COVERAGE MERCANTILE LAW

2015 BAR EXAMINATIONS

I. Letters of Credit

A. Definition of Letter of Credit

Letters of credit (L/C) are those issued by one merchant to another, or for the
purpose of attending to a commercial transaction. (Art. 567, Code of Commerce)
A written instrument whereby the writer requests or authorizes the addressee to
pay money or deliver goods to a third person and assumes responsibility for
payment of debt therefor to the addressee (Transfield Philippines v. Luzon Hydro,
2004).
An engagement by a bank or other person made at the request of a customer
that the issuer shall honor drafts or other demands of payment upon compliance
with the conditions specified in the credit (Prudential Bank v. Intermediate
Appellate Court, 1992).
B. Nature of Letter of Credit
1. Financial device L/Cs are developed by merchants as a convenient and
relatively safe mode of dealing with sales of goods to satisfy the
seemingly irreconcilable interests of a seller, who refuses to part with his
goods before he is paid, and a buyer, who wants to have control of the
goods before paying. (Bank of America, NT&SA v. Court of Appeals, 1993)
2. Composite of three distinct contracts:
a. First Contract between the party applying for the L/C (buyer/
importer/ account party) and the party for whose benefit the L/C is
issued (seller/ exporter/ beneficiary).
b. Second Contract between the buyer and the issuing bank. This
contract is sometimes called the "Application and Agreement" or
the "Reimbursement Agreement".
c. Third Contract between the issuing bank and the seller, in order to
support the contract, under (a) above (Reliance Commodities v.
Daewoo, 1993).
C. Parties to a Letter of Credit (Rights and Obligations)
1. Applicant/Buyer/Importer
-procures the letter of credit, purchases the goods and obliges himself to
reimburse the issuing bank upon receipt of the documents title.
2. Issuing Bank
-one which, whether a paying bank or not, Issues the letter of credit and
undertakes to pay the seller upon receipt of the draft and proper
documents of title from the seller and to surrender them to the buyer
upon reimbursement.
3. Beneficiary/Seller/Exporter
- in whose favor the instrument is executed. One who delivers the
documents of title and draft to the issuing bank to recover payment.
The number of parties may be increased. Modern letters of credit usually
involve banktobank transactions. The following additional parties may be:
1. Advising/notifying bank
-the correspondent bank (agent) of the issuing bank through which it
advises the beneficiary of the LC.
2. Confirming bank
- bank which, upon the request of the beneficiary, confirms the LC issued.

3. Paying bank
- bank on which the drafts are to be drawn, which may be the issuing bank
or another bank not in the city of the beneficiary
4. Negotiating bank
- bank in the city of the beneficiary which buys or discounts the drafts
contemplated by the LC, if such draft is to be drawn on the opening bank
not in the city of the beneficiary.
A. Basic Principles of Letter of Credit
1. Doctrine of Independence
The principle of independence assures the seller or the beneficiary of
prompt payment independent of any breach of the main contract and
precludes the issuing bank from determining whether the main contract is
actually accomplished or not.
Under this principle, banks assume no liability or responsibility for the
form, sufficiency, accuracy, genuineness, falsification or legal effect of any
documents, or for the general and/or particular conditions stipulated in
the documents or superimposed thereon, nor do they assume any liability
or responsibility for the description, quantity, weight, quality, condition,
packing, delivery, value or existence of the goods represented by any
documents, or for the good faith or acts and/or omissions, solvency,
performance or standing of the consignor, the carriers, or the insurers of
the goods, or any other person whomsoever (Transfield Philippines v.
Luzon Hydro, 2004; Bank of America, NT&SA v. Court of Appeals, 1993).
2. Fraud Exception Principle
The principle that limits the application of the independence principle only
to instances where it would serve the commercial function of the credit
and not when fraud attends the transaction.
The Fraud exception rule. It provides that the untruthfulness of a
certificate accompanying a demand for payment under a standby letter of
credit may qualify as fraud sufficient to support an injunction against
payment. (Transfield v. Luzon Hydro, G.R. No. 146717, Nov. 22, 2004)
3. Doctrine of Strict Compliance
The settled rule in commercial transactions involving letters of credit
requires that the documents tendered by the seller must strictly conform
to the terms of the letter of credit. Otherwise, the issuing bank or the
concerned correspondent bank is not obliged to perform its undertaking
under the contract.
The documents tendered by the seller/beneficiary must strictly conform to
the terms of the letter of credit. The tender of documents must include all
documents required by the letter. Thus, a correspondent bank which
departs from what has been stipulated under the LC acts on its own risk
and may not thereafter be able to recover from the buyer or the issuing
bank, as the case may be, the money thus paid to the beneficiary. (Feati
Bank and Trust Company v. CA, G.R. No. 940209, Apr. 30, 1991)

III. Trust Receipts Law

A. Definition of a Trust Receipt Transaction

It is any transaction between the entruster and entrustee:

1. Whereby the entruster who owns or holds absolute title or security

interests over certain specified goods, documents or instrument, releases
the same to the possession of entrustee upon the latters execution of a
TR agreement.
2. Wherein the entrustee binds himself to hold the designated goods in trust
for the entruster and, in case of default, to sell such goods, documents or
instrument with the obligation to turn over to the entruster the proceeds
to the extent of the amount owing to it or to turn over the goods,
documents or instrument itself if not sold. (Sec. 4, P.D. 115)
B. Definition of a Trust Receipt
It is the written or printed document signed by the entrustee in favor of the
entruster containing terms and conditions substantially complying with the
provisions of PD 115.
C. Concept of a Trust Receipt Transaction
A commercial document (Sec. 4, P.D. 115)
A commercial transaction It is a separate and independent security
transaction intended to aid in financing importers and retail dealers who
do not have sufficient funds. (Nacu v. CA, G.R. No. 108638, Mar. 11, 1994)
Letters of credit and trust receipts are not negotiable instrument, but
drafts issued in connection with letters of credit are negotiable
instruments. Hence, while the presumption of consideration under the
negotiable instrument law may not necessarily be applicable to trust
receipts and letters of credit, the presumption that the drafts drawn in
connection with the letters of credit have sufficient consideration applies.
(Lee v. CA, G.R. No. 117913, Feb. 1, 2002)
1. Loan/Security Feature
A trust receipt arrangement is endowed with its own distinctive features
and characteristics. Under that setup, a bank extends a loan covered by
the Letter of Credit, with the trust receipt as a security for the loan. In
other words, the transaction involves a loan feature represented by the
letter of credit, and a security feature which is in the covering trust
receipt. A trust receipt, therefore, is a security agreement, pursuant to
which a bank acquires a "security interest" in the goods. It secures an
indebtedness and there can be no such thing as security interest that
secures no obligation. (Sps. Vintola vs. Insular Bank of Asia and America,
G.R. No. 73271, May 29, 1987)
A trust receipt arrangement does not involve a simple loan transaction
between a creditor and debtor-importer. Apart from a loan feature, the
trust receipt arrangement has a security feature that is covered by the
trust receipt itself. That second feature is what provides the much needed
financial assistance to our traders in the importation or purchase of goods
or merchandise through the use of those goods or merchandise as
collateral for the advancements made by a bank. The title of the bank to
the security is the one sought to be protected and not the loan which is a
separate and distinct agreement (People v. Nitafan, 1992)
2. Ownership of the Goods, Documents and Instruments under a
Trust Receipt
Entrustee is the factual owner of the goods, documents and instruments
(Prudential Bank v. NLRC). Entruster is the real owner of the goods,
documents and instruments.

D. Rights of the Entruster

The entruster shall have the following rights:
1. Right to the proceeds from the sale of the goods, documents or
instruments released under a trust receipt to the entrustee to the extent
of the amount owing to the entruster or as appears in the trust receipt; OR
2. Right to the return of the goods, documents or instruments in case of nonsale; AND
3. Right to the enforcement of all other rights conferred on him in the trust
receipt provided such are not contrary to the provisions of the TRL.
4. Right to cancel the trust and take possession of the goods, documents or
instruments subject of the trust or of the proceeds realized therefrom at
any time upon default or failure of the entrustee to comply with any of the
terms and conditions of the trust receipt or any other agreement between
the entruster and the entrustee.
5. Right to sell the goods, documents or instruments at public or private sale
at least five days notice to the defaulting entrustee of the intention to sell.
6. Right to purchase the goods, documents or instruments at a public sale.
7. Right to recover the deficiency from the entrustee should the proceeds of
the sale not be sufficient (Sec. 7)
1. Validity of the Security Interest as Against the Creditors of the
Entrustee/Innocent Purchasers for Value
As between the entruster and the creditors of the entrustee, the entruster
has a better right over the goods. His security interest in goods,
documents, or instruments pursuant to the written terms of a trust receipt
shall be valid as against all creditors of the entrustee for the duration of
the trust receipt agreement. (Sec. 12, P.D. 115)
A purchaser in good faith can defeat the rights of the entruster over the
goods. He acquires goods, documents or instruments free from the
entruster's security interest. (Sec. 11, P.D. 115)
E. Obligation of the Entrustee
1. To hold the goods, documents or instruments in trust for the entruster and
shall dispose of them strictly in accordance with the terms and conditions
of the trust receipt;
2. To receive the proceeds in trust for the entruster and turn over the same to
the entruster to the extent of the amount owing to the entruster or as
appears on the trust receipt;
3. To insure the goods for their total value against loss from fire, theft,
pilferage or other casualties;
4. To keep said goods or proceeds thereof whether in money or whatever
form, separate and capable of identification as property of the entruster;
5. To return the goods, documents or instruments in the event of non-sale or
upon demand of the entruster; and
6. To observe all other terms and conditions of the trust receipt not contrary
to the provisions of the TRL. (Sec. 9)
F. Liability of the Entrustee
1. To hold good, documents and instruments (GDI) in trust for the entruster
and to dispose of them strictly in accordance with the terms of TR;
2. To receive the proceeds of the sale for the entruster and to turn over the
same to the entruster to the extent of amount owing to the entruster;
3. To insure GDI against loss from fire, theft, pilferage or other casualties.

4. To keep GDI or the proceeds thereof, whether in money or whatever form,

separate and capable of identification as property of the entruster;
5. To return GDI to the entruster in case they could not be sold or upon
demand of the entruster; and
6. To observe all other conditions of the trust receipts. (Sec. 9, P.D. 115)
1. Payment/Delivery of Proceeds of Sale or Disposition of Goods,
Documents or Instruments
The order in the application of proceeds or the TR transactions:
1. Expenses of the sale
2. Expenses derived from storing the goods
3. Principal obligation
The entrustee is liable for the deficiency but any excess shall likewise
belong to him. (Sec. 7, P.D. 115)
2. Return of Goods, Documents or Instruments in Case of Sale
The obligation of the entrustee in case the goods, documents or
instruments were not sold is to return the goods, documents, or
instruments to the entrustor. (Sec. 4, P.D. 115)
3. Liability for Loss of Goods, Documents or Instruments
The entrustee shall bear the loss of goods which are the subject of TR.
Loss of goods, documents or instruments which are the subject of a TR,
pending their disposition, irrespective of whether or not it was due to the
fault or negligence of the entrustee, shall not extinguish his obligation to
the entruster for the value thereof. (Sec. 10, P.D. 115)
4. Penal Sanction if Offender is a Corporation
The TR Law declares the failure to turn over goods or proceeds realized
from sale thereof, as a criminal offense under Art. 315(l)(b) of RPC
(estafa). The law is violated whenever the entrustee or person to whom
trust receipts were issued fails to: (a) return the goods covered by the
trust receipts; or (b) return the proceeds of the sale of said goods.
(Metropolitan Bank v. Tonda, G.R. No. 134436, Aug. 16, 2000)
B. Remedies Available
1. In case of default or failure of the entrustee to comply with the trust
receipt agreement - Entruster may cancel the trust receipt agreement,
take possession of the goods, documents, instruments, and sell the same
at any private or public sale at least five days from notice of intention to
sell to the entrustee. The proceeds of any such sale, whether public or
private, shall be applied (a) to the payment of the expenses thereof; (b) to
the payment of the expenses of re-taking, keeping and storing the goods,
documents or instruments; (c) to the satisfaction of the entrustee's
indebtedness to the entruster (Sec. 7)
2. In case of loss of the goods, documents, instruments -Entruster may claim
damages from the entrustee (Sec.10)
3. In case of failure to turn over proceeds of the sale of the goods, documents
or instruments or to return the same in case of non-sale - Entruster may
file a criminal complaint for estafa (Art. 315 (b) of the Revised Penal Code)
against the entrustee (Sec. 13)
C. Warehousemans Lien
A warehouseman shall have a lien on goods deposited or on the proceeds
thereof in his hands:

(1) For all lawful charges for storage and preservation of the goods;
(2) For all lawful claims for money advanced, interest, insurance,
transportation, labor, weighing, coopering and other charges and expenses in
relation to such goods;
(3) For all reasonable charges and expenses for notice, and advertisements of
sale; and
(4) For sale of the goods where default had been made in satisfying the
warehouseman's lien (Sec. 27)
General rule: A warehouseman shall have lien only for charges for storage of
goods subsequent to the date of the receipt.
Exception: When the receipt expressly enumerated other charges provided under Sec. 27
even though the amounts thereof are not stated in the receipt. (Sec. 30)

