacturer, or dealer, or which imported into the Philippines or admitted entry
shall copy or simulate a mark registered in at any customhouse of the Philippines. The
accordance with the provisions of this Act, or owner, importer, or consignee of goods refused
shall bear a mark or trade name calculated to entry at any customhouse under this section
induce the public to believe that the article is may have any recourse under the customs
manufactured in the Philippines, or that it is revenue laws or may have the remedy given by
manufactured in any foreign country or locality this Act in cases involving goods refused entry
other than the country or locality where it is in or seized. [Sec. 169.2, RA 8293]
fact manufactured, shall be admitted to entry
at any customhouse of the Philippines. [Sec. J.3. INFRINGEMENT OF NAME AND
166, RA 8293] MARKS OF OWNERSHIP STAMP ON
CONTAINERS
A mere distributor and not the owner cannot General Rule: It is unlawful for any person,
assert any protection from trademark without the consent of the manufacturer,
infringement as it had no right in the first place bottler or seller who has registered the mark of
to the registration of the disputed trademarks. ownership to fill such bottles, boxes, kegs,
[Superior Commercial Enterprises v. Kunnan barrels or other containers so marked and
Enterprises (2010)] stamped, for the purpose of sale, dispose of, or
wantonly destroy the same, whether filled or
J.2. FALSE DESIGNATIONS OF ORIGIN; not, to use the same for drinking vessels or
FALSE DESCRIPTION OR drain pipes, foundation pipes, for any other
REPRESENTATION purpose than that registered. [Sec. 2, RA 623
Any person who, on or in connection with any as amended by RA 5700]
goods or services, or any container for goods,
uses in commerce any word, term, name, The use of the same without apparent
symbol, or device, or any combination thereof, permission from the trademark owners thereof
or any false designation of origin, false or shall be prima facie presumption that such
misleading description of fact, or false or possession or use is unlawful. [Sec. 3, RA 623
misleading representation of fact, which: as amended by RA 5700]
(1) Is likely to cause confusion, or to cause
mistake, or to deceive as to the affiliation, Exceptions:
connection, or association of such person (1) Use of the bottles as containers for sisi,
with another person, or as to the origin, bagoong, patis, and similar native
sponsorship, or approval of his or her products [Sec. 6 RA 623 as amended by
goods, services, or commercial activities by RA 5700]
another person; [Sec. 169.1(a), RA 8293] (2) Persons in whose favor the containers were
(2) In commercial advertising or promotion, sold [Distelleria Washington v. LA Tondena
misrepresents the nature, characteristics, Distillers (1997)]
qualities, or geographic origin of his or her
or another person's goods, services, or J.4. DAMAGES
commercial activities, shall be liable to a The owner of a registered mark may recover
civil action for damages and injunction [Sec. damages from any person who infringes his
169.1 (b), RA 8293] rights, and the measure of the damages
suffered shall be either the reasonable profit
which the complaining party would have made,
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had the defendant not infringed his rights, or confusion, or to cause mistake, or to deceive is
the profit which the defendant actually made an element of infringement. Requirement of
out of the infringement, or in the event such notice may be complied by displaying with the
measure of damages cannot be readily mark the words '"Registered Mark" or the
ascertained with reasonable certainty, then the letter R within a circle. [Sec. 158, RA 8293]
court may award as damages a reasonable
percentage based upon the amount of gross J.6. OTHER REMEDIES AVAILABLE:
sales of the defendant or the value of the (1) Injunction [Sec. 156.4];
services in connection with which the mark or (2) Impounding of sales invoices and other
trade name was used in the infringement of documents [Sec. 156.2];
the rights of the complaining party. [Sec. 156.1, (3) Double damages in case of actual intent to
RA 8293] defraud or to mislead [Sec. 156.3];
(4) Court order for the disposal or destruction
The owner of the registered mark shall not be of the infringing goods [Sec. 157];
entitled to recover profits or damages unless (5) Criminal Action;
the acts have been committed with knowledge (6) Administration sanctions
that such imitation is likely to cause confusion,
or to cause mistake, or to deceive. Such Any foreign national, who qualifies under the
knowledge is presumed if the registrant gives principle on reciprocity and does not engage in
notice that his mark is registered by displaying business in the Philippines, whether or not it is
with the mark the words '"Registered Mark" or licensed to do business in the Philippines, may
the letter R within a circle or if the defendant bring civil or administrative action for:
had otherwise actual notice of the registration. (1) Opposition
[Sec. 158, RA 8293] (2) Cancellation
(3) Infringement
Should damages be recoverable, the measure (4) Unfair Competition
of the damages suffered shall be either: (5) False designation of origin or false
(1) The reasonable profit which the description (Sec. 160. RA 8293)
complaining party would have made, had
the defendant not infringed his rights; or
J.7. LIMITATIONS TO ACTIONS FOR
(2) The profit which the defendant actually INFRINGEMENT
made out of the infringement; or The remedies given to the owner of a right
(3) A reasonable percentage based upon the infringed shall be limited as follows:
amount of gross sales of the defendant or (1) Registered mark shall have no effect
the value of the services in connection with against any person who, in good faith,
which the mark or trade name was used in before the filing date or the priority date,
the infringement of the rights of the was using the mark for the purposes of his
complaining party if such measure of business or enterprise: Provided, That his
damages cannot be readily ascertained right may only be transferred or assigned
with reasonable certainty. [Sec. 156.1, RA together with his enterprise or business or
8293] with that part of his enterprise or business
in which the mark is used. [Sec. 159.1, RA
J.5. REQUIREMENT OF NOTICE 8293]
Notice of registration of trademark is necessary
for an owner of a trademark to recover (2) Where an infringer who is engaged solely
damages in an action for infringement since in the business of printing the mark or
knowledge that such imitation is likely to cause other infringing materials for others is an
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innocent infringer, the owner of the right That said drugs and medicines bear the
infringed shall be entitled as against such registered marks that have not been
infringer only to an injunction against tampered, unlawfully modified, or
future printing. [Sec. 159.2, RA 8293] infringed upon as defined under Section
155. [Sec. 159.4 RA 8293 as amended by RA
(3) Where the infringement complained of is 9502]
contained in or is part of paid
advertisement in a newspaper, magazine, K. UNFAIR COMPETITION
or other similar periodical or in an A person who has identified in the mind of the
electronic communication, the remedies of public the goods he manufactures or deals in,
the owner of the right infringed as against his business or services from those of others,
the publisher or distributor of such whether or not a registered mark is employed,
newspaper, magazine, or other similar has a property right in the goodwill of the said
periodical or electronic communication goods, business or services so identified, which
shall be limited to an injunction against will be protected in the same manner as other
the presentation of such advertising matter property rights. [Sec. 168.1, RA 8293]
in future issues of such newspapers,
magazines, or other similar periodicals or Any person who shall employ deception or any
in future transmissions of such electronic other means contrary to good faith by which he
communications. shall pass off the goods manufactured by him
or in which he deals, or his business, or services
The limitations shall apply only to innocent for those of the one having established such
infringers: Provided, That such injunctive goodwill, or who shall commit any acts
relief shall not be available to the owner of calculated to produce said result, shall be
the right infringed with respect to an issue guilty of unfair competition, and shall be
of a newspaper, magazine, or other similar subject to an action therefor. [Sec. 168.2, RA
periodical or an electronic communication 8293]
containing infringing matter where
restraining the dissemination of such The following shall be deemed guilty of unfair
infringing matter in any particular issue of competition:
such periodical or in an electronic (1) Any person, who is selling his goods and
communication would delay the delivery of gives them the general appearance of
such issue or transmission of such goods of another manufacturer or dealer,
electronic communication is customarily either as to the goods themselves or in the
conducted in accordance with the sound wrapping of the packages in which they are
business practice, and not due to any contained, or the devices or words thereon,
method or device adopted to evade this or in any other feature of their appearance,
section or to prevent or delay the issuance which would be likely to influence
of an injunction or restraining order with purchasers to believe that the goods
respect to such infringing matter. [Sec. offered are those of a manufacturer or
159.3, RA 8293] dealer, other than the actual manufacturer
or dealer, or who otherwise clothes the
(4) There shall be no infringement of goods with such appearance as shall
trademarks or tradenames of imported or deceive the public and defraud another of
sold drugs and medicines allowed under his legitimate trade, or any subsequent
Section 72.1 as well as imported or sold off- vendor of such goods or any agent of any
patent drugs and medicines: Provided,
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vendor engaged in selling such goods with every unfair act committed in the course of
a like purpose; [Sec. 168.3(a), RA 8293] business; it covers only acts characterized by
(2) Any person who by any artifice, or device, deception or any other means contrary to
or who employs any other means good faith in the passing off of goods and
calculated to induce the false belief that services as those of another who has
such person is offering the services of established goodwill in relation with these
another who has identified such services in goods or services, or any other act calculated
the mind of the public; [Sec. 168.3(b), RA to produce the same result.
8293]
(3) Any person who shall make any false What unfair competition is, is further
statement in the course of trade or who particularized under Section 168.3 when it
shall commit any other act contrary to provides specifics of what unfair competition is
good faith of a nature calculated to without in any way limiting the scope of
discredit the goods, business or services of protection against unfair competition. Part of
another. (Sec. 168.3(c), RA 8293) these particulars is provided under Section
168.3(c) which provides the general catch-all
The elements of an action for unfair phrase that the petitioner cites. Under this
competition are: (1) confusing similarity in the phrase, a person shall be guilty of unfair
general appearance of the goods, and (2) competition who shall commit any other act
intent to deceive the public and defraud a contrary to good faith of a nature calculated to
competitor. The confusing similarity may or discredit the goods, business or services of
may not result from similarity in the marks, but another. [Coca-Cola v. Gomez (2008)]
may result from other external factors in the
packaging or presentation of the goods. The From jurisprudence, unfair competition has
intent to deceive and defraud may be inferred been defined as the passing off (or palming off)
from the similarity in appearance of the goods or attempting to pass off upon the public the
as offered for sale to the public. Actual goods or business of one person as the goods
fraudulent intent need not be shown. or business of another with the end and
[McDonalds Corporation v. L.G. Big Mak Burger, probable effect of deceiving the public. It
Inc., et al. (2004)] formulated the true test of unfair
competition: whether the acts of defendant are
An action for unfair competition is based on such as are calculated to deceive the ordinary
the proposition that no dealer in merchandise buyer making his purchases under the ordinary
should be allowed to dress his goods in conditions which prevail in the particular trade
simulation of the goods of another dealer, so to which the controversy relates. One of the
that purchasers desiring to buy the goods of essential requisites in an action to restrain
the latter would be induced to buy the goods of unfair competition is proof of fraud; the intent
the former. The most usual devices employed to deceive must be shown before the right to
in committing this crime are the simulation of recover can exist. The advent of the IP Code
labels and the reproduction of form, color and has not significantly changed these rulings as
general appearance of the package used by they are fully in accord with what Section 168
the pioneer manufacturer or dealer. [Caterpillar, of the Code in its entirety provides. Deception,
Inc v. Samson (2006)] passing off and fraud upon the public are still
the key elements that must be present for
Articles 168.1 and 168.2 provide the concept unfair competition to exist.
and general rule on the definition of unfair
competition. The law does not thereby cover
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M.1. GROUNDS FOR CANCELLATION considerations, the artistic aspects of the work
In addition to the grounds under Section 149, cannot be conceptually separable from the
the Court shall cancel the registration of a utilitarian aspects; thus, the article cannot be
collective mark if the person requesting the copyrighted.
cancellation proves:
(1) That only the registered owner uses the B.2. PROTECTION EXTENDS ONLY TO
mark; or THE EXPRESSION OF AN IDEA, NOT THE
(2) That he uses or permits its use in IDEA ITSELF.
contravention of the agreements referred No protection shall extend, under this law, to
to in Subsection 166.2; or any idea, procedure, system method or
(3) That he uses or permits its use in a manner operation, concept, principle, discovery or mere
liable to deceive trade circles or the public data as such, even if they are expressed,
as to the origin or any other common explained, illustrated or embodied in a work.
characteristics of the goods or services [Sec 175, RA 8293]
concerned. [Sec. 167.3, RA 8293]
B.3. THE COPYRIGHT IS DISTINCT FROM
The registration of a collective mark, or an THE PROPERTY IN THE MATERIAL
application therefor shall not be the subject of a OBJECT SUBJECT TO IT. [SEC 181, RA
license contract. [Sec. 167.4, RA 8293] 8293]
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the use of his works by others. [Sec. 180.1, RA (4) The scientist or technologist or any other
8293 as amended by RA 10372] person with regard to his discovery or
invention.