III.Negotiable Instruments Law

A. Forms and Interpretation

1. Requisites of Negotiability
a) Words that appear on the face of negotiable instrument
b) Requirements enumerated in Section 1 of NIL
c) Intention of the parties by considering the whole of the instruments
d) In writing and signed by the maker or drawer
e) Contains an unconditional promise or order to pay a sum certain in money
f) Payable on demand, or at a fixed or determinable future time
g) Payable to order or to bearer (so called badges of negotiability)
h) If addressed to a drawee, he must be named or otherwise indicated with
reasonable certainty. (Sec. 1)
2. Kinds of Negotiable Instruments
Promissory notes (PN) An unconditional promise in writing made by one person to
another, signed by the maker, engaging to pay on demand, or at a fixed or determinable
future time, a sum certain in money to order or to bearer. (Sec. 184)
Bill of exchange (BOE) An unconditional order in writing addressed by one person to
another signed by the person giving it, requiring the person to whom it is addressed to
pay on demand or at a fixed or determinable future time a sum certain in money to order
or to bearer. (Sec. 126)
B. Completion and Delivery
1. Insertion of Date
a) Where an instrument expressed to be payable at a fixed period after date is
issued undated, or
b) Where the acceptance of an instrument payable at a fixed period after sight is
undated
2. Completion of Blanks
The holder has a prima facie authority to complete it.
A signature on a blank paper delivered by the person making the signature in order
that the paper may be converted into a negotiable instrument operates as a prima
facie authority to fill it up as such for any amount. (Sec. 14)
3. Incomplete and Undelivered Instruments
Not valid against the party whose signature was placed before delivery, whether the
holder is a holder in due course or not. With respect, however, to a holder in due
course, nondelivery must be proved because as to him, there is a prima facie
presumption of delivery.
4. Complete but Undelivered Instruments
It is incomplete and revocable until delivery of the instrument for the purpose of
giving it effect.(Sec. 16)
C. Signature
1. Signing in Trade Name

As a general rule, only persons whose signatures appear on an instrument are liable
thereon. But one who signs in a trade or assumed name is liable as if he signed his own
name (Sec. 18 [2]). It is necessary, however, that the party who signed intended to be
bound by his signature.
2. Signature of Agent
The requisites are complied with, the legal effects of an agents signature in a negotiable
instrument are:
a) His signature will bind his principal
b) He will be exempt from personal liability
3. Indorsement by Minor or Corporation
Not void. The incapacity of the infant is not a defense which can be availed of by
prior parties. However, it does not destroy the right of such an infant indorser to
disaffirm under the rules of infancy.
Passes property therein
Voidable. Therefore, parties prior to the minor or corporation cannot escape liability
by setting up as defense the incapacity of the indorsers.
A minor, however, may be held bound by his signature in an instrument where he is
guilty of actual fraud committed by specifically stating that he is of age. (PNB v. CA,
G.R. No. L34404, June 25, 1980)
4. Forgery - is the counterfeit making or fraudulent alteration of any writing.
Q: When is there forgery?
A: Signature is affixed by one who does not claim to act as an agent and who has no
authority to bind the person whose signature he has forged.
Q: What is the effect when there is forgery?
GR: It does NOT render the instrument void. The signature is wholly inoperative, and no
right to retain the instrument, or to give a discharge thereof, or to enforce payment
thereof against any party to it, is acquired through or under such signature. (Cutof
rule)
XPN: If the party against whom it is sought to enforce such right is precluded from
setting up forgery or want of authority.(Sec. 23)
Where the forged signature is not necessary to the holders title, in which case, the
forgery may be disregarded. (Sec. 48)
D. Consideration
It is an inducement to a contract that is the cause, price or impelling influence, which
induces a party to enter into a contract.
Q: What is the effect of want of consideration?
A: It becomes a matter of defense as against any person not a holder in due course (Sec.
28);
Q: What is the effect of partial failure of consideration?
A: Partial failure of consideration is a defense pro tanto, whether the failure is an
ascertained and liquidated amount or otherwise (Sec. 28)
E. Accommodation Party
Q: Who is an accommodation party?
A: One who has signed the instrument as maker, drawer, acceptor, or indorser, without
receiving value therefor, and for the purpose of lending his name to some other person.
(Sec. 29)
Q: What are the requisites to be an accommodation party?
A:
a) Accommodation party must sign as maker, drawer, acceptor or indorser
b) No value is received by the accommodation party for the accommodated party; and
c) The purpose is to lend the name.
Q: What are the requisites to be an accommodation party?

A:
a) Accommodation party must sign as maker, drawer, acceptor or indorser
b) No value is received by the accommodation party for the accommodated party; and
c) The purpose is to lend the name.
Note: It does not mean, however, that one cannot be an accommodation party merely
because he has received some consideration for the use of his name. The phrase without
receiving value therefor only means that no value has been received for the instrument
and not for lending his name.
F. Negotiation
Q: When is an instrument negotiated?
A: An instrument is negotiated when it is transferred from one person to another in such a
manner as to constitute the transferee the holder thereof. (Sec. 30)
Note: A holder is the payee or indorser of a bill or note, who is in possession of it, or the
bearer thereof. (Sec. 191)

2. Distinguished from Assignment

only negotiable
instrument may be
negotiated.

the transferee, if he is a
hidc may acquire better
rights than his transferor.
the holder can hold the
drawer liable and the
indorsers liable if the
party primarily liable
does not pay.

non negotiable;
instrument may be
assigned absent of any
prohibition against
assignment written on its
face.
the transferee can have
no better rights than his
transferor; he merely
steps into the shoes of
the assignor.
the transferee has no
right of recourse for
payment against
immediate parties

NEGOTIATION ASSIGNMENT
3. Modes of Negotiation
G. What are the methods of negotiation?
A:
1. If payable to bearer it is negotiated by delivery
2. If payable to order it is negotiated by the indorsement of the holder completed by
delivery. (Sec. 30)
H. What is the effect, if any, if a bearer instrument is negotiated by indorsement
and delivery?
A: A bearer instrument, even when indorsed specially, may nevertheless be further
negotiated by delivery, but the person indorsing specially shall be liable as endorser to
only such holders as make title through his endorsement (once a bearer instrument,
always a bearer instrument). (Sec. 40)

Note: This rule does not apply to an instrument originally payable to order but is
converted into bearer instrument because the only or last indorsement is an indorsement
in blank.
1. Kinds of Indorsements
A. Special (Sec. 34)Specifies the person to whom or to whose order the
instrument is to be payable. Also known as specific indorsement or indorsement
in full.
B. Blank (Sec. 34) Specifies no indorsee.
C. Instrument is payable to bearer and may be negotiated by delivery;
May be converted to special indorsement by writing over the signature of the indorser in
blank any contract consistent with the character of indorsement(Sec. 35).
AbsoluteThe indorser binds himself to pay:
a)upon no other condition than failure of prior parties to do so
b)upon due notice to him of such failure
Conditional Right of the indorsee is made to depend on the happening of a contingent
event. Party required to pay may disregard the conditions (Sec. 39)
Restrictive When the instrument:
a)Prohibits further negotiation of the instrument (it destroys the negotiability of the
instrument);
b)Constitutes the indorsee the agent of the indorser; (Sec. 36)
c) Vests the title in the indorsee in trust for or to the use of some persons. But mere
absence of words implying power to negotiate does not make an instrument
restrictive.
Qualified(Sec. 34) constitutes the indorser a mere assignor of the title to the
instrument. It is made by adding to the indorsers signature words like, without
recourse (serves as an ordinary equitable assignment) (Sec. 38)
Jointindorsement made payable to 2 or more persons who are not partners. (Sec. 41)
Note: All of them must indorse unless the one indorsing has authority to indorse
for the others
Irregular(Sec. 64) A person who, not otherwise a party to an instrument, places
thereon his signature in blank before delivery.
Facultative Indorser waives presentment and notice of dishonor, enlarging his liability
and his indorsement.
Successive indorsement to two persons in succession.
Note: Any of them can indorse to effect negotiation of the instrument.
I. Rights of the Holder
Q: Who is a holder?
A: The payee or indorsee of a bill or note who is in possession of it or the bearer thereof.
(Sec. 191)
Q: What are the classes of holders?
A:
Holders in general (Simple Holders). (Sec. 51)
Holders for value. (Sec. 26)
Holders in due course. (Secs. 52, 57)

What are the rights of a holder in general?

A:
Right to sue
Right to receive payment (Sec. 51)
Note: If the payment is in due course, the instrument is discharged
1. Holder in Due Course
Q: Who is a holder in due course (HIDC)?
He who takes a negotiable instrument:
A. That is complete and regular upon its face;
Note: Absence of the required documentary stamp will not make the instrument
incomplete. (It is not a requisite of negotiability under Sec. 1 and it is not a material
particular under Sec. 125)
B. Became the holder before it was overdue, and without notice that it has been
previously dishonored, if such was the fact;
Note: if the instruments is payable on demand, the date of maturity is determined
by the date of presentment, which must be made within a reasonable time after its
issue, if it is a note, or after the last negotiation thereof, if it is a bill of exchange.
(Secs. 71 and 143[a])
Where transferee receives notice of any infirmity in the instrument of defect in the
title of the person negotiating the same before he had paid the full amount agreed
to be paid, he will be deemed a holder in due course only to the extent of the
amount paid by him. (Sec. 54)
C. Took it in good faith and for value;
D. At the time it was negotiated to him, he had no notice of any infirmity in the
instrument or defect in the
title of the person negotiating it. (Sec. 52)
Note: Knowledge of the agent is constructive knowledge to the principal.
2. Defenses Against the Holder
Real Defenses those that are available against all parties, both immediate and
remote, including holders in due course.
Personal Defenses defenses which are not available against a holder in due course. Those
which grow out of the agreement or conduct of a particular person in regard to the
instrument which renders it inequitable or him,
J. Liabilities of Parties
1. Maker
K.What are the liabilities a maker?
A:
A. Engages to pay according to the tenor of the instrument; and
B. Admits the existence of the payee and his then capacity to indorse. (Sec.60)
Note: Liability of the maker is primary and unconditional.
Q: When is a maker precluded from settingup these defenses?
A:
A. That payee is a fictitious person

 B. That payee was insane, a minor, or a corporation acting ultra vires.

2. Drawe
Q. To whom is the drawer secondarily liable?
A: The holder. Any of the indorsers intervening between holder and drawer who is
compelled to pay by the holder, the drawer will be liable to that indorser so compelled to
pay

3. Acceptor
What are the liabilities of an acceptor?
a) Engages to pay according to the tenor of his acceptance
b) Admits the existence of the drawer, the genuineness of his signature and his capacity
and authority to draw the instrument
c) Admits the existence of the payee and his then capacity to indorse. (Sec. 62)
Note: Drawee does not become liable until he accepts the instrument in which case he
becomes an acceptor.
When is an acceptor is precluded from settingup these defenses?
a. That the drawer is nonexistent or fictitious
b. That the drawers signature is a forgery
c. That there is no consideration between him and the drawer
4. Indorser
Who is deemed an indorser?
A: A person placing his signature upon an instrument otherwise than as maker or
acceptor, is deemed to be an indorser, unless he clearly indicates by appropriate words his
intention to be bound in some other capacity. (Sec. 63)
Note: A person who places his indorsement on an instrument negotiable by delivery
incurs all liabilities of an indorser. (Sec. 67)
5. Warranties
What are the warranties provided by the person negotiating an instrument?
A:
a.
b.
c.
d.

That the instrument is genuine and in all respects what it purports to be

That he has good title to it
That all prior parties had capacity to contract
That he has no knowledge of any fact which would impair the validity of the
instrument or render it useless.

L.Presentment for Payment

What is presentment for payment (PP)?
The presentation of an instrument to the person primarily liable for the purpose of
demanding and receiving payment.
How should presentment be made?
GR: Instrument must be exhibited to the person from whom payment is demanded;
when paid, it must be delivered to person paying it. (Sec. 74)
XPN: When exhibition is excused:
A. Debtor does not demand to see the instrument and refuses payment on some
other grounds; or
B. Instrument is lost or destroyed.

2. Necessity of Presentment for Payment

When is PP necessary?
PP is only necessary to charge persons secondarily liable (Sec. 70). But PP is not necessary
in the following instances:
- As to drawer, where he has no right to expect or require that the drawee or acceptor will
pay the instrument (Sec. 79)
- As to indorser where the instrument was made or accepted for his accommodation and
he has no reason to expect that the instrument will be paid if presented (Sec. 80)
When dispensed with under Sec. 82, such as:
a) Where, after the exercise of reasonable diligence, presentment cannot be made
b) Where the drawee is a fictitious person
c) By waiver of presentment, express or implied
d) When the instrument has been dishonored by nonacceptance
3. Parties to Whom Presentment for Payment Should Be Made
Who are the parties to whom presentment for payment should be made?
Presentment for payment must be made the primary party to the (1) maker in case of a
promissory note, or to the (2) acceptor in case of an accepted bill. If the bill of exchange or
check is payable on demand, the presentment must be made to the drawee although he is
not liable on the bill.
Note: If the person primarily liable is absent or inaccessible, then presentment must be
made to any person of sufficient discretion at the proper place of presentment.
4. Dispensation with Presentment for Payment
What is the effect when presentment is not made?
Drawer and the indorsers are discharged from their secondary liability unless such
presentment is excused.
When is the delay in making presentment excused?
A. When caused by circumstances beyond the control of the holder; and
B. Not imputable to his default, misconduct, or negligence (Sec. 81).
Note: Only the delay in presentment is excused and not the presentment itself. Hence, as
soon as the cause of delay ceases to operate, presentment must be made with reasonable
diligence (Sec. 81).
5. Dishonor by Non-Payment
When is an instrument dishonored by non payment?
A: Nonpayment upon due presentation. Happens when:
A. The instrument is duly presented for payment to party primarily liable;&
B. It is either refused or cannot be obtained.
Nonpayment without presentation. Happens when:
0 A. Presentment is excused
1 B. the instrument is overdue
2 C. it is unpaid
What is the effect of dishonor by non payment?
As to the holder, after an instrument has been dishonored by nonpayment, the person
secondarily liable becomes the principal debtors and he need not proceed against the
person primarily liable.
M. Notice of Dishonor

What is notice of dishonor?