Copyright in a work of architecture: shall
include the right to control the erection of any Article 722. The author and the composer,
building which reproduces the whole or a mentioned in Nos. 1 and 2 of the preceding
substantial part of the work either in its article, shall have the ownership of their
original form or in any form recognizably creations even before the publication of the
derived from the original: Provided, That the same. Once their works are published, their
copyright in any such work shall not include rights are governed by the Copyright laws.
the right to control the reconstruction or
rehabilitation in the same style as the original The painter, sculptor or other artist shall have
of a building to which that copyright relates. dominion over the product of his art even
[Sec. 186, RA 8293] before it is copyrighted. The scientist or
technologist has the ownership of his discovery
Communication to the Public of Copyrighted or invention even before it is patented.
Works: Includes point-to-point transmission of
a work, including video on demand, and Article 723. Letters and other private
providing access to an electronic retrieval communications in writing are owned by the
system, such as computer databases, servers, person to whom they are addressed and
or similar electronic storage devices. delivered, but they cannot be published or
Broadcasting, rebroadcasting, retransmission disseminated without the consent of the writer
by cable, and broadcast and retransmission by or his heirs. However, the court may authorize
satellite are all acts of communication to the their publication or dissemination if the public
public within the meaning of the IPC. [Rule 11, good or the interest of justice so requires.
Copyright Safeguards and Regulations]
First Public Distribution of Work: An exclusive E.2. MORAL RIGHTS [SEC. 193]
right of first distribution of work includes all The author of a work shall, independently of
acts involving distribution, specifically the economic rights in Section 177 or the grant
including the first importation of an original of an assignment or license with respect to
and each copy of the work into the jurisdiction such right, have the right:
of the Republic of the Philippines. [Rule 12, (1) To require that the authorship of the works
Copyright Safeguards and Regulations] be attributed to him, in particular, the right
that his name, as far as practicable, be
Civil Code Provisions on Ownership of indicated in a prominent way on the copies,
Intellectual Creation: and in connection with the public use of his
work; [Sec. 193.1, RA 8293]
Article 721. By intellectual creation, the (2) To make any alterations of his work prior to,
following persons acquire ownership: or to withhold it from publication; [Sec.
(1) The author with regard to his literary, 193.2, RA 8293]
dramatic, historical, legal, philosophical, (3) To object to any distortion, mutilation or
scientific or other work; other modification of, or other derogatory
(2) The composer; as to his musical action in relation to, his work which would
composition; be prejudicial to his honor or reputation;
(3) The painter, sculptor, or other artist, with [Sec. 193.3, RA 8293]
respect to the product of his art;
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communication to the public of television been held that the playing of music in dine and
broadcasts of the same; [Sec. 211.2, RA dance establishments which was paid for by
8293] the public in purchases of food and drink
(3) The use of such records for fresh constitute performance for public. The music
transmissions or for fresh recording. [Sec. provided for is for the purpose of entertaining
211.3, RA 8293] and amusing customers in order to make the
establishment more attractive and desirable.
Must-Carry Rule: Prevents cable television The expenses entailed thereby are added to
companies from excluding broadcasting the overhead of the restaurant which are either
organization especially in those places not eventually charged to the price of the food and
reached by signal. Also, the rule prevents cable drink or the overall total of additional income
television companies from depriving viewers in produced by the bigger volume of business
far-flung areas the enjoyment of programs which the entertainment was programmed to
available to city viewers. [ABS-CBN attract. Nevertheless, the there is no
Broadcasting vs. Philippine Multi-Media System infringement of copyright law as the composers
(2009)] in this case waived their right in favour of the
public when they allowed their intellectual
Limitations on Protection creations to become property of public domain.
Sections 203, 208 and 209 shall not apply [Filipino Society of Composers vs Benjamin Tan
where the acts referred to in those Sections are 148 SCRA 461 (1987)]
related to:
(1) The use by a natural person exclusively for Term of Protection
his own personal purposes; Works Term
(2) Using short excerpts for reporting current
events; For performances not Fifty (50) years from
(3) Use solely for the purpose of teaching or incorporated in the end of the year in
for scientific research; and recordings which the
(4) Fair use of the broadcast subject to certain performance took
conditions. (Sec. 212, RA 8293) place [Sec. 215.1(a),
RA 8293]
The issue in this case as WON the playing and For sound or image and Fifty (50) years from
signing of musical compositions which have sound recordings and for the end of the year in
been copyrighted under the provisions of the performances which the recording
copyright law inside the restaurant constitute a incorporated therein took place. [Sec.
performance for profit? The court ruled that 215.1(b), RA 8293]
the word perform as used in the ACT has
been applied to one who plays a musical
composition on a piano, thereby producing in Broadcasts Twenty (20) years
the air sound waves which are heard as a from the date the
music and if the instrument he plays on is a broadcast took place
piano plus a broadcasting apparatus, so that [Sec. 215.2, RA 8293]
the waves are thrown out, not only upon the air
but upon others, then he also performing a
musical composition. In relation thereto it has
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Original Literary and Artistic Works including Lifetime of author and for fifty (50) years after his
Posthumous Works death [Sec 213.1, RA 8293]
Derivative Works including Posthumous Works Lifetime of author and for fifty (50) years after his
death [Sec 213.1, RA 8293]
Joint Authorship Lifetime of the last surviving author and for fifty
(50) years after his death [Sec 213.2, RA 8293]
Anonymous or Pseudonymous Works Fifty (50) years from date of first lawful
publication [Sec. 213.3, RA 8293]
Applied Art Twenty-five (25) years from date of making [Sec.
213.4, RA 8293]
Published Photographic Works Fifty (50) years from publication [Sec. 213.5, RA
8293]
Unpublished Photographic Works Fifty (50) years from the making [Sec. 213.5, RA
8293]
Published Audio-visual Works Fifty (50) years from publication [Sec. 213.6, RA
8293]
Unpublished Audio-visual Works Fifty (50) years from the making [Sec. 213.6, RA
8293]
more persons jointly own a copyright or any part computer program with other programs. This
thereof, neither of the owners shall be entitled may also constitute fair use [Sec. 185.1, RA
to grant licenses without the prior written 8293].
consent of the other owner or owners. [Sec.