A: Given by the holder to the parties secondarily liable, drawer and each indorser, that the
instrument was dishonored by nonpayment or nonacceptance by the drawee/maker.
Note: Persons primarily liable need not be given notice of dishonor because they are the
ones who dishonored the instrument.
Q: What are the purposes for requiring notice of dishonor?
A:
A. To inform parties secondarily liable that the maker or acceptor has failed to meet his
engagement.
B. To advise them that they are required to make payment.

What is the liability of person secondarily liable when instrument dishonored?

After the necessary proceedings for dishonor had been duly taken, an immediate right of
recourse to all parties secondarily liable thereon accrues to the holder. (Sec. 84)
2. Parties to Be Notified
To whom must notice be given?
Notice of dishonor should be given to:
0 The drawer; or
1 His agent (Sec. 97)
2 Where party is dead to a personal representative or sent to the last residence or
last place of business of the deceased (Sec. 98)
3 When the parties to be notified are partners notice to any one partner though there
has been a dissolution (Sec. 99)
Parties Who May Give Notice and Dishonor
Who gives the notice?
A:
Holder
Another in behalf of the holder
Any party to the instrument who may be compelled to pay and who, upon taking it up,
would have a right to reimbursement from the party to whom notice is given. (Sec. 90)
3. Effect of Notice
What is the effect of notice of dishonor if given by or on behalf of the holder?
Notice of dishonor inures to the benefit of:
All holders subsequent to the holder who has given notice; and
All parties prior to the holder but subsequent to the party to whom notice has been
given and against whom they may have a right of recourse. (Sec. 92)
What is the effect of notice of dishonor if given by party entitled thereto?
Notice of dishonor inures to the benefit of:
The holder; and
All parties subsequent to the party to whom notice is given (Sec. 93).
4. Form of Notice

What is the form and contents of a notice of dishonor?

A:
Oral; or
In writing
It may be given by personal delivery, or by mail (Sec. 96)
Must contain the following:
Description of the instrument;
Statement that it has been presented for payment or for acceptance and that it has
been dishonored (If protest is necessary, notice must also contain a statement
that it has been protested).
Statement that the party giving the notice intends to look for the party addressed
for payment.
Note: A written notice need not be signed, and an insufficient notice may be
supplemented or validated by verbal communication. A misdescription of the
instrument does not vitiate the notice unless the party to whom the notice is
given is in fact misled thereby. (Sec. 95)
5. Waiver
When may waiver of notice be given?
A:
Before the time of giving notice has arrived; or
After the omission to give due notice.
(Sec. 109)
What are the ways to give a waiver of notice?
It can either be:
Express; or
Implied (e.g. Payment by an indorser after he learns of the default of the maker
admission of liability after dishonor). (Sec. 109)
Who are affected by the waiver of notice?

All parties (if embodied on the face of the instrument); or

Particular indorser (if written above the signature of such indorser) (Sec. 110)
6. Dispensation with Notice
When is notice of dishonor not necessary?
Waiver of notice. (Sec. 109)
Waiver of protest. (Sec. 111)

When after due diligence, notice cannot be given. (Sec. 112)

Drawer in cases under Sec. 114
Indorser in cases under Sec. 115; and
Where due notice of dishonor by non acceptance has been given (notice of
dishonor by nonpayment not necessary). (Sec. 116)
With regard to the drawer, when can a notice of dishonor be dispensed with?

When drawer and drawee is the same person

Drawee is fictitious or does not have the capacity to contract
Drawer is person to whom the instrument is presented for payment
(he is the one who dishonored the instrument)
Drawer has no right to expect or require that the drawee or acceptor will honor the
instrument.
Drawer has countermanded the payment (e.g. stop payment order)
(Sec.114)
7. Effect of Failure to Give Notice
What is the effect of omission of a previous holder to give notice of dishonor by
non acceptance?
A: It does not prejudice the rights of a holder in due course subsequent to the omission to
present the instrument to the drawee for acceptance and notify the drawer and indorsers
if acceptance is refused. (Sec. 117)
When should the notice be given?
A:
GR: As soon as instrument was dishonored (Sec. 102) Party is allowed one entire day
for the purpose of giving notice.
XPN: Delay is excused (Sec. 113)
Note: An instrument cannot be dishonored by nonpayment until after the maturity
Parties reside in the same place
Place of business Before close of business hours on the day following
Residence Before the usual hours of rest on the day following
By mail Deposited in the post office in time to reach him in the usual course on the
day following

(Sec. 103)
Parties reside in diferent places
By mail Deposited in the post office in time to go by mail (actual departure in the
course of mail from the post office in which the notice was deposited) the day
following the day of dishonor.
If no mail At a convenient hour (of the sender) on that day, by the next mail
thereafter
Other than by post office (e.g. personal messenger) Within the time that notice
would have been received in due course of mail, if it has been deposited in the
post office within the time specified in
(Sec. 104)
Time of notice to antecedent parties Same time for giving notice that the holder has
after the dishonor (Sec. 107)
Note: Actual receipt of the party within the time specified by law is sufficient
though not sent in the places specified above. (Sec. 108)
K. Discharge of Negotiable Instrument
1. Discharge of Negotiable Instrument
L. What is discharge?
A: It is the release of all parties, whether primary or secondary, from the obligations
arising thereunder. It renders the instrument without force and effect, and consequently, it
can no longer be negotiated.
Q: What are the methods for discharge of instrument?
A:
a. Payment by principal debtor:
By or on behalf of principal debtor
At or after its maturity
To the holder thereof
In good faith and without notice that the holders title is defective
b. Payment by accommodated party
c. Intentional cancellation of instrument by the holder (by expressly stating it in the
instrument or when the instrument is torn up, burned or destroyed)
d. Any act which discharges a simple contract for the payment of money under Art.
1231 of the NCC specifically remission, novation, and merger.
Note: Loss of the negotiable instrument will not extinguish liability; compensation
is not available so long as an obligation is evidenced by a negotiable instrument.
(Commercial Law Review, Villanueva, 2009ed)
e. Reacquisition by principal debtor in his own right. Reacquisition must be:

 By the principal debtor

In his own right
At or after date of maturity (instrument is discharged; if made before, it may be
renegotiated)
(Sec. 119)

2. Discharge of Parties Secondarily Liable

What are the methods of discharge of secondary parties?
A:
Any act which discharges the instrument;
Intentional cancellation of his signature by the holder Discharge of prior party which
may be made when signature is stricken out
Valid tender of payment by a prior party;
Release of the principal debtor, unless holder expressly reserves his right of recourse
against the said subsequent parties
Extension of time of payment, unless:
Extension is consented to by such party
Holder expressly reserves his right of recourse against such party.
(Sec. 120)
What are the effects of payment by persons secondarily liable?
A:
Instrument is not discharged
It only cancels his own liability and that of the parties subsequent to him
GR: Instrument may be renegotiated
XPN:
Where it is payable to the order of a third person, and has been paid by the drawer;
and
Where it is paid by the accommodated party
Note: (a) and (b) has the same effect as payment by the party primarily liable.
Person paying is remitted to his former rights (as regards prior parties) and he
may strike out his own and all subsequent indorsements. (Sec. 121)
3. Right of Party Who Discharged Instrument

GR: The party so discharging the instrument is remitted to his former rights as regards
all prior parties, and he may strike out his own and all subsequent indorsements, and
again negotiate the instrument.

XPN:
Where it is payable to the order of a third person, and has been paid by the drawee; &
It was made or accepted for accommodation, and has been paid by the party
accommodated.
4. Renunciation by Holder
What is renunciation?
A: The act of surrendering a claim or right with or without recompense (a personal
defense).
Q: How is renunciation by holder made?
A:
Must be written
If oral, the instrument must be surrendered to the person primarily liable. (Sec. 122)
What are the effects of renunciation?
A:
Made in favor of principal debtor made at or after the maturity (made absolutely and
unconditionally) of the instrument discharges the instrument
(Sec. 122)
Made in favor of a secondary party may be made by the holder before, at or after
maturity discharges only the secondary parties and all subsequent to him (Sec.
122)
Renunciation does not affect the rights of a holder in due course without notice. (Sec.
120)
What is the rule regarding cancellation of an instrument?
A: It is presumed intentional. It is inoperative if unintentional, or under a mistake
or without the authority of the holder. But where an instrument or any signature
appears to have been cancelled, burden of proof lies on the party who alleges
that the cancellation was made unintentionally, or under a mistake or without
authority. (Sec. 123)
M.

Material Alteration

1. Concept
What is a material alteration?

 A: Any change in the instrument which affects or changes the liability of the
parties in any way.
What constitutes a material alteration?
Any alteration which changes the:
Date
Sum payable, either principal or interest;
Time or place of payment
Number or relations of the parties
Medium or currency in which payment is to be made; or
Adds a place of payment when no place of payment is specified, or any other change or
addition which alters the effect of the instrument in any respect.
(Sec. 125)
Note: The change in the date of indorsement is not material where the date is
not necessary to fix the maturity of the instrument.
2. Effect of Material Alteration
What is the effect of material alteration which is not apparent?
A:
Avoids the instrument except against:
0 A party who has made the alteration;
1 A party who authorized or assented to the alteration; or
2 The indorsers who indorsed subsequent to the alteration (because of their
warranties)
If negotiated to a HIDC, he may enforce the payment thereof according to its original
tenor against the party prior to the alteration. He may also enforce payment thereof
against the party responsible for the alteration for the altered amount.
If negotiated to a NHIDC, he cannot enforce payment against the party prior to the
alteration. He may however enforce payment according to the altered tenor from
the person who caused the alteration and from the indorsers. (Sec. 124)
Is there material alteration when the serial number of a check had been altered?
No. An alteration is said to be material if it alters the effect of the instrument. It
means an unauthorized change in an instrument that purports to modify in any
respect the obligation of a party or an unauthorized addition of words or numbers
or other change to an incomplete instrument relating to the obligation of a party.
The alteration of the serial number of a check did not change the relations
between the parties nor the effect of the instrument. Hence, the alteration on the
serial number of a check is not a material alteration. (International Corporate
Bank vs. CA, G.R. No. 141968, Feb. 12, 2001
N. Acceptance

1. Definition
What is acceptance of a bill?
A: A signification by the drawee of his assent to the order of the drawer (Sec. 132).
Q: What is the effect of acceptance?
A: Upon acceptance, the bill, in effect becomes a note. The drawee who thereby
becomes an acceptor assumes the liability of the maker (which is primary
liability) and the drawer, that of the first indorser.
2. Manner
O. What are the requisites for acceptance?
A:
1. In writing, except constructive acceptance and to a foreign bill payable in another
state (unless the other state requires for written acceptance)
2. Signed by the drawee (without it, he is not liable)
3. Must express a promise to pay money (not goods)
4. Delivered to the holder (before delivery or notification, acceptor may revoke or
cancel his acceptance).
P. What are the kinds of acceptance?
A:
General Assents without qualification to the order of the drawer (Sec. 139).
Note: A holder may refuse to accept a qualified acceptance and if he does not
obtain an unqualified acceptance, he may treat the bill as dishonored by non
acceptance.
Qualified An acceptance which in express terms varies the effect of the bill as
drawn (Sec. 139).
Conditional makes payment by the acceptor dependent on the fulfillment of a
condition therein stated.
Partial an acceptance to pay part only of the amount for which the bill is drawn.
Local an acceptance to pay only at a particular place.
Qualified as to time
The acceptance of some one or more of the drawees but not of all. (Sec. 141)
Constructive/implied
Drawee to whom the bill is delivered for acceptance destroys it; or
Drawee refuses, within 24 hours after such delivery, or within such time as is
given him, to return the bill accepted or nonaccepted

Extrinsic the acceptance is written on

paper other than the bill itself. To be binding upon the acceptor:
Acceptance must be shown to the person to whom the instrument is negotiated;
and
Such person must take the bill for value on the faith of such acceptance (Sec.
134).
Virtual conditions:
Unconditional promise in writing to accept a bill
Promise made before it is drawn
Any person who, upon faith thereof, received the bill for value.
(Sec. 135)

2. Time for Acceptance

What is the time allowed for the drawee to make the acceptance?
A: The drawer has 24 hours after presentment to decide whether or not he will accept the
bill. The acceptance, if given, dates as of the day of presentation. (Sec. 136)
Note: Drawee bank is not entitled to 24 hours to decide whether or not to pay a
check since a check is presented for payment, not acceptance.
3. Rules Governing Acceptance
What is the effect of accepting an instrument with a qualified acceptance?

GR: When the holder takes a qualified acceptance the drawer and indorsers are
discharged from liability on the bill.
XP
N:
When they have expressly
1. or impliedly
authorized the holder to
take a
qualified acceptance, or
Subsequently assent
2. thereto
Implied assent (when
3. they did not
express their dissent to
the holder
within a reasonable time
when they
received a notice of
qualified
acceptance). (Sec. 142)

Q: When may an incomplete bill be accepted?

A: Acceptance may be made before the bill has been signed by the drawer or while
otherwise incomplete, or after it is overdue, or even after it has been dishonored by non
acceptance or non payment. (Sec. 138)
Q: What is the effect of the certification by the drawee bank?
A: Certification implies that the check is drawn upon sufficient funds in the hand
of the drawee, that they have been set apart for its satisfaction and that they
shall be so applied whenever the check is presented for payment. Where a check
is certified by the bank on which it is drawn, the certification is equivalent to
acceptance (New Pacific Timber v. Seneris, G.R. No. L41764, Dec. 19, 1980).
Q. Presentment for Acceptance
What is presentment for acceptance (PA)?
A: Production or exhibition of a bill of exchange to the drawee for his acceptance or
payment (also includes presentment for payment).
Q: What are the rules as to PA?
A:
GR: PA is not necessary to render any party to the bill liable. (par.2, Sec. 143)
2. Time/Place/Manner of Presentment
How must PA be made?
A:
By or on behalf of the holder
At a reasonable hour on a business day
Before the bill is overdue; and
To the drawee or some person authorized to accept or refuse to accept on his
behalf. When:
Addressed to 2 or more drawees not partners To all (except when one was
given authority)
Drawee is dead To his personal representative
Note: Where drawee is dead, PA is not required.
Drawee is bankrupt or insolvent or has made an assignment for the benefit of
creditors To him or to his trustee or assignee. (Sec. 145)

3. Effect of Failure to Make Presentment

What is the effect of failure to make presentment?
Failure to make such presentment will discharge the drawer from liability or to the extent
of the loss caused by the delay (Republic of
the Philippines vs. PNB, G.R. No. L 16106, December 30, 1961).

When may delay in making PA be excused?

A:
Bill drawn payable elsewhere than at the place of business or the residence of the
drawee; and
Holder has no time, with the exercise of reasonable diligence, to present the bill for
acceptance before presenting it for payment on the day that it falls due.
(Sec. 147)
When is presentment excused?
A:
Drawee is dead, or has absconded, or is a fictitious person not having capacity to
contract by bill
After exercise of reasonable diligence, presentment cannot be made; or
Although presentment has been irregular, acceptance has been refused on some
other ground. (Sec. 148)

4. Dishonor by Non-Acceptance
When is a bill dishonored by nonacceptance?
A:
5. When it is duly presented for acceptance and such an acceptance is refused or
cannot be obtained; or
6. When presentment for acceptance is excused, and the bill is not accepted.
(Sec. 149)
What is the duty of the holder where bill is not accepted?
A: The person presenting it must treat the bill as dishonored by nonacceptance or he
loses the right of recourse against the drawer and indorsers. (Sec. 150)
Q: What are the rules when a bill is dishonored by nonacceptance?
A:
Right of recourse against all secondary party accrues to the holder
No presentment for payment is necessary since dishonor of the instrument by non
payment is to be expected
If the instrument is accepted after it has been dishonored by nonacceptance
presentment for payment is necessary upon maturity; and
In case of nonpayment, holder must give the corresponding notice of dishonor;
otherwise, secondary parties are discharged.

R. Promissory Notes
What is a promissory note?
A: An unconditional promise in writing made by one person to another, signed by the
maker, engaging to pay on demand, or at a fixed or determinable future time, a sum
certain in money to order or to bearer. (Sec. 184 NIL)
What are the special types of promissory notes?
A:
Certificate of deposit a written acknowledgment by a bank of the receipt of money on
deposit on which the bank promises to pay to the depositor or to him or his order or
to some other person or to him or his order, or to a specified person or bearer, on
demand or on a fixed date, often with interest.
Bonds A promise, under seal, to pay money.
Registered bond one payable only to the person whose name appears on the face
of the certificate.
Coupon bond one to which are attached coupons which entitle the holder to
interest when due.
Bank Note PN of issuing bank payable to bearer on demand and intended to circulate
as money.
Due Bill An instrument where one person acknowledges his indebtedness to another
Mortgage Note an instrument secured by either a real or personal property.
Titleretaining Note an instrument used to secure the purchase price of goods
Collateral Note it is used when the maker pledges securities to the payee to secure
the payment of the amount of the note
Judgment Note this is a note to which
power of attorney is added enabling the payee to take judgment against the maker
without the formality of a trial if the note is not paid on its due date.

S. Checks
1. Definition
What is a check?
A: It is a bill of exchange drawn on a bank and payable on demand (Sec. 185). It
must be presented for payment within a reasonable time after its issue or the
drawer shall be discharged from liability thereon to the extent of the loss caused
by the delay. (Sec. 186)
2. Kinds
What are the different kinds of checks?

A:
Cashiers or managers check Drawn by the banks cashier or manager, as the case
may be, upon the bank itself and deemed accepted by the act of issuance.
Travelers check Upon which the holders signature must appear twice, one to be
affixed by him at the time it is issued and the second counter signature, to be
affixed by him in the presence of the payee before it is paid, otherwise, it is
incomplete.
Certified check Bears upon its face an agreement by the drawee bank that the check
will be paid on presentation.
Memorandum check Memo is written across its face, signifying that drawer will pay
holder absolutely without need of presentment.
What is a crossed check? What are the effects of crossing a check? Explain.
A crossed check is a check with two (2) parallel lines, written diagonally on the upper right
corner thereof. It is a warning to the drawee bank that payment must be made to the right
party; otherwise the bank has no authority to use the drawer's funds deposited with the
bank. To be assured that it will avoid any mistake in paying to the wrong party, banks
adopted the policy that crossed checks must be deposited in the payee's account. When
withdrawal is made, the banks can be sure that they are paying to the right party. The
crossing becomes a warning also to whoever deals with the said instrument to inquire as
to the purpose of its issuance. Otherwise, if something wrong happens to the payment
thereof, that person cannot claim to be a holder in due course. Hence, he is subject to the
personal defense on the part of the drawer that there is breach of trust committed by the
payee in not complying with the drawer's instruction.
(2005 Bar Question)
What is a stale check?
A check which has not been presented for payment within a reasonable time after its
issue. It is valueless and thus, should not be paid. A check becomes stale 6 months from
date of issue.
What is the effect of a stale check?
The drawer and all indorsers are discharged from liability thereon. (Sec. 188)
What is a memorandum check?
A memorandum check is an evidence of debt against the drawer and although
may not be intended to be presented, has the same effect as an ordinary check
and if passed on to a third person, will be valid in his hands like any other check.
(People v. Nitafan, G.R. No. 75954, Oct. 22, 1992
3. Presentment for Payment
a. Time
: Within what time must a check be presented?
A: Within a reasonable time after its issue or the drawer will be discharged from liability
thereon to the extent of the loss caused by the delay (Sec. 186).

a. Effect of Delay
: What is the effect of delay to make presentment for payment?
A: The indorser shall be discharged from liability.
T.
(PNB vs. Seeto, G.R. No. L4388, August 13, 1952)
Note: See also Sec. 186 and above.
A check was dishonored due to material alteration. Creditor filed an action
against drawee bank for the amount. Is the creditor entitled?
A: No. If a bank refuses to pay a check (notwithstanding the sufficiency of funds), the
payeeholder cannot, as provided under Sections 185 and 189 of the NIL, sue the bank.
The payee should instead sue the drawer who might in turn sue the bank. This is so
because no privity of contract exists between the draweebank and the payee (Villanueva
v. Nite, G.R. No. 148211, July 25, 2006).
Q: When will the delivery of a check produce the effect of payment even if the
same had not been encashed?
A: If the debtor was prejudiced by the creditor's unreasonable delay in presentment.
Acceptance of a check implies an undertaking of due diligence in presenting it for
payment. If no such presentment was made, the drawer cannot be held liable irrespective
of loss or injury sustained by the payee. Payment will be deemed effected and the
obligation for which the check was given as conditional payment will be discharged. (Pio
Barretto Realty Corp. v. CA, G.R. No. 132362, June 28, 2001).

IV. INSURANCE CODE

A. CONCEPT OF INSURANCE
Insurance is a type of contract. It is an agreement whereby one undertakes for a
consideration to indemnify another against loss, damage or liability arising from an
unknown or contingent event. (Sec. 2[a], Insurance Code)
In general, an insurance contract is a promise by one person to pay another, money
or any other thing of value upon the happening of a fortuitous event beyond the
effective control of either party in which the promise has an interest apart from the
contract (Edwin W Patterson, Essentials of Insurance Law, p. 10, 1957 Ed., published
by McGraw-Hill Book Co., Inc.) In insurance, the insurer for a stipulated
consideration, undertakes to compensate the insured for a future loss, damage or
liability on a specified subject caused by a specified event or peril. (Sec. 3[g],
Insurance Code) A written insurance contract is called a policy. (Sec. 49, Insurance
Code)
B. ELEMENTS OF AN INSURANCE CONTRACT
1. Existence of Insurable Interest The insured possesses an interest of some kind
susceptible of pecuniary estimation, known as insurable interest.
2. Risk of loss The insured is subject to a risk of loss through the destruction or
impairment of that interest by the happening of designated perils.
3. Assumption of Risk The insurer assumes that risk of loss for a consideration.

4. Scheme to distribute losses Such assumption of risk is part of a general

scheme to distribute actual losses among a large group or substantial number of
persons bearing a similar risk.
Note: Because of this element, an insurance contract is therefore a riskdistributing device.
5. Payment of premium As consideration for the insurers promise, the insured
makes a ratable contribution called premium, to a general insurance fund.
Note: All the elements must be present, otherwise there can be no contract of
insurance, and even if the contract contains all the elements, it is not an insurance
contract within the context of the Insurance Code if the primary purpose of the
parties is the rendering of service and not the indemnification of a party for loss,
damage, or liability incurred by the latter.
C. CHARACTERISTICS AND NATURE OF INSURANCE CONTRACTS
1. Consensual A contract of insurance is perfected by the meeting of the minds of
the parties. Acceptance of the offer therefore perfects the contract.
Note: Insurance contracts through correspondence follow the cognition theory
wherein an acceptance made by the latter shall not bind the person making the
offer except from the time it came to his knowledge (Enriquez v. Sun Life
Assurance Co. of Canada, GR No. L-15774, Nov. 29, 1920).
2. Voluntary The parties may incorporate such terms and conditions as they may
deem convenient provided they do not contravene any provision of the law and
are not opposed to public policy, law, morals, good customs and public order.
General Rule: The taking out of an insurance contract is not compulsory.
Exception: Liability insurance may be required by law in certain instances such
as for motor vehicles (Secs. 373-389, Insurance Code), or employees (Arts. 168184, Labor Code), or as a condition to granting a license to conduct a business or
calling affecting the public safety or welfare.
3. Aleatory Liability of the insurer depends upon some contingent event.
Note: An aleatory contract is a contract where one or both of the parties
reciprocally bind themselves to give or do something in consideration of what
the other shall give or do upon the happening of an event which is uncertain, or
which is to occur at an indeterminate time (Art. 2010. Civil Code).
4. Unilateral It imposes legal duties only on insurer who promises to indemnify in
case of loss.
5. Conditional It is subject to conditions the principal one of which is the
happening of the event insured against. In addition to this main condition, the
contract usually includes many other conditions (such as payment of premium or
performance of some other act) which must be complied with as precedent to
the right of the insured to claim benefit under it.
6. Contract of indemnity
General Rule: The insurer promises to make good only the loss of the insured.
Exception: A life insurance is not a contract of indemnity. It is not applicable to
life insurance policies because life is not capable of pecuniary estimation. The
only situation where the principle of indemnity is applicable to life insurance is if
the amount in the policy is fixed. An example would be in a case where a creditor
insures the life of his debtor to the extent of the latters debt to the former.
7. Personal Between the insurer and the insured each party having in view the
character, credit and conduct of the other.
8. Property Since insurance is a contract, it is property in legal contemplation. But
unlike property policies, life insurance policies are generally assignable or
transferrable like any chose action. They are in the nature of property and do
not represent a personal agreement between the insurer and insured.

9. Risk-distributing device Insurance serves to distribute the risk of economic loss

among as many as possible of those who are subject to the same kind of loss.
10.Onerous There is a valuable consideration called premium.
D. CLASSES
1. MARINE
a.) Marine insurance, defined.
Marine Insurance is an insurance against risks connected with navigation, to
which a ship, cargo, freightage, profits or other insurable interest in movable
property, may be exposed during a certain voyage or fixed period of time.
b.) Vessels contemplated in marine insurance.
Those used, or at least, intended for navigation. Example, one for shipping,
chartering, voyage and the like. Vessels which are used for museums or those
that are stationary are not entitled to be insured under a marine insurance.

c.) What marine insurance includes.

Marine insurance includes:
1. Insurance against loss or damage to:
a. Vessels, craft, aircraft, vehicles, goods, freight, cargoes, merchandise,
effects, disbursements, profits, moneys, securities, choses in action,
instruments of debt, valuable papers, bottomry, and respondentia
interests and all other kinds of property and interests therein, in
respect to, appertaining to or in connection with any and all risks or
perils of navigation transit or transportation; or while being assembled,
packed, crated, baled, compressed or similarly prepared for shipment
or while waiting shipment, or during any delays, storage,
transshipment, or reshipment incident thereto, including war risks,
marine builders risks, and all personal property floater risks.
b. Person or property in connection with or appertaining to a marine,
inland marine, transit or transportation insurance, including liability for
loss of or damage arising out of or in connection with the construction,
repair, operation, maintenance or use of the subject matter of such
insurance (but not including life insurance or surety bonds nor
insurance against loss by reason of bodily injury to any person arising
out of the ownership, maintenance, or use of automobiles);
c. Precious stones, jewels, jewelry, and precious metals whether in the
course of transportation or otherwise; and
d. Bridges, tunnels and other instrumentalities of transportation and
communication (excluding buildings, their furniture and furnishings,
fixed contents and supplies held in storage); piers, wharves, docks and
slips, and other aids to navigation and transportation, including dry
docks and marine railways, dams and appurtenant facilities for the
control of waterways.
2. Marine protection and indemnity insurance, which means insurance
against, or against legal liability of the insured for, loss, damage, or
expense incident to ownership, operation, chartering, maintenance, use,
repair, or construction of any vessel, craft or instrumentality in use in
ocean or inland waterways, including liability of the insured for personal
injury, illness or death or for loss of or damage to the property of another
person. (Sec. 101, Insurance Code)
Measure of indemnity:

a. Valued policy the parties are bound by the valuation, if the insured
had some interest at risk and there is no fraud on his part. (Sec. 158,
Insurance Code)
b. Open policy the following rules shall apply in estimating a loss:
i. The value of the ship is its value at the beginning of the risk,
including all articles or charges which add to its permanent value
or which are necessary to prepare it for the voyage insured;
ii. The value of the cargo is its actual cost to the insured, when laden
on board, or where that cost cannot be ascertained, its market
value at the time and place of lading, adding the charges incurred
in purchasing and placing it on board, but without reference to
any loss incurred in raising money for its purchase, or to any
drawback on its exportation, or to the fluctuation of the market at
the port of destination, or to expenses incurred on the way or on
arrival;
iii. The value of freightage is the gross freightage, exclusive of
primage, without reference to the cost of earning it; and
iv. The cost of insurance is in each case to be added to the value
thus estimated. (Sec. 163, Insurance Code)
d.) Two major divisions of marine insurance.
1. Ocean marine insurance covers primarily sea perils.
Scope:
a. Ships or hulls
b. Goods or cargoes
c. Earnings such as freight, passage, money, commissions, or profits
d. Liability incurred by the owner or any party interested in or responsible
for the insured property by reason of maritime perils
2. Inland marine insurance covers primarily the land or over the land
transportation perils of property shipped by railroads, motor trucks,
airplanes, and other means of transportation. It also covers risks of lake,
river, or other inland waterway transportation and other waterborne perils
outside of those risks that fall definitely within the ocean marine category.
Classes (scope):
a. Property in transit provides protection for property frequently exposed
to loss while it is in transportation from one location to another.
b. Bailee liability provides protection to persons who have temporary
custody of the goods or personal property of others, such as carriers,
laundrymen, warehousemen, and garage keepers.
c. Fixed transportation property covers bridges, tunnels, and other
instrumentalities of transportation and communication, although as a
matter of fact they are fixed property. They are so insured because they
are held to be an essential part of the transportation system.
d. Floater provides insurance to follow the insured property wherever it
may be located, subject always to the territorial limits of the contract.
Floater policies may be issued for such items as jewelry, furs, works of
art, contractors equipment, theoretical property, salesmen samples,
and others.
e.) Perils of the sea or perils of navigation, defined.
It includes only those casualties due to the unusual violence or extraordinary
action of wind and wave, or to other extraordinary causes connected with
navigation.
f.) Perils of the ship, defined.
It is a loss which, in the ordinary course of events, results from:

1. The natural and inevitable action of the sea

2. The ordinary wear and tear of the ship
3. The negligent failure of the ships owner to provide the vessel with proper
equipment to convey the cargo under ordinary conditions.
g.) Does an insurer undertake to insure against perils of the ship?
General Rule: No.
Exception: In the absence of any stipulation to the contrary, the insurer does
not undertake to insure against perils of the ship. The purpose of an ocean
marine policy is to secure an indemnity against accidents which may happen
not against event which must happen.
h.) All risks marine insurance policy.
General Rule: It is that policy which insures against all causes of conceivable
loss or damage.
Exception:
1. As otherwise excluded in the policy; or
2. Due to fraud or intentional misconduct on the part of the insured. (Choa Tiek
v. CA, G.R. No. 84507, Mar. 15, 1990) This type of policy grants greater
protection than that afforded by the perils clause.
i.) Burden of proof in an all risks marine insurance policy.
The insured under an "all risks insurance policy" has the initial burden of
proving that the cargo was in good condition when the policy attached and that
the cargo was damaged when unloaded from the vessel; thereafter, the burden
then shifts to the insurer to show the exception to the coverage.
j.) Extent of the insurable interest in marine insurance.
As to the:
1. Shipowner
a. Over the vessel to the extent of its value, except that if chartered, the
insurance is only up to the amount not recoverable from the charterer.
(Sec. 102)
b. If hypothecated by a bottomry loan, the insurable interest is only up to
the excess of the values of the vessel over the amount of the bottomry
loan. (Sec. 103)
c. He also has an insurable interest on expected freightage. (Sec. 105)
2. Cargo owner over the value of the cargo and expected profits. (Sec. 107)
3. Charterer over the amount he is liable to the ship owner, if the ship is lost
or damaged during the voyage. (Sec. 108)
4. Creditor/lender amount of the loan
k.) Concealment in marine insurance, defined.
It is the failure to disclose any material fact or circumstance which in fact or law
is within, or which ought to be within the knowledge of one party and of which
the other has no actual or presumptive knowledge.
l.) Is information of the belief or expectation of a third person, in reference to a
material fact, material?
Yes. Thus, there is concealment where the insured at the time of application for
insurance did not disclose the opinion of marine experts who inspected the
vessel insured that it was unseaworthy. (Sec. 110)
m.) When insured presumed to have knowledge of a prior loss in marine
insurance.
The insured is presumed to have knowledge, at the time of insuring, of a prior
loss, if the information might possibly have reached him in the usual mode of
transmission and at the usual rate of communication. (Sec. 111)
n.) Matters, when concealed, do not vitiate the entire insurance contract, but
merely exonerates the insurer from a loss resulting from the risk concealed.
1. National character of the insured
2. The liability of the thing insured to capture and detention

3.
4.
5.
o.)
1.

The liability to seizure from breach of foreign laws of trade

The want of necessary documents
The use of false and simulated papers. (Sec. 112)
Effect of false representation by the insured.
Intentional Any misrepresentation of a material fact made with fraudulent
intent avoids the policy.
2. Not intentional If the misrepresentation is not intentional or fraudulent but
the fact misrepresented is material to the risk, the insurer may rescind the
contract from the time representation becomes false.
p.) Effect of falsity as to expectation.
Representations of expectation or intention, unless made with fraudulent intent,
their failure of fulfillment is not ground for rescission. (Sec. 114)
q.) Warranty in marine insurance, defined.
It is a stipulation, either express or implied, forming part of the policy as to some
fact, condition or circumstance relating to the risk. (Hearn v. Equitable Safety Ins.
Co., 30 Wall. 494, 22 L. Ed. 398.)
r.) Implied warranties in marine insurance.
1. Seaworthiness. (Sec. 115)
2. Nondeviation from the agreed voyage. (Secs. 123, 124, 125)
3. Nonengagement from illegal venture.
4. Warranty of neutrality the ship will carry neutrality of the ship or cargo
where such nationality or neutrality is expressly warranted. (Sec. 122)
5. Presence of insurable interest
s.) Seaworthiness, defined.
It is a relative term depending upon the nature of the ship, voyage, service and
goods denoting in general, a ships fitness to perform the service and to
encounter the ordinary perils of the voyage, contemplated by the parties to the
policy. (Sec. 116)
t.) When warranty of seaworthiness complied with.
General Rule: The warranty of seaworthiness is complied with if the ship be
seaworthy at the time of the commencement of the risk. (Sec. 117) There is no
implied warranty that the vessel will remain in seaworthy condition throughout
the life of the policy.
Exception:
1. In the case of time policy the ship must be seaworthy at the commencement
of every voyage she may undertake. (Sec. 117 [a])
2. In the case of cargo policy each vessel upon which cargo is shipped or
transshipped must be seaworthy at the commencement of each particular
voyage. (Sec. 117 [b])
3. In the case of voyage policy contemplating a voyage in different stages the
ship must be seaworthy at the commencement of each portion. (Sec. 117)
u.) Scope of the seaworthiness of a vessel.
A warranty of seaworthiness extends not only to the condition of the structure of
the ship itself, but requires that it be properly laden, and provided with a
competent master, a sufficient number of competent officers and seamen, and
the requisite appurtenances and equipment, such as ballasts, cables and
anchors, cordage and sails, food, water, fuel and lights, and other necessary or
proper stores and implements for the voyage. (Sec. 118)
v.) Deviation in marine insurance policy, defined.
Deviation is a departure of the vessel from the course of the voyage, or an
unreasonable delay in pursuing the voyage, or the commencement of an entirely
new voyage. (Sec. 125)
w.) Four cases of deviation in marine insurance.
1. Departure from the course of sailing fixed by mercantile usage between the
places of beginning and ending specified in the policy. (Sec. 123)

2. Departure from the most natural, direct, and advantageous route between
the places specified if the course of sailing is not fixed by mercantile usage.
(Sec. 124)
3. Unreasonable delay in pursuing the voyage. (Sec. 125)
4. The commencement of an entirely different voyage.
x.) Two kinds of deviation.
a. Proper This will not vitiate a policy of marine insurance because deviation is
considered justified or caused by actual necessity which is equal in
importance to such deviation. (Sec. 126)
b. Improper The insurer becomes immediately absolved from further liability
under the policy for losses occurring subsequent to the deviation because
deviation is considered to be without just cause. Every deviation not specified
in Sec.126 is improper. (Sec. 127)
y.) Two kinds of total loss.
1.
Actual total loss - exists when the subject matter of the insurance is wholly
destroyed or lost or when it is so damaged as no longer to exist in its original
character.
2.
Constructive total loss - one which the loss, although not actually total, is of
such a character that the insured is entitled, if he thinks fit, to treat it as total by
abandonment. It is also called, a technical loss.
z.) What actual total loss, constitutes.
1.
A total destruction of the thing insured
2.
The irretrievable loss of the thing by sinking, or by being broken up
3.
Any damage to the thing which renders it valueless to the owner for the
purpose for which he held it; or
4.
Any other event which effectively deprives the owner of the possession, at
the port of destination, of the thing insured. (Sec. 132)
aa.) Constructive total loss, defined.
1.
Actual loss of more than of the value of the object
2.
Damage reducing value by more than of the value of the vessel and of
cargo; and
3.
Expense of transshipment exceeds of the value of the cargo.
bb.) Rights of the insured in case of general average.
General Rule: The insurer is liable for any general average loss where it is
payable or has been paid by the insured in consequence of a peril insured
against.
The insured may either hold the insurer directly liable for the whole of the
insured value of the property sacrificed for the general benefit, subrogating him
to his own right of contribution or demand contribution from the other interested
parties as soon as the vessel arrives at her destination.
Exception: There can be no recovery for general average loss against the
insurer:
1.
After the separation of the interests liable to contribution, that is to say,
after the cargo liable for contribution has been removed from the vessel; or
2.
When the insured has neglected or waived his right to contribution.
Note: General average is a principle of law whereby, when it is decided by the
master of a vessel, acting for all the interest concerned to sacrifice a part of a
venture exposed to a common and imminent peril in order to save the rest, the
interests so saved are compelled to contribute ratably or proportionately to the
owner of the interest sacrificed, so that the cost of the sacrifice shall fall equally
upon all. (Hector S. De Leon, The Law on Insurance, 2003)
cc.) Free from Particular Average Clause (FPA Clause), defined.
A clause agreed upon in a policy of marine insurance in which it is stated that
the insurer shall not be liable for a particular average.

The insurer is liable only for general average and not for particular average
unless such particular average loss as the effect of depriving the insured of the
possession at the port of destination of the whole of the thing insured. (Sec. 138)
dd.) Limit as to liability of insurer.
The liability of the insurer for any general average loss is limited to the
proportion of contribution attaching to his policy value where this is less than the
contributing value of the thing insured. (Sec. 164)
ee.) Abandonment in marine insurance, defined.
It is the act of the insured by which, after a constructive total loss he declared
the relinquishment to the insurer of his interest in the thing insured. (Sec. 140)
ff.) Requisites for the validity of abandonment.
1.
There must be an actual relinquishment by the person insured of his
interest in the thing insured. (Sec. 140)
2.
There must be a constructive total loss. (Sec. 141)
3.
The abandonment must neither be partial nor conditional. (Sec. 142)
4.
It must be made within a reasonable time after receipt of reliable
information of the loss. (Sec. 143)
5.
It must be factual. (Sec. 144)
6.
It must be made by giving notice thereof to the insurer which may be done
orally or in writing. (Sec. 145); and
7.
The notice of abandonment must be explicit and must specify the particular
cause of abandonment. (Sec. 146)
gg.) When the insured, by a contract of marine insurance, may abandon the
thing insured.
1.
If more than threefourths thereof in value is actually lost, or would have to
be expended to recover it from the peril
2.
If it is injured to such an extent as to reduce its value more than three
fourths
3.
If the thing insured is a ship, and the contemplated voyage cannot be
lawfully performed without incurring either an expense to the insured of more
than threefourths the value of the thing abandoned or a risk which a prudent
man would not take under the circumstances; or
4.
If the thing insured is cargo or freightage, and the voyage cannot be
performed, nor another ship procured by the master, within a reasonable time
and with reasonable diligence to forward the cargo, without incurring the like
expense or risk mentioned in the preceding subparagraph. But freightage
cannot in any case be abandoned, unless the ship is also abandoned. (Sec. 141)
hh.) Effects of acceptance of abandonment.
1.
The insurer becomes at once liable for the whole amount of the insurance
and also becomes entitled to all rights which insured possessed in the thing
insured. (Sec. 148)
2.
It fixes the rights of the parties; whether express or implied, is conclusive
upon them (Sec. 153), and irrevocable. (Sec. 154)
3.
It stops the insurer to rely on any insufficiency in the form, time, or right, of
abandonment. Whether the insured has a right to abandon is immaterial where
the abandonment is accepted and there is no fraud.
4.
On accepted abandonment of a ship, the freightage earned subsequent to
the loss belongs to the insurer of the ship. But freightage earned previously
belongs to the insurer of said freightage who is subrogated to the rights of the
insured up to the time of the loss. (Sec. 155)
ii.) When coinsurance exist.
There is coinsurance if the value of the insureds interest exceeds the amount of
insurance; he is considered the coinsurer for an amount determined by the
difference between the insurance taken out and the value of the property.