180.3, RA 8293] The fact that a work is unpublished shall not by
itself bar a finding of fair use if such finding is
The copyright is distinct from the property in the made upon consideration of all the above
material object subject to it. Consequently, the factors. [Sec 185.2, RA 8293]
transfer, assignment or licensing of the
Factors to consider in determining Fair Use
copyright shall not itself constitute a transfer of
(1) The purpose and character of the use,
the material object. Nor shall a transfer or
including whether such use is of a
assignment of the sole copy or of one or several
commercial nature or is for non-profit
copies of the work imply transfer, assignment or
educational purposes;
licensing of the copyright. [Sec. 181, RA 8293 as
(2) The nature of the copyrighted work;
amended by RA 10372]
(3) The amount and substantiality of the
portion used in relation to the copyrighted
The owners of copyright and related rights or
work as a whole; and
their heirs may designate a society of artists,
(4) The effect of the use upon the potential
writers, composers and other right-holders to
market for or value of the copyrighted work
collectively manage their economic or moral
[Sec. 185.1, RA 8293; (Harper & Row v.
rights on their behalf. For the said societies to
Nation Enterprise, 471 US 539, 105 S.Ct. 2218,
enforce the rights of their members, they shall
85 L.Ed.2d 588]
first secure the necessary accreditation from the
Intellectual Property Office. [Sec. 183, RA 8293 The format of a show is not copyrightable.
as amended by RA 10372] [Joaquin vs Drilon 302 SCRA 225 (1999)]
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(4) Reproduction and communication to the (11) Use made of a work for the purpose of any
public of literary, scientific or artistic works judicial proceedings or for the giving of
as part of reports of current events by professional advice by a legal practitioner.
means of photography, cinematography or [Sec. 184.1(k), RA 8293]
broadcasting to the extent necessary for the (12) The reproduction or distribution of
purpose; [Sec. 184.1(d), RA 8293] published articles or materials in a
(5) Inclusion of a work in a publication, specialized format exclusively for the use of
broadcast or other communication to the the blind, visually- and reading-impaired
public, sound recording or film if made by persons: Provided, That such copies and
way of illustration for teaching purposes distribution shall be made on a nonprofit
compatible with fair use and the source and basis and shall indicate the copyright owner
the name of the author appearing on work, and the date of the original publication. [Sec.
must be mentioned; [Sec. 184.1(e), RA 8293] 184.1(l), RA 8293 as amended by RA 10372]
(6) Recording made in schools, universities, or
educational institutions of a work included Reproduction of Published Work
in a broadcast for the use of schools, General Rule: The private reproduction of a
universities or educational institutions. published work in a single copy, where the
Such recording must be deleted within a reproduction is made by a natural person
reasonable period; such recording may not exclusively for research and private study, shall
be made from audio-visual works which are be permitted, without the authorization of the
part of the general cinema, repertoire of owner of copyright in the work. [Sec. 187.1, RA
feature films except of brief excerpts of the 8293]
work; [Sec. 184.1(f), RA 8293]
Exceptions: Such permission shall not extend to:
(7) Making of ephemeral recordings; (i) by a
(1) A work of architecture in the form of
broadcasting organization, (ii) by means of
building or other construction;
its work or facilities, (iii) for use in its own
(2) An entire book, or a substantial part thereof,
broadcast; [Sec. 184.1(g), RA 8293]
or of a musical work in graphic form by
(8) Use made of a work by or under the
reprographic means;
direction or control of the government for
(3) A compilation of data and other materials;
public interest compatible with fair use; [Sec.
(4) A computer program except as provided in
184.1(h), RA 8293]
Section 189; and
(9) Public performance or the communication
(5) Any work in cases where reproduction
to the public of a work in a place where no
would unreasonably conflict with a normal
admission fee is charged by a club on
exploitation of the work or would otherwise
institution for charitable or educational
unreasonably prejudice the legitimate
purpose only and the aim is not profit-
interests of the author. [187.2, RA 8293]
making; [Sec. 184.1(i), RA 8293]
(10) Public display of the original or a copy of the Reprographic Reproduction by Libraries
work not made by means of a film, slide, Any library or archive whose activities are not
television, image or otherwise on screen or for profit may, without the authorization of the
by means of any other device or process author of copyright owner, make a single copy
either the work has been published, sold, of the work by reprographic reproduction:
given away, or transferred to another (1) Where the work by reason of its fragile
person by the author or his successor in character or rarity cannot be lent to user in
title; [Sec. 184.1(j), RA 8293] its original form;
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(2) Where the works are isolated articles obtained copy of the computer program is
contained in composite works or brief lost, destroyed or rendered unusable. [Sec.
portions of other published works and the 189.1, RA 8293]
reproduction is necessary to supply them,
when this is considered expedient, to No copy or adaptation mentioned in this Section
persons requesting their loan for purposes shall be used for any purpose other than the
of research or study instead of lending the ones determined in this Section, and any such
volumes or booklets which contain them; copy or adaptation shall be destroyed in the
and event that continued possession of the copy of
(3) Where the making of such a copy is in order the computer program ceases to be lawful. [Sec.
to preserve and, if necessary in the event 189.2, RA 8293]
that it is lost, destroyed or rendered
Importation for Personal Purposes
unusable, replace a copy, or to replace, in
The importation of a copy of a work by an
the permanent collection of another similar
individual for his personal purposes shall be
library or archive, a copy which has been
permitted without the authorization of the
lost, destroyed or rendered unusable and
author of, or other owner of copyright in, the
copies are not available with the publisher.
work under the following circumstances:
[Sec. 188.1, RA 8293]
(1) When copies of the work are not available in
It shall not be permissible to produce a volume the Philippines and:
of a work published in several volumes or to (a) Not more than one (1) copy at one
produce missing tomes or pages of magazines time is imported for strictly
or similar works, unless the volume, tome or individual use only; or
part is out of stock: Provided, That every library (b) The importation is by authority of
which, by law, is entitled to receive copies of a and for the use of the Philippine
printed work, shall be entitled, when special Government; or
reasons so require, to reproduce a copy of a (c) The importation, consisting of not
published work which is considered necessary more than three (3) such copies or
for the collection of the library but which is out likenesses in any one invoice, is not
of stock. [Sec. 188.2, RA 8293)] for sale but for the use only of any
religious, charitable, or educational
Reproduction of Computer Program society or institution duly
The reproduction in one (1) back-up copy or incorporated or registered, or is for
adaptation of a computer program shall be the encouragement of the fine arts,
permitted, without the authorization of the or for any state school, college,
author of, or other owner of copyright in, a university, or free public library in
computer program, by the lawful owner of that the Philippines.