A marine insurer is liable upon a partial loss only for such proportion of the
amount insured by him as the loss bears to the value of the whole interest of the
insured in the property insured (Sec. 159).
jj.) Requisites for coinsurance.
There is coinsurance when the following requisites concur:
a.
The amount of insurance is less than the insureds insurable interest;
b.
The loss is partial.
kk.) Formula to determine the amount recoverable.
(Partial) Loss
X Amount of Insurance = Amount of recovery
Value of thing Insured
ll.) When loss of profits conclusively presumed.
When profits are valued and insured by a contract of marine insurance, a loss of
them is conclusively presumed from a loss of the property out of which they
were expected to arise, and the valuation fixes their amount. (Sec. 162)
2. FIRE
a.) Fire insurance, defined.
It is a contract of indemnity by which the insurer, for a consideration, agrees to
indemnify the insured against loss of or damage by fire, lightning, windstorm,
tornado or earthquake and other allied risks, when such risks are covered by
extension to fire insurance policies or under separate policies. (Sec. 169)
b.) Concept of fire.
Spontaneous combustion is usually a rapid oxidation. Fire is oxidation which is so
rapid as to produce either a flame or glow. Fire is always caused by combustion,
but combustion does not always cause fire. The word spontaneous refers to the
origin of the combustion.it means the internal; development without the action of
an external agent. Combustion or spontaneous combustion may be so rapid as to
produce fire, but until it does so, combustion cannot be said to be fire. (Western
Woolen Mills, Co. v. Northern Assur. Co., 139 Fed. 637)
c.) Ocean marine and fire policies, dinguished.
OCEAN
FIRE INSURANCE
MARINE
A policy of
Where the hazard is fire
insurance
alone and the subject is an
on a vessel
unfinished vessel, never
engaged in
afloat for a voyage, the
navigation
contract to insure is a fire
is
a
risk, especially in the
contract of
absence of an express
marine
agreement that it shall
insurance
have the incidents of
although it
marine policy, or where it
insures
insures materials in a
against fire
shipyard
for
use
in
risks only.
constructing vessels.
d.) When alteration in the thing insured entitles the insurer to rescind.
In order that the insurer may rescind a contract of fire insurance for any
alteration made in the use or condition of the thing insured, the following
requisites must be present:
1. The use or condition of the thing is specially limited or stipulated in the
policy;
2. Such use or condition as limited by the policy is altered;
3. The alteration is made without the consent of the insurer;
4. The alteration is made by means within the control of the insured; and
5. The alteration increases the risk.

e.) Measure of indemnity in open and valued policies in fire insurance.

a. Open Policies - The expense necessary to replace the thing lost or injured in
the condition it was at the time of the injury.
b. Valued Policies - The valuation stated in the policy, in the absence of fraud.
f.) Coinsurance clause, defined.
It is that clause which requires the insured to maintain insurance to an amount
equal to the value or specified percentage of the value of the insured property
under penalty of becoming coinsurer to the extent of such deficiency. (Sec. 174)
Note: The insured is not a coinsurer under fire policies in the absence of
stipulation.
g.) Fall of building clause, defined.
It is that clause which provides, in a fire insurance policy, that if the building or
any part thereof falls, except as a result of fire, all insurance by the policy shall
immediately cease.
h.) Option to rebuild clause, defined.
The clause which gives the insurer the option to rebuild the destroyed property
instead of paying the indemnity. This clause serves to protect the insurer against
unfair appraisals friendly to the insured. (Sec. 174)
3. CASUALTY
a.) Casualty insurance, defined.
It is that which covers loss or liability arising from accident or mishap, excluding
those falling under types of insurance as fire or marine. (Sec. 176)
b.) Two divisions of casualty insurance.
a. Accident or health insurance Insurance against specified perils which may
affect the person and/or property of the insured such as personal accident,
robbery or theft, damage to or loss of motor vehicle, insolvency of debtors,
defalcation of employees, etc.
b. Third party liability insurance Insurance against specified perils which may
give rise to liability on the part of the insured of claims for injuries to others or for
damage to their property, such as workmens compensation, motor vehicle
liability, professional liability, products liability, etc.
c.) Accident and accidental as used in accident policy, defined.
The terms accident and accidental, as used in accident policy have not
acquired any technical meaning. They are construed by the courts in their
ordinary and common acceptation. Thus, the terms have been taken to mean that
which happens by chance or fortuitously, without intention or design, and which
is unexpected, unusual and unforeseen. This presupposes the lack of intention to
commit the wrong resulting from the event that happens.
d.) Rules on third party liability insurance.
1. Insurable interest is based on the interest of the insured in the safety of the
persons, and their property, who may maintain an action against him in case of
their injury or destruction respectively.
2. In a third party liability (TPL) insurance contract, the insurer assumes the
obligation by paying the injured third party to whom the insured is liable. Prior
payment by the insured to the third person is not necessary in order that the
obligation may arise. The moment the insured becomes liable to third persons,
the insured acquires an interest in the insurance contract which may be
garnished like any other credit.
3. In burglary, robbery and theft insurance, the opportunity to defraud the insurer
(moral hazard) is so great that insurer have found it necessary to fill up the
policies with many restrictions designed to reduce the hazard. Persons frequently
excluded are those in the insureds service and employment. The purpose of the
exception is to guard against liability should theft be committed by one having
unrestricted access to the property.

4. Right of third party injured to sue the insurer of party at fault depends on
whether the contract of insurance is intended to benefit third persons also or only
the insured.
e.) When an injured person has the right to sue insurer of the party at fault.
a. Indemnity against third party liability injured third party can directly sue
the insurer.
b. Indemnity against actual loss or payment third party has no cause of
action against the insurer. The third persons recourse is limited to the
insured alone. The contract is solely for the insurer to reimburse the insured
for liability actually satisfied by him.
f.) Liability insurance, defined.
It has been said to be a contract of indemnity for the benefit of the insured and
those in privity with him, or those to whom the law upon the grounds of public
policy extends the indemnity against liability.
g.) Basis and extent of insurers liability.
1. Contract of insurance
2. Sum limited in the contract
h.) Differences between the liability of the insurer and that of the insured in case
of indemnity against third person liability.
INSURER
INSURED
a. The liability a.
Liability
is
is direct but direct and can
the
insurer be held liable
cannot
be with
all
the
held solidarily parties at fault.
liable with the
insured
and
other parties
at fault.
b. Liability is b.
Liability
is
based
on based on tort.
contract
c. The third c. The liability
party liability extends to the
is only up to amount of actual
the extent of and
other
the insurance damages. (Heirs
policy
and of George Y. Poe
that required v.
Malayan
by law
Insurance
Company,
Inc.
G.R. No. 156302,
Apr. 7, 2009)
i.) No action clause, defined.
It is a requirement in a policy of liability insurance which provides that suit and
final judgment be first obtained against the insured, that only thereafter can the
person injured recover on the policy. (Guingona v. Del Monte, G.R. No. L21806,
Aug. 17, 1967)
Note: A no action clause must yield to the provisions of the Rules of Court
regarding multiplicity of suits. (Shafter v. RTC, G.R. No. 78848, Nov. 14, 1988)
4. SURETYSHIP
a.) Suretyship, defined.
It is an agreement whereby the surety guarantees the performance by another of
an undertaking or an obligation in favor of a third party. (Sec. 177)

b.) Nature of liability of surety.

1. Solidary with the bond obligor
2. Limited to the amount in the bond (it cannot be extended by implication)
3. Determined strictly by the terms of the contract of suretyship in relation to the
principal contract between the obligor and the obligee
c.) Suretyship and property insurance, distinguished.
SURETYSHIP
PROPERTY
INSURANCE
It is an accessory The principal
contract.
contract
itself.
There are three There
are
parties:
the only
two
surety,
parties:
obligor/debtor,
insurer
and
and
the insured
obligee/creditor.
More of a credit A contract of
accommodation
indemnity
with the surety
assuming
primary liability
Surety is entitled No right of
to
recovery for
reimbursement
the loss the
from
the insurer may
principal and his sustain
guarantors
for except when
the loss it may the insurer is
suffer under the entitled
to
contract.
subrogation.
A bond may be May
be
cancelled by or cancelled
with the consent unilaterally
of the obligee or either by the
by
the insured or by
commissioner or the insurer on
by the court.
grounds
provided by
law.
Requires
Does
not
acceptance
of need
the
obligee acceptance
before
it of any third
becomes
valid party.
and enforceable.
A
riskshifting A
risk
device,
the distributing
premium
paid device,
the
being
in
the premium paid
nature
of
a being
service fee.
considered a
ratable
contribution
to a common

fund.
d.) Rules in the payment of premiums in suretyship.
1. The premium becomes a debt as soon as the contract of suretyship or bond
is perfected and delivered to the obligor;
2. The contract of suretyship or bonding shall not be valid and binding unless
and until the premium therefore has been paid;
3. Where the obligee has accepted the bond, it shall be valid and enforceable
notwithstanding that the premium has not been paid; (Philippine Pryce
Assurance Corp. v. CA, G.R. No. 107062, Feb. 21, 1994)
4. If the contract of suretyship or bond is not accepted by, or filed with the
obligee, the surety shall collect only a reasonable amount;
5. If the nonacceptance of the bond be due to the fault or negligence of the
surety, no service fee, stamps, or taxes imposed shall be collected by the
surety; and
6. In the case of continuing bond (for a term longer than one year or with no
fixed expiration date), the obligor shall pay the subsequent annual premium
as it falls due until the contract is cancelled. (Sec. 179)
e.) Types of surety bonds.
1. Contract bonds These are connected with construction and supply contracts.
They are for the protection of the owner against a possible default by the
contractor or his possible failure to pay materialmen, laborers and sub
contractors.
The position of surety, therefore, is to answer for a failure of the principal to
perform in accordance with the terms and specifications of the contract.
There may be two bonds:
a. Performance bond One covering the faithful performance of the contract;
and
b. Payment bond One covering the payment of laborers and material men.
2. Fidelity bonds They pay an employer for loss growing out of a dishonest act of
his employee.
For the purposes of underwriting, they are classified as:
a. Industrial bond One required by private employers to cover loss through
dishonesty of employees; and
b. Public official bond One required of public officers for the faithful
performances of their duties and as a condition of entertaining upon the
duties of their offices.
3. Judicial bonds They are those which are required in connection with judicial
proceedings.
5. LIFE
a.) Life insurance, defined.
It is that which is payable upon the death of a person or on his surviving a
specified period, or otherwise contingently on the continuance of cessation of life
(Sec. 181). It is a mutual agreement by which a party agrees to pay a given sum
on the happening of a particular event contingent on the duration of human life,
in consideration of the payment of a smaller sum immediately, or in periodical
payments by the other party.
b.) Parties involved in the policy.
1. The owner of the policy;

2. The person whose life is the subject of the policy, also known as the cestui que
vie; and
3. The beneficiary to whom the proceeds are paid.
Note: One person might occupy all three positions by naming his estate as
beneficiary; or each of the three (3) positions may be held by a separate property.
c.) Kinds of life insurance policies.
1. Ordinary life, general life or old line policy Insured pays a premium every
year until he dies. Surrender value after 3 years.
2. Limited payment Insured pays premium for a limited period. It is payable
only at the death of the insured.
3. Endowment Insured pays a premium for a specified period. If he outlives
the period, the face value of the policy is paid to him; if not, his
beneficiaries receive benefit.
4. Term insurance Insured pays once only, and he is insured for a specified
period. If he dies within the period, his beneficiaries benefit. If he outlives
the period, no person benefits from the insurance. Also known as temporary
insurance.
5. Industrial life Life insurance entitling the insured to pay premiums weekly,
or where premiums are payable monthly or oftener
6. Variable contract Any policy or contract on either a group or individual
basis issued by an insurance company providing for benefits or other
contractual payments or values thereunder to vary so as to reflect
investment results of any segregated portfolio of investment.
d.) Effect if the beneficiary will fully bring about the death of the insured.
General Rule: The interest of a beneficiary in a life insurance policy shall be
forfeited when the beneficiary is the principal, accomplice; accessory in willfully
bringing about the death of the insured, in which event, the nearest relative of
the insured shall receive the proceeds of said insurance, if not otherwise
disqualified.
Exception:
1. The beneficiary acted in selfdefense;
2. The insureds death was not intentionally caused (e.g., thru accident);
3. Insanity of the beneficiary at the time he killed the insured.
e.) When the insurer liable in case of suicide.
1. The suicide is committed after the policy has been in force for a period of 2
years from the date of its issue or of its last reinstatement;
2. The suicide is committed after a shorter period provided in the policy although
within the 2 year period; and
3. The suicide is committed in the state of insanity regardless of the date of
commission, unless suicide is an excepted risk. (Sec. 183)
Note: The policy cannot provide a period longer than 2 years. If the policy
provides for a longer period and the suicide is committed within said period but
after 2 years, the insurer is liable.
The insurer is not liable if it can show that the policy was obtained with the
intention to commit suicide even in the absence of any suicide exclusion in the
policy.
f.) Measure of indemnity under a policy of insurance upon life or health.
Unless the interest of a person insured is susceptible of exact pecuniary
measurement, the measure of indemnity under a policy of insurance upon life or
health is the sum fixed in the policy. (Sec. 186)
6. COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE
a.) Motor vehicle liability insurance, defined.