computer program: Provided, That the copy or (2) When such copies form parts of libraries
adaptation is necessary for: and personal baggage belonging to persons
(a) The use of the computer program in or families arriving from foreign countries
conjunction with a computer for the and are not intended for sale: Provided, that
purpose, and to the extent, for which the such copies do not exceed three (3). [Sec.
computer program has been obtained; and 190.1, RA 8293 is repealed by RA 10372]
(b) Archival purposes, and, for the replacement
of the lawfully owned copy of the computer Copies imported as allowed by this Section may
program in the event that the lawfully not lawfully be used in any way to violate the
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rights of owner the copyright or annul or limit The following are specific rules applicable in
the protection secured by this Act, and such IPR Cases:
unlawful use shall be deemed an infringement
and shall be punishable as such without (a) Rules 2-9 of the RoC shall apply to all civil
prejudice to the proprietor's right of action. [Sec. actions for violation of intellectual property
190.2, RA 8293 is repealed by RA 10372] rights under RA 8293 and other violations
of intellectual property rights as may be
Importation and Exportation of Infringing defined by law.
Materials. Subject to the approval of the (b) Special Commercial Courts in Quezon City,
Secretary of Finance, the Commissioner of Makati, Manila, and Pasig shall have
Customs is hereby empowered to make rules authority to act on applications for the
and regulations for preventing the importation issuance of writs of search and seizure in
or exportation of infringing articles prohibited civil actions for violations of the Code,
under Part IV of this Act and under relevant enforceable nationwide. Special
treaties and conventions to which the Commercial Courts have concurrent
Philippines may be a party and for seizing and jurisdiction over applications enforceable
condemning and disposing of the same in case within their own jurisdiction for violations
they are discovered after they have been within the judicial region.
imported or before they are exported [Sec. 190, (c) It shall be the duty of the Clerk of Court to
RA 8293 as amended by RA 10372] notify the Director-General of the
Intellectual Property Office of any action
involving a copyright, trademark, service
IV. Rules of Procedure mark, patent, industrial design, utility
model, undisclosed information, and
for Intellectual Property technology transfer agreement.
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(c) Any foreign national or juridical person who Applicant has 31 days from issuance of writ to
meets the requirements of the preceding file a case before the appropriate court or quasi-
paragraph, and does not engage business judicial agency.
in the Philippines.
For failure to file a case, the Court may, upon
C.3. FORM AND CONTENTS OF THE motion of the owner of the seized goods, order
PETITION: the return of such goods. Such motion must be
(1) Full names of parties to the case; filed within 60 days from the expiration of the
(2) Facts showing capacity of parties to sue or period to file cases.
be sued, or the authority of a party to sue or
be sued in a representative capacity, or the If the owner fails to file the motion, the Court
legal existence of an organized association may dispose of the goods after notice and
of persons that is made a party; hearing.
(3) ultimate facts showing the cause of action
(4) reliefs sought; C.6. SUMMONS:
(5) an affidavit in question-and-answer format Summons shall be served no later than 5 days
must be attached to the complaint. Such from receipt of the complaint.
affidavit shall state only the facts of direct
personal knowledge to the affiants which C.7. ANSWER:
are admissible in evidence, and shows the Must be filed 15 days afer service of summons;
competence of the affiants to testify. 10 days if answer to compulsory counterclaim or
(6) Certificate of non-forum shopping. cross-claim.
C.4. PROHIBITED PLEADINGS: Should the defendant fail to answer, the Court
(a) Motion to dismiss may, motu proprio or upon motion of the
(b) Motion for bill of particulars plaintiff, render judgment based on the
(c) Motion for reconsideration of a final order affidavits and the evidence on record unless it
judgment, except with regard to an order of requires the submission of additional evidence.
destruction
(d) Reply D. MODES OF DISCOVERY
(e) Petition for relief from judgment A party may avail of the different modes of
(f) Motion for extention of time to submit discovery not later than 30 days from the
pleadings, except for meritorious reasons joinder of issues.
(g) Motion for postponement intended for delay
(h) Third-party complaint Any objection must be made within 10 days
(i) Intervention from receipt of the request for discovery and
(j) Motion to hear affirmative defenses only on the ground that the matter requested is
(k) Any petition or motion with similar effect to manifestly incompetent, irrelevant, immaterial,
the foregoing. privileged in nature or for harassment.
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If either fails, the case shal be sent back to the Authentication of documents may be subject of
court for pre-trial. agreement of the parties.
Immediately after the termination of the Presumptions in the Intellectual Property Code
clarificatory hearings the parties must submit shall apply to these Rules.
their position papers within 10 days.
I. EVIDENCE IN PATENT CASES
The judicial affidavits attached to the position Subject matter is a patent for process for
papers shall serve as the direct testimony of the obtaining a product:
witnesses, subject to cross-examination. Any identical product is presumed to have been
obtained through the use of the patented
The period of trial shall be 30 days allotted to process if:
the plaintiff and defendant. (1) The product is new;
(2) There is substantial likelihod that the
After an oral ruling on the last offer of evidence, product was made by the process and that
the Court shall direct the parties to submit their the owner of the patent has been unable,
respective draft decisions within a non- despite reasonable efforts, to determine the
extendible period of 30 days from receipt of process actually used.
order.
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In such cases the Court shall order the In determining likelihood of confusion, the
defendant/accused to show that the the Court must consider the general impression of
process he used to obtain the identical product the ordinary purchaser, buying under the
is different from the patented process. normally prevalent conditions of trade, and
giving such attention buyers normally give in
Presumptions concerning patents: buying that class of goods.
(1) A letters patent issued by the IPO is prima
facie evidence of its existence and validity The following factors are taken into account:
during the term specified, unless cancelled (1) Strength of the plaintiff's mark
or voided by final judgment. (2) Degree of similarity between the
(2) Letters patent issued by the IPO are plaintiff's and the defendan's marks
presumed to have been validly issued (3) Proximity of the products or services.
unless overcome by evidence of irregularity. (4) Likelihood that the plaintiff will bridge
(3) It is presumed that the defendant/accused the gap
is aware of the existence of the patent if the (5) Evidence of actual confusion
words "Philippine patent" with the patent (6) Defendant's good faith in adopting the
number are written on: mark
(a) the patented invention or the product (7) Quality of the defendant's service
manufactured using the patented (8) Sophistication of the buyers
process
"Colorable imitation" - denotes a close or
(b) on the container or the package in
ingenious imitation as calculated to deceive
which said article is supplied to the
ordinary persons, or such a resemblance to the
public
original as to deceive an ordinary purchaser
(c) on the advertising material related to
giving such attention as a purchaser usually
the patented invention or process.
gives, as to cause him to purchase the one
supposing it to be the other.
J. EVIDENCE IN TRADEMARK
INFRINGEMENT AND UNFAIR Intent to Defraud
COMPETITION CASES There is a presumption of an intent to defraud:
(1) When the defendant passess of a
A certificate of registration shall be prima facie product as his by using imitative devices,
evidence of: signs, or marks on the general
(1) The validity of the registration appearance of the goods, misleading
(2) The registrant's ownership of the mark purchasers into buying his merchandise
(3) The registrant's right to exclusively use under the impression that they are
the same buying that of his competitors.
(2) When the defendant makes a false
Determination of a well-known mark:
statement in the course of trade to
Knowledge of the relevant sector of the public,
discredit the goods and business of
rather than the knowledge of the general public,
another.
shall be taken into account. (for the criteria in
(3) Where the similarity of the goods as
determining a well-known mark, see
packed and offered for sale is so striking.
Determinants, supra.)
K. EVIDENCE IN COPYRIGHT CASES
Likelihood of confusion:
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Presumption of Copyright
Copyright is presumed to subsist and ownership The hearing shall be summary in nature with
thereof shall be presumed to belong to the notice of hearing addressed to defendant to
complainant if he so claims through affidavit afford him opportunity to oppose the motion.
evidence, unless defendant attaches proof to
the contrary in his answer to the complaint.
Conditions for the Order of Destruction
Mere denial of the subsistence of the copyright (a) Inventory and photographs of the seized
based on lack of knowledge shall not be infringing goods taken before
sufficient to rebut the presumption. destruction
(b) Taking and inventory must be witnessed
Effect of registration and deposit by the (i) accused, counsel or agent; (ii)
Registration and deposit of copyrighted work is the complainant, his representative, or
not a condition sine qua non to a claim of counsel,
copyright infringement. (c) A representative sample of the seized
goods must be retained for evidentiary
Presumption of authorship (supra.) purposes
(d) An inventory of the samples must have
International registration of works been made
A statement concerning a work, recorded in an (e) The officer authorized to supervise the
international register in accordance with an destruction has submitted a report
international treaty to which the Philippines is thereon within 5 days from the date of
or may become a party, shall be construed as the destruction
true until the contrary is proved, except: (f) Posting of a bond by the applicant
(a) Where the statement cannot be
valid under the Intellectual Property
Code or any other law concerning
intellectual property;
(b) Where the statement is
contradicted by another statement
in the register.
L. ORDER OF DESTRUCTION
At any time after the filing of the complaint or
information, the Court, upon motion and after
due notice and hearing where the violation of
the intellectual property rights of the owner is
established, may order the destruction of the
seized infringing goods, objects and devices,
including but not limited to, sales invoices,
other documents evidencing sales, labels, signs,
prints, packages, wrappers, receptacles, and
advertisements and the like used in the
infringing act.
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SPECIAL LAWS
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legal person or arrangement; and (iv) acting verifying their legal existence and
as (or arranging for another person to act organizational structure, as well as the
as) a nominee shareholder for another authority and identification of all persons
person; and purporting to act on their behalf.
(7) persons who provide any of the following
services: The provisions of existing laws to the contrary
i. managing of client money, securities or notwithstanding, anonymous accounts,
other assets; accounts under fictitious names, and all other
ii. management of bank, savings or similar accounts shall be absolutely prohibited.
securities accounts; Peso and foreign currency non-checking
iii. organization of contributions for the numbered accounts shall be allowed. The BSP
creation, operation or management of may conduct annual testing solely limited to the
companies; and determination of the existence and true identity
iv. creation, operation or management of of the owners of such accounts.
juridical persons or arrangements, and
buying and selling business entities. Record Keeping
All records of all transactions of covered
Notwithstanding the foregoing, the term institutions shall be maintained and safely
covered persons shall exclude lawyers and stored for five (5) years from the dates of
accountants acting as independent legal transactions.
professionals in relation to information
concerning their clients or where disclosure of With respect to closed accounts, the records on
information would compromise client customer identification, account files and
confidences or the attorney-client relationship: business correspondence, shall be preserved
Provided, That these lawyers and accountants and safely stored for at least five (5) years from
are authorized to practice in the Philippines and the dates when they were closed.
shall continue to be subject to the provisions of
their respective codes of conduct and/or Reporting of Covered and Suspicious
professional responsibility or any of its Transactions
amendments. (Sec. 1, RA 10365) Covered institutions shall report to the AMLC all
covered transactions and suspicious
C. OBLIGATIONS OF COVERED transactions within five (5) working days from
INSTITUTIONS occurrence thereof, unless the Supervising
Authority prescribes a longer period not
(1) Customer Identification exceeding ten (10) working days.
(2) Record Keeping
(3) Reporting of Covered and Suspicious Should a transaction be determined to be both
Transactions (Sec. 9) a covered transaction and a suspicious
transaction, the covered institution shall be
Customer Identification required to report the same as a suspicious
Covered institutions shall establish and record transaction.
the true identity of its clients based on official
documents. They shall maintain a system of When reporting covered or suspicious
verifying the true identity of their clients and, in transactions to the AMLC, covered institutions
case of corporate clients, require a system of and their officers and employees
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(2) The client is not properly identified; (3) Any person knowing that any monetary
(3) The amount involved is not commensurate instrument or property is required under
with the business or financial capacity of the this Act to be disclosed and filed with the
client; Anti-Money Laundering Council (AMLC),
(4) Taking into account all known fails to do so. (Sec. 4)
circumstances, it may be perceived that the
clients transaction is structured in order to Sec. 4 of RA 10365 amends this section as
avoid being the subject of reporting follows:
requirements under the Act;
(5) Any circumstance relating to the Money laundering is committed by any person
transaction which is observed to deviate who, knowing that any monetary instrument or
from the profile of the client and/or the property represents, involves, or relates to the
clients past transactions with the covered proceeds of any unlawful activity:
institution;
(6) The transaction is in anyway related to an (a) transacts said monetary instrument or
unlawful activity or offense under this Act property;
that is about to be, is being or has been (b) converts, transfers, disposes of, moves,
committed; or acquires, possesses or uses said monetary
(7) Any transaction that is similar or analogous instrument or property;
to any of the foregoing (Sec. 3 [b-1], added (c) conceals or disguises the true nature,
by Sec. 2 of RA 9194) source, location, disposition, movement or
ownership of or rights with respect to said
F. WHEN IS MONEY LAUNDERING monetary instrument or property;
COMMITTED (d) attempts or conspires to commit money
laundering offenses referred to in
Money laundering is a crime whereby the paragraphs (a), (b) or (c);
proceeds of an unlawful activity are transacted, (e) aids, abets, assists in or counsels the
thereby making them appear to have originated commission of the money laundering
from legitimate sources. offenses referred to in paragraphs (a), (b) or
(c) above; and
It is committed by the following: (f) performs or fails to perform any act as a
result of which he facilitates the offense of
(1) Any person knowing that any monetary money laundering referred to in paragraphs
instrument or property represents, involves, (a), (b) or (c) above.