It is a protection coverage that will answer for legal liability for losses and
damages for bodily injuries or property damage that may be sustained by another
arising from the use and operation of a motor vehicle by its owner.
b.) Purpose of motor vehicle liability insurance.
The purpose of motor vehicle liability insurance is to give immediate financial
assistance to victims of motor vehicle accidents and/or their dependents,
especially if they are poor regardless of financial capability of motor vehicle
owners of operators responsible for the accident sustained. (First Integrated
Bonding Insurance Co., Inc. v. Hernando, G.R. No. L51221, July 31, 1991)
c.) Passenger, defined.
Any fare paying person being transported and conveyed in and by a motor
vehicle for transportation of passengers for compensation, including persons
expressly authorized by law or by the vehicles operator or his agents to ride
without fare. (Sec. 386, [b])
d.) Thirdparty, defined.
Any person other than a passenger as defined in this section and shall also
exclude a member of the household, or a member of the family within the second
degree of consanguinity or affinity, of a motor vehicle owner or land
transportation operator, as likewise defined herein, or his employee in respect of
death, bodily injury, or damage to property arising out of and in the course of
employment. (Sec. 386, [c])
e.) Motor vehicle owner, defined.
It means the actual legal owner of a motor vehicle, whose name such vehicle is
duly registered with the Land Transportation Office. (Sec. 386, [d])
f.) Land transportation operator, defined.
It means the owner or owners of motor vehicles for transportation of a passenger
for compensation, including school buses. (Sec. 386, [e])
g.) No fault indemnity clause, defined.
The no fault indemnity clause is a clause where the insurer is required to pay a
third party injured or killed in an accident without the necessity of proving fault or
negligence on the part of the insured. There is a stipulated maximum amount to
be recovered.
h.) Rules under the no fault clause.
1. The total indemnity in respect of any one person shall not exceed P15,000 for
all motor vehicles (Insurance Memorandum Circular No. 42006)
2. Proof of loss:
a. Police report of accident
b. Death certificate and evidence sufficient to establish proper payee
c. Medical report and evidence of medical or hospital disbursement.
3. Claim may be made against one motor vehicle only
4. In case of an occupant of a vehicle, the claim shall lie against the insurer of the
vehicle in which the occupant is riding, mounting or dismounting from
5. In any other case, claim shall lie against the insurer of the directly offending
vehicle
6. In all cases, the right of the party paying the claim to recover against the
owner of the vehicle responsible for the accident shall be maintained
i.) Authorized driver clause, defined.
The authorized driver clause indemnifies the insured owner against loss or
damage to the car but limits the use of the insured vehicle to:
a. The insured himself; or
b. Any person who drives on his order or with his permission. (Villacorta v.
Insurance Commissioner, G.R. No. 54171, Oct. 28, 1980)
j.) Main purpose of an authorized driver clause.
The main purpose is to require a person other than the insured, who drives the
car on the insureds order, such as, his regular driver, or with his permission, such
as a friend or member of the family or the employees of a car service or repair

shop to be duly licensed drivers and have no disqualification to drive a motor

vehicle. (Villacorta v. Insurance Commission, G.R. No. L54171, Oct. 28, 1980)
k.) Theft clause, defined.
It is that clause which includes theft as among the risks insured against. Where a
car is unlawfully and wrongfully taken without the knowledge and consent of the
owner, such taking constitutes theft and it is the theft clause, not the
authorized driver clause which should apply. (Palermo v. Pyramid Inc., G.R. No. L
36480, May 31, 1988)
l.) Cooperation clause, defined.
It is that clause which provides that the insured shall give all such information
and assistance as the insurer may require, usually including attendance at trials
or hearings.
m.) Persons subject to the compulsory motor vehicle liability insurance
requirement.
1. Motor vehicle owner (MVO) or one who is the actual legal owner of a motor
vehicle in whose name such vehicle is registered with the LTO; or
2. Land transportation operator (LTO) or one who is the owner of a motor vehicle
or vehicles being used for conveying passengers for compensation including
school buses.
n.) Substitutes for a compulsory motor vehicle liability insurance policy.
MVOs or LTOs, instead of a CMLVI policy, may either:
1. Post a surety bond with the Insurance Commissioner who shall be made the
obligee or creditor in the bond in such amount or amounts required as limits of
indemnity to answer for the same losses sought to be covered by a CMLVI policy;
or
2. Make a cash deposit with the Insurance Commission in such amount or
amounts required as limits of indemnity for the same purpose.
E. INSURABLE INTEREST
1. In life/Health
a.) Two general classes of life policies.
a. Insurance upon ones life are those taken out by the insured upon his own
life (Section 10[a]) for the benefit of himself, or of his estate, in case it
matures only at his death, for the benefit of third person who may be
designated as beneficiary.
The question of insurable interest is immaterial where the policy is procured
by the person whose life is insured. A person who insures his own life can
designate any person as his beneficiary, whether or not the beneficiary has an
insurable interest in the life of the insured subject to the limits under Article
739 and 2012 of the NCC.
Note: An application for insurance on ones own life does not usually present
an insurable interest question.
b. Insurance upon life of another are those taken out by the insured upon
the life of another. (Sec. 10 [a], [b], [c] and [d])
Where a person names himself beneficiary in a policy he takes on the life of
another, he must have insurable interest in the life of the latter.
b.) For whose life and health does a person have an insurable interest?
a. Of himself, of his spouse and of his children.
b. Of any person on whom he depends wholly or in part for education or
support, or in whom he has a pecuniary interest;
Note: Mere blood relationship or mere relationship by affinity does not
constitute an insurable interest; there must be a risk of monetary loss from
the insureds death.

c. Of any person under a legal obligation to him for the payment of money, or
respecting property or services, of which death or illness might delay or
prevent performance;
d. Of any person upon whose life any estate or interest vested in him depends.
(Sec. 10)
c.) Persons under Sec. 10, (c) who have an insurable interest on the life and
health of a person.
A creditor may name himself as beneficiary in a policy he takes on the life of his
debtor. The death of the debtor may either prevent payment if his estate is not
sufficient to pay his debts or delay such payment if an administrator has to be
appointed to settle his estate. Except Section 10, (a) of the Insurance Code, an
insurance contract partakes the nature of a contract of indemnity.
d.) Extent of the creditors recovery upon the death of the debtor.
General Rule: Limited to the amount of his interest (the amount owing to him).
Exception: If the debtor is the insured and the creditor is named beneficiary, the
creditor will be entitled to the whole proceeds of the policy upon the debtors
death, though his credit may be much less.
Note: The debtor was the one who applied for the insurance, to insure his own
life.
Exception to Exception:
1. If debtor applied for insurance and designated creditor in compliance with
creditors requirement that debtor will take insurance to insure creditors interest.
2. A person may take a policy on the life of his business partner because the
latters death may result in an interruption of business operations which can be in
turn cause financial loss.
3. A business firm can take out a policy on the life of its officers or employees
whose services proved valuable to the business. The proceeds are not taxable
income but constitute indemnity to the employer for the loss which the business
suffers because of the death of a valued officer or employee.
e.) When insurable interest must exist.
1. Life or health insurance
General Rule: Insurable interest in life or health must exist when the
insurance takes effect, bur need not exist thereafter or when the loss occurs.
(Sec. 19)
Exception:
a. When the insurance is taken by the creditor on the life of the debtor, the
creditor is required to have an insurable interest not only at the time of the
contract but also at the time of the debtors death because in this case, it is
considered as a contract of indemnity.
b. When the insurance is taken by the employer on the life of the employee.
2. Property Insurance When the insurance takes effect and when the loss
occurs, but need not exist in the meantime. (Sec. 19)
2. In Property
a.) What an insurable interest in property constitutes.
1. An existing interest The existing interest in the property may be legal or
equitable title.
Examples of insurable interest arising from legal title:
a. Trustee, as in the case of the seller of property not yet delivered;
b. Mortgagor of the property mortgaged;
c. Lessor of the property leased
Examples of insurable interest arising from equitable title:
a. Purchaser of property before delivery or before he has performed the
conditions of the sale
b. Mortgagee of property mortgaged;

c. Mortgagor, after foreclosure but before the expiration of the period within
which redemption is allowed
2. An inchoate interest founded on an existing interest
Example: A stockholder has an inchoate interest in the property of the
corporation of which he is a stockholder, which is founded on an existing
interest arising from his ownership of shares in the corporation
3. An expectancy coupled with an existing interest in that out of which the
expectancy arises.
Note: Expectancy to be insurable must be coupled with an existing interest or
founded on an actual right to the thing or upon any valid contract for it. (Sec.
16)
b.) Measure of insurable interest in property.
The extent to which the insured might be damnified by loss or injury thereof.
(Sec. 17). Insurable interest in property does not necessarily imply a property
interest in, or lien upon, or possession of, the subject matter of the insurance,
and neither title nor a beneficial interest is requisite to the existence thereof. It is
sufficient that the insured is so situated with reference to the property that
would be liable to loss should it be injured or destroyed by the peril against
which it is insured. Anyone has an insurable interest in property who derives a
benefit from its existence or would suffer loss from its destruction. (Gaisano
Cagayan, Inc. v. Insurance Company of North America, G.R. No. 147839, June 8,
2006)
c.) Extent of insurable interest of a common carrier or depository in a thing held
by him.
To the extent of his liability but not to exceed the value thereof (Sec. 15). This is
so because the loss of the thing by the carrier or depository may cause liability
against him to the extent of its value.
d.) Time when insurable interest in property must exist
An interest in property insured must exist when the insurance takes effect, and
when the loss occurs, but need not exist in the meantime. (Sec. 19)
3. Double insurance and Over insurance
a.) Double insurance and over insurance, distinguished.
DOUBLE
OVER
INSURANCE
INSURANCE
There may be When
the
no
over amount of the
insurance
as insurance
is
when the sum beyond
the
total
of
the value of the
amounts of the insureds
policies issued insurable
does
not interest.
exceed
the
insurable
interest of the
insured.
Two or more There may be
insurers.
only
one
insurer, with
whom
the
insured takes
insurance
beyond
the
value of his

insurable
interest.
Not prohibited
by law, unless
there
is
a
stipulation
to
the contrary.

Prohibited by
law because it
is a wagering
contract and
no longer a
contract
of
indemnity.

b.) When double insurance exists.

Double insurance exists where the same person is insured by several insurers
separately, in respect to the same subject and interest. (Sec. 95)
c.) Requisites of double insurance.
1. Person insured is the same;
2. Two (2) or more insurers insuring separately;
3. Subject matter is the same;
4. Interest insured is the same; and
5. Risk or peril insured against is the same
d.) Purpose of the rule on double insurance.
The purpose of the rule on double insurance is to prevent overinsurance and
thus avert the perpetration of fraud. The public, as well as the insurer, is
interested in preventing the situation in which a loss would be profitable to the
insured (Pioneer Insurance and Surety Corp v. Yap, G.R. No. L36232, Dec. 19,
1974)
e.) Is double insurance prohibited by law?
No. A person may therefore procure two or more insurances to cover his
property. What is prohibited by law is over insurance.
f.) Rules where the insured is overinsured by double insurance.
1. The insured, unless the policy otherwise provides, may claim payment from
the insurers in such order as he may select, up to the amount which the
insurers are severally liable under their respective contracts.
2. Where the policy under which the insured claims is a valued policy, the
insured must give credit as against the valuation for any sum received by
him under any other policy without regard to the actual value of the
subject matter insured.
3. Where the policy under which the insured claims is an unvalued policy he
must give credit, as against the full insurable value, for any sum received
by him under any policy.
4. Where the insured receives any sum in excess of the valuation in the case
of valued policies, or of the insurable value in the case of unvalued
policies, he must hold such sum in trust for the insurers, according to their
right of contribution among themselves.
5. Each insurer and the other insurers, to contribute ratably to the loss in
proportion to the amount for which he is liable under his contract. (Sec. 96)
4. Multiple or Several Interests on Same Property
a.) Instances where more than one insurable interest may exist on the same
property.
a. In trust, both trustor and trustee have insurable interest over the
property in trust.
b. In a corporation, both the corporation and its stockholders have
insurable interest over the assets.

c. In partnership both the firm and partners has insurable interest over its
assets.
d. In assignment both the assignor and assignee has insurable interest
over the property assigned.
e. In lease, the lessor, lessee and sublessees have insurable interest over
the property in lease.
f. In mortgage, both the mortgagor and mortgagee have insurable
interest over the property mortgaged.
b.) Is the insurable interest of mortgagor and mortgagee in case of a
mortgaged property the same?
Each has an insurable interest in the property mortgaged and this interest is
separate and distinct from the other. Therefore, insurance taken by one in his
name only and in his favor alone does not inure to the benefit of the other.
The same is not open to objection that there is double insurance. (Sec. 8)
c.) Extent of insurable interest of mortgagor and mortgagee.
a. Mortgagor To the extent of its value as owner of the property. The loss
or destruction of the property insured will not extinguish the mortgage
debt. The exception is in marine insurance.
b. Mortgagee To the extent of the debt. Such interest continues until the
mortgage debt is extinguished. The property relied on as mortgaged is
only a security. In insuring the property, he is not insuring the property
itself but his interest or lien thereon.
F. PERFECTION OF THE CONTRACT OF INSURANCE
Q: What is a policy of insurance?
A: It is the written instrument in which the contract of insurance is set forth (Sec. 49). It is the written document
embodying the terms and stipulations of the contract of insurance between the insured and insurer. It is not
necessary for the perfection of the contract.
Q: What is the form of an insurance contract?
A: May be verbal or in writing, or partly in writing and partly verbal. However, the law provides that no policy of
insurance shall be issued or delivered unless in the form previously approved by the Insurance Commission.
Q: When is the insurance contract perfected?
A: When the assent or consent is manifested by the meeting of the offer and the
acceptance upon the thing and the cause which are to constitute the contract. Mere offer
or proposal is not contemplated. (De Lim v. Sun Life Assurance Co., G.R. No. L15774, Nov.
29, 1920)
F.1. OFFER AND ACCEPTANCE/CONSENSUAL
Q. How offer is made in property and liability insurance?
A. It is the insured who makes an offer to the insurer, who accepts the offer, rejects it, or makes a counter offer.
The offer is usually accepted by an insurance agent on behalf of the insurer.
Q. How offer is made in Life and Health Insurance?
A. it depends upon whether the insured pays the premium at the time he applies for insurance.
1. If he does not pay the premium, his application is considered an invitation to the insurer to make an
offer, which he must then accept before the contract goes into effect.
2. If he pays the premium with his application, his application will be considered an offer.
Q. When is there an acceptance?
A. Where the application for insurance constitutes an offer by the insured, a policy is issued strictly in accordance
with the offer is an acceptance of the offer that perfects the contract.