or relates to the proceeds of any unlawful
activity, transacts or attempts to transact Money laundering is also committed by any
said monetary instrument or property. covered person who, knowing that a covered or
(2) Any person knowing that any monetary suspicious transaction is required under this Act
instrument or property involves the to be reported to the Anti-Money Laundering
proceeds of any unlawful activity, performs Council (AMLC), fails to do so.
or fails to perform any act as a result of
which he facilitates the offense of money
laundering referred to in paragraph (a)
above.
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known as the Wildlife Resources the Chairman of the Securities and Exchange
Conservation and Protection Act; Commission as members. (Sec. 7)
(26) Violation of Section 7(b) of Republic Act
No. 9072, otherwise known as the National H.1. FUNCTIONS
Caves and Cave Resources Management
Protection Act; The AMLC shall act unanimously in the
(27) Violation of Republic Act No. 6539, discharge of its functions as defined hereunder:
otherwise known as the Anti-Carnapping (1) to require and receive covered or
Act of 2002, as amended; suspicious transaction reports from
(28) Violations of Sections 1, 3 and 5 of covered institutions;
Presidential Decree No. 1866, as amended, (2) to issue orders addressed to the
otherwise known as the decree Codifying appropriate Supervising Authority or the
the Laws on Illegal/Unlawful Possession, covered institution to determine the true
Manufacture, Dealing In, Acquisition or identity of the owner of any monetary
Disposition of Firearms, Ammunition or instrument or property subject of a
Explosives; covered transaction or suspicious
(29) Violation of Presidential Decree No. 1612, transaction report or request for
otherwise known as the Anti-Fencing Law; assistance from a foreign State, or
(30) Violation of Section 6 of Republic Act believed by the Council, on the basis of
No. 8042, otherwise known as the Migrant substantial evidence, to be, in whole or in
Workers and Overseas Filipinos Act of 1995, part, wherever located, representing,
as amended by Republic Act No. 10022; involving, or related to, directly or
(31) Violation of Republic Act No. 8293, indirectly, in any manner or by any means,
otherwise known as the Intellectual the proceeds of an unlawful activity.
Property Code of the Philippines; (3) to institute civil forfeiture proceedings and
(32)Violation of Section 4 of Republic Act No. all other remedial proceedings through
9995, otherwise known as the Anti-Photo the Office of the Solicitor General;
and Video Voyeurism Act of 2009; (4) to cause the filing of complaints with the
(33)Violation of Section 4 of Republic Act No. Department of Justice or the Ombudsman
9775, otherwise known as the Anti-Child for the prosecution of money laundering
Pornography Act of 2009; offenses;
(34) Violations of Sections 5, 7, 8, 9, 10(c), (d) (5) to investigate suspicious transactions and
and (e), 11, 12 and 14 of Republic Act No. covered transactions deemed suspicious
7610, otherwise known as the Special after an investigation by AMLC, money
Protection of Children Against Abuse, laundering activities, and other violations
Exploitation and Discrimination; of this Act;
(6) to apply before the Court of Appeals, ex
H. ANTI-MONEY LAUNDERING parte, for the freezing of any monetary
COUNCIL instrument or property alleged to be the
proceeds of any unlawful activity as
The Anti-Money Laundering Council shall be defined in Section 3(i) hereof;
composed of the Governor of the Bangko (7) to implement such measures as may be
Sentral ng Pilipinas as chairman, the necessary and justified under this Act to
Commissioner of the Insurance Commission and counteract money laundering;
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No court shall issue a temporary restraining related accounts, with any banking institution
order or a writ of injunction against any freeze or non-bank financial institution upon order of
order, except the Supreme Court. any competent court based on an ex parte
application in cases of violations of this Act,
J. AUTHORITY TO INQUIRE INTO when it has been established that there is
BANK DEPOSITS probable cause that the deposits or investments,
including related accounts involved, are related
Notwithstanding the provisions of Republic Act to an unlawful activity as defined in Section 3(i)
No. 1405, as amended, Republic Act No. 6426, hereof or a money laundering offense under
as amended, Republic Act No. 8791, and other Section 4 hereof; except that no court order
laws, the AMLC may inquire into or examine any shall be required in cases involving activities
particular deposit or investment with any defined in Section 3(i)(1), (2), and (12) hereof,
banking institution or non-bank financial and felonies or offenses of a nature similar to
institution upon order of any competent court in those mentioned in Section 3(i)(1), (2), and (12),
cases of violation of this Act when it has been which are Punishable under the penal laws of
established that other countries, and terrorism and conspiracy to
commit terrorism as defined and penalized
(1) there is probable cause that the deposits under Republic Act No. 9372."
OR
(2) investments involved are related to an "The Court of Appeals shall act on the
unlawful activity as defined in Section 3(i) application to inquire into or examine any
hereof or a money laundering offense deposit or investment with any banking
under Section 4 hereof; institution or non-bank financial institution
within twenty-four (24) hours from filing of the
except that no court order shall be required in application."
cases involving unlawful activities defined in
Sections 3(i)(1), (2) and (12). "To ensure compliance with this Act, the
Bangko Sentral ng Pilipinas may, in the course
To ensure compliance with this Act, the Bangko of a periodic or special examination, check the
Sentral ng Pilipinas (BSP) may inquire into or compliance of a Covered institution with the
examine any deposit or investment with any requirements of the AMLA and its
banking institution or non-bank financial implementing rules and regulations."
institution when the examination is made in the
course of a periodic or special examination, in "For purposes of this section, related accounts
accordance with the rules of examination of the shall refer to accounts, the funds and sources of
BSP. (Sec.11) which originated from and/or are materially
linked to the monetary instrument(s) or
Sec. 2 of RA 10167 amended Sec. 11 to read as property(ies) subject of the freeze order(s)."
follows:
"A court order ex parte must first be obtained
Notwithstanding the provisions of Republic Act before the AMLC can inquire into these related
No. 1405, as amended; Republic Act No. 6426, Accounts: Provided, That the procedure for the
as amended; Republic Act No. 8791; and other ex parte application of the ex parte court order
laws, the AMLC may inquire into or examine any for the principal account shall be the same with
particular deposit or investment, including that of the related accounts."
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"The authority to inquire into or examine the (e) Transfers the authority to freeze any
main account and the related accounts shall money/property from the AMLC to the
comply with the requirements of Article III, Court of Appeals.
Sections 2 and 3 of the 1987 Constitution, which
are hereby incorporated by reference."
III. Foreign Investments
Amendments under RA 9194
(a) Lowers the threshold amount for single
Act (R.A. 7042)
covered transactions (cash or other
equivalent monetary instrument) from P4M A. POLICY OF THE LAW
to P500,000.00 within one (1) banking day.
It is the policy of the State to attract, promote
(b) Expands the reporting requirements to and welcome productive investments from
include the reporting of suspicious foreign individuals, partnerships, corporations,
transactions regardless of the amount and governments, including their political
involved subdivisions, in activities which significantly
contribute to national industrialization and
(c) Authorizes AMLC to inquire into or examine socio-economic development to the extent that
any particular deposit or investment, with foreign investment is allowed in such activity by
any banking institution or non-bank the Constitution and relevant laws. Foreign
financial institution and their subsidiaries investments shall be encouraged in enterprises
and affiliates upon order of any competent that significantly expand livelihood and
court in cases of violation of this Act, when employment opportunities for Filipinos;
it has been established that there is enhance economic value of farm products;
probable cause that the deposits or promote the welfare of Filipino consumers;
investments are related to an unlawful expand the scope, quality and volume of
activity. However, no court order is required exports and their access to foreign markets;
in cases involving unlawful activities of and/or transfer relevant technologies in
kidnapping for ransom, narcotics offenses agriculture, industry and support services.
and hijacking, destructive arson and murder, Foreign investments shall be welcome as a
including those perpetrated by terrorists supplement to Filipino capital and technology
against non-combatant persons and similar in those enterprises serving mainly the domestic
targets. market.
(d) Authorizes the Bangko Sentral ng Pilipinas As a general rule, there are no restrictions on
to inquire into or examine any deposit or extent of foreign ownership of export enterprises.
investment with any banking institution or In domestic market enterprises, foreigners can
non-bank financial institution and their invest as much as one hundred percent (100%)
subsidiaries and affiliates when the equity except in areas included in the negative
examination is made in the course of a list. Foreign owned firms catering mainly to the
periodic or special examination, in domestic market shall be encouraged to
accordance with the rules of examination of undertake measures that will gradually increase
the BSP to ensure compliance with R.A. No. Filipino participation in their businesses by
9160, as amended. taking in Filipino partners, electing Filipinos to
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(5) A trustee of funds for pension or other national intending to engage in the same line of
employee retirement, where the trustee is a business as an existing joint venture, in which
Philippine national and at least 60% of the he or his majority shareholder is a substantial
fund will accrue to the benefit of Philippine partner, must disclose the fact and the names
nationals and addresses of the partners in the existing
joint venture in his application for registration
Provided, That where a corporation and its non- with SEC. During the transitory period as
Filipino stockholders own stocks in a Securities provided in Section 15 hereof, SEC shall
and Exchange Commission (SEC) registered disallow registration of the applying non-
enterprise, at least sixty percent (60%) of the Philippine national if the existing joint venture
capital stock outstanding and entitled to vote of enterprise, particularly the Filipino partners
each of both corporations must be owned and therein, can reasonably prove they are capable
held by citizens of the Philippines and at least to make the investment needed for the
sixty percent (60%) of the members of the domestic market activities to be undertaken by
Board of Directors of each of both corporations the competing applicant. Upon effectivity of this
must be citizens of the Philippines, in order that Act, SEC shall effect registration of any
the corporation shall be considered a Philippine enterprise applying under this Act within fifteen
national (Sec. 3[a]) (15) days upon submission of completed
requirements. (Sec. 5)
Registration of Investments on Non-Philippine
Nationals D. FOREIGN INVESTMENTS IN
Without need of prior approval, a non- EXPORT ENTERPRISE
Philippine national may, upon registration with
the Securities and Exchange Commission (SEC), Foreign investment in export enterprises whose
or with the Bureau of Trade Regulation and products and services do not fall within Lists A
Consumer Protection (BTRCP) of the and B of the Foreign Investment Negative List
Department of Trade and Industry in the case of provided under Section 8 hereof is allowed up
single proprietorships, do business as defined in to one hundred percent (100%) ownership.
Section 3 (d) of this Act or invest in a domestic
enterprise up to one hundred percent (100%) of Export enterprises which are non-Philippine
its capital, unless participation of non- nationals shall register with BOI and submit the
Philippine nationals in the enterprise is reports that may be required to ensure
prohibited or limited to a smaller percentage by continuing compliance of the export enterprise
existing law and/or under the provisions of this with its export requirement. BOI shall advise
Act. The SEC or BTRCP, as the case may be, SEC or BTRCP, as the case may be, of any
shall not impose any limitations on the extent of export enterprise that fails to meet the export
foreign ownership in an enterprise additional to ratio requirement. The SEC or BTRCP shall
those provided in this Act: Provided, however, thereupon order the non-complying export
That any enterprise seeking to avail of enterprise to reduce its sales to the domestic
incentives under the Omnibus Investment Code market to not more than forty percent (40%) of
of 1987 must apply for registration with the its total production; failure to comply with such
Board of Investments (BOI), which shall process SEC or BTRCP order, without justifiable reason,
such application for registration in accordance shall subject the enterprise to cancellation of
with the criteria for evaluation prescribed in said SEC or BTRCP registration, and/or the penalties
Code: Provided, finally, That a non-Philippine provided in Section 14 hereof. (Sec. 6)
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