F.1.a. Delay in Acceptance

Q. When can there be an issuance of policy without acceptance?
A. If the issued policy does not conform to the insureds application, it is an offer to the insured which he may
accept or reject.
Q. What is the effect of delay?
A. Unreasonable delay in returning the premium raises the presumption of acceptance of the insurance
application. (Gloria v. Philippine American Life Ins. Co., [CA}73 O.G. [No.37] 8660)
Q: When does the policy become binding?
A:

1. When all the conditions precedent stated in the offer have been satisfied; and
2. When delivered
F.1.b. Delivery of Policy
Q: What are the requisites for a valid delivery?
A:
1. Intention of the insurer to give legal effect as a completed instrument;
2. Word or act by insurer putting the instrument beyond his legal, though not necessarily physical control;
3. Insured must acquiesce in this intention.

Q: What are the 2 types of delivery?

A:
1. Actual delivery to the person of the insured.
2. Constructive
a. By mail If policy was mailed already and premium was paid and nothing is left to be done by the insured, the

policy is considered constructively delivered if insured died before receiving the policy.
b. By agent If delivered to the agent of the insurer, whose duty is ministerial, or delivered to the agent of
the insured, the policy is considered constructively delivered.
Q: What is the importance of delivery?
A:
1.
2.
3.
4.

It becomes the evidence of the making of a contract and of its terms;

It is considered as communication of the insurers acceptance of the insureds offer;
It becomes the determination of policy period;
It marks the end of insurers opportunity to decline coverage.

F.2. PREMIUM PAYMENT

Q: What is premium?
A: It is an agreed price for assuming and carrying the risk that is, the consideration paid an insurer for
undertaking to indemnify the insured against a specified peril.
Q: What is the difference between premium and assessment?
A: Premium is levied and paid to meet anticipated losses, while assessment are collected to meet actual losses.
Also, while premium is not a debt, assessment properly levied, unless otherwise expressly agreed, is a debt.
Q: When does payment of premium become a debt or obligation?
A:
1. In fire, casualty and marine insurance, the premium payable becomes a debt as soon as the risk attaches.
2. In life insurance, the premium becomes a debt only when, in the case of the first premium, the contract has
become binding, and in the case of subsequent premiums, when the insurer has continued the insurance after
maturity of the premium, in consideration of the insureds express or implied promise to pay.

Q: Does nonpayment of balance of premiums cancel the policy?

A: No, a contrary rule would place exclusively in the hands of the insured the right to decide whether the contract
should stand or not. (Philippine Phoenix Surety & Insurance, Co., Inc., v. Woodworks, Inc., G.R. No. L 22684,
Aug. 31, 1967)
Q: What are the effects of nonpayment of premiums?
A: Nonpayment of the first premium unless waived, prevents the contract from becoming binding
notwithstanding the acceptance of the application or the issuance of the policy.
Nonpayment of the subsequent premiums does not affect the validity of the contracts unless, by express
stipulation, it is provided that the policy shall in that event be suspended or shall lapse.
Q: Is the fire insurance policy a binding one even if the premium stated in the policy is not paid?
A: No, insurance is a contract whereby one undertakes for a consideration to indemnify another against loss,
damage or liability arising from an unknown contingent event.
The consideration is the premium. The premium must be paid at the time and in the way
and manner specified in the policy, and if not, the policy will lapse and be forfeited by its
own terms.
The nonpayment of consideration constitutes inability of the agreement (Philippine Surety
and Insurance Company v. Woodwork, Inc., G.R. No. L25317, Aug. 6, 1979)
Q: If the applicant failed to pay premium and instead execute a promissory note in favor of the insurer
payable within 30 days which was accepted by the latter, is the insurer liable in case of loss?
A: Yes, the insurer is liable because there has been a perfected insurance contract. The
insurer accepted the promise of the applicant to pay the insurance premium within thirty
30 days from the effective date of policy. By so doing, it has implicitly agreed to modify the
tenor of the insurance policy and in effect, waived any provision therein that it would only
pay for the loss or damage in case the same occurs after the payment of the premium.
Considering that the insurance policy is silent as to the mode of payment, insurer is
deemed to have accepted the promissory note in payment of the premium. This rendered
the policy immediately operative on the date it was delivered. (Capital Insurance & Surety
Co. Inc. v. Plastic Era Co., Inc. G.R. No. L22375, July 18, 1975)
Q: Can fortuitous event excuse the insured from not paying the premiums?
A:
GR: No, nonpayment of premiums does not merely suspend but put an end to an insurance contract since the
time of the payment is peculiarly of the essence of the contract.
XPN:
1. The insurer has become insolvent and has suspended business, or has refused without justification a valid
tender of premiums. (Gonzales v. Asia Life Ins. Co., G.R. No. L5188, Oct. 29, 1952)
2. Failure to pay was due to the wrongful conduct of the insurer.
3. The insurer has waived his right to demand payment.
Q: What is the effect of acceptance of premium?
A: Acceptance of premium within the stipulated period for payment thereof, including the agreed grace period,
merely assures continued effectivity of the insurance policy in accordance with its terms. (Stoke v. Malayan
Insurance Co., Inc., G.R. No. L34768, Feb. 28, 1984)
Where an insurer authorizes an insurance agent or broker to deliver a policy to the
insured, it is deemed to have authorized said agent to receive the premium in its behalf.
The insurer is bound by its agents acknowledgment of the receipt of payment of premium.
Q: What is the effect of payment of premium by post dated check?

A: Delivery of a promissory note or a check will not be sufficient to make the policy
binding until the said note or check has been converted into cash. This is consistent with
Article 1249 of the Civil Code.
Q: What if there was no premium paid, may the insurer recover the unpaid premium from the insured?
A: No, the continuance of the insurers obligation is conditioned upon the payment of the premium, so that no
recovery can be had upon a lapsed policy, the contractual relation between the parties having ceased. If the peril
insured against had occurred, the insurer would have had a valid defense against recovery under the policy.
Q: What is the cash and carry rule?
A:
GR: No policy or contract of insurance issued by an insurance company is valid and binding unless and until
the premium thereof has been paid. Any agreement to the contrary is void. (2003 Bar Question)
XPN: A policy is valid and binding even when there is nonpayment of premium:
1. In case of life or industrial life policy whenever the grace period provision applies.
2. When there is acknowledgment in a policy of a receipt of premium, which the law declares to be conclusive
evidence of payment, even if there is stipulation therein that it shall not be binding until the premium is
actually paid. This is without prejudice however to right of insurer to collect corresponding premium. (Sec.
77)
3. When there is an agreement allowing the insured to pay the premium in installments and partial payment has
been made at the time of loss (Makati Tuscany Condominium Corp. v. CA, G.R. No. 95546, Nov. 6, 1992).
4. When there is an agreement to grant the insured credit extension for the payment of the premium. (Art. 1306,
NCC), and loss occurs before the expiration of the credit term. (UCPB General Insurance v. Masagana
Telemart, G.R. No. 137172, Apr. 4, 2001).
5. When estoppel bars the insurer to invoke nonrecovery on the policy.
6. When the public interest so requires, as determined by the Insurance Commissioner
E.g.: In compulsory motor vehicle insurance, if the policy was issued without payment of premium by the
vehicle owner, the insurer will still be held liable. To rule otherwise would prejudice the 3rd party victim.
Q: What is the effect of acknowledgment of receipt of premium in policy?
A: Conclusive evidence of its payment, in so far as to make the policy binding, notwithstanding any stipulation
therein that it shall not be binding until the premium is actually paid (Sec. 78).
When the policy contains such written acknowledgment, it is presumed that the insurer has waived the condition
of prepayment. It hereby creates a legal fiction of payment. The presumption is however, extended only to the
question of the binding effect of the policy.
As far as the payment of the premium itself is concerned, the acknowledgment is only a prima facie evidence of
the fact of such payment. The insurer may still dispute its acknowledgment but only for the purpose of recovering
the premium due and unpaid. Whether payment was indeed made is a question of fact.
Q: Is the insurance company liable when a car, bought on installment basis, met an accident but the car is
not yet fully paid?
A: Yes, when insured and insurer have agreed to the payment of premium by installments
and partial payment has been made at the time of loss, then the insurer becomes liable.
When the car loss happened on the 5th month, the six months agreed period of payment
had not yet elapsed. The owner may recover from Peninsula Insurance Company, but the
latter has the right to deduct the amount of unpaid premium from the insurance proceeds.
(2006 Bar Question)

F.3. NON-DEFAULT OPTIONS IN LIFE INSURANCE

Q: What are the devices used to prevent the forfeiture of a life insurance after the payment of the first
premium?
A:

1. Grace period After the payment of the first premium, the insured is entitled to a grace period of 30 days within which
to pay the succeeding premiums. (Sec. 227,(a)).
2. Cash surrender value The amount the insurer agrees to pay to the holder of the policy if he surrenders it
and releases his claim upon it. (Cyclopedia Law Dictionary, 3rd ed., 1077)
3. Extended insurance It is where the insured is given a right, upon default, after payment of at least three full
annual premiums (see Sec. 227 [f]) to have the policy continued in force from the date of default for a time
either stated or equal to the amount as the net value of the policy taken as a single premium, will purchase.
(De Leon, The Insurance Code of the Philippines Annotated, 2006)
4. Paid up Insurance The insured is given a right, upon default, after the payment of at least three annual
premiums to have the policy continued in force from the date of default for the whole period of the insurance
without further payment of premiums.(ibid.) It results to a reduction of the original amount of insurance, but
for the same period originally stipulated.(6 Couch 2d., 355; 37 C.J.S. 364)
5. Automatic Loan Clause A stipulation in the policy providing that upon default in payment of premium, the
same shall be paid from the loan value of the policy until that value is consumed. In such a case, the policy is
continued in force as fully and effectively as though the premiums had been paid by the insured from funds
derived from other sources.(6 Couch 2d., 383)
6. Reinstatement Provision that the holder of the policy shall be entitled to reinstatement of the contract at
anytime within 3 years from the date of default in the payment of premium, unless the cash surrender value
has been paid, or the extension period expired, upon production of evidence of insurability satisfactory to the
company and the payment of all overdue premiums and any indebtedness to the company upon said policy.
(Sec. 227, (j)).
F.6. REINSTATEMENT OF A LAPSED POLICY OF LIFE INSURANCE
Q. What is purpose of the Reinstatement Provision?
A. The purpose of the provision is to clarify the requirements for restoring a policy to
premiumpaying status after it has been permitted to lapsed.
Q. Within what period shall the holder of the policy be entitled to reinstatement of the
contract?
A. The law requires that the policy owner be permitted to reinstate the policy, subject to
the violations specified, any time within three (3) years from the date of default of
premium payment. A longer period, being more favorable to the insured, may be used.
Q. Is reinstatement of a lapsed policy an absolute right of the insured?
A. Reinstatement is not an absolute right of the insured, but discretionary on the part of
the insurer, which has the right to deny reinstatement if it were not satisfied as to the
insurability of the insured, and if the latter did not pay all overdue premiums and other
indebtedness to the insurer. (McGuire vs. Manufacturers Life Ins. Co., 87 Phil. 370).
Q. What does Evidence of Insurability includes?
A. Evidence of Insurability is broader phrase than Evidence of Good Health and includes such other factors as
the insureds occupation, habits, financial condition, and other risk selection factors.
Q. A life insurance policy lapsed. The insured applied for reinstatement of the policy and paid only a part
of the overdue premiums. Subsequently, the insured died. Was the insurer liable?

A. The insurer is was not liable as the policy was not reinstated. The failure to pay the
balance of the overdue premiums prevented reinstatement and recovery of the face value
of the policy. (Andres vs. Crown Life Ins. Co., 55 O.G. 3483).
F.5. REFUND OF PREMIUMS
Q: When is the insured entitled to recover premiums already paid or a portion thereof?
A:
1. Whole:
a. When no part of the thing insured has been exposed to any of the perils insured against (Sec. 79)
b. When the contract is voidable because of the fraud or misrepresentations of the insurer of his agent (Sec.81).
c. When the insurance is voidable because of the existence of facts of which the insured was ignorant without his fault
(Sec.81).
d. When the insurer never incurred any liability under the policy because of the default of the insured other than actual fraud
(Sec. 81).
e. When rescission is granted due to insurers breach of contract (Sec. 74).
2. Pro rata:
a. When the insurance is for a definite period and the insured surrenders his policy before the termination thereof; (Sec. 79
[b]); except:
i. Policy not made for a definite period of time;
ii. Short period rate is agreed upon;
iii. Life insurance policy.
b. When there is overinsurance. The premiums to be returned shall be proportioned to the amount by which the aggregate
sum insured in all the policies exceeds the insurable value of the thing at risk. (Sec. 82)

i. In case of overinsurance by double insurance, the insurer is not liable for the total amount of the insurance
taken, his liability being limited to the property insured. Hence, the insurer is not entitled to that portion of
the premium corresponding to the excess of the insurance over the insurable interest of the insured.
ii. In case of overinsurance by several insurers, the insured is entitled to a ratable return of the premium,
proportioned to the amount by which the aggregate sum insured in all the policies exceeds the insurable
value of the thing insured (Sec. 82).
E.g. Where there is a total over insurance of P500,000.00 in an aggregate P2,000,000.00 policy
(P1,500,000.00 is only the insurable value), 25% (proportion of P500k to P2M) of the premiums
paid to the several insurers should be returned.
Q: When insured not entitled to return of premiums paid?
A:
1. The risk has already attached and the risk is entire and indivisible;
2. In life policies;
3. If contract is void ab initio because of fraud by the insured;
4. If contract is illegal and the parties are in pari delicto.
G. RESCISSION OF INSURANCE CONTRACTS
Q. What are the instances wherein a contract of insurance may be rescinded?
A.
1. Concealment
2. Misrepresentation/ omission
3. Breach of warranties
G.1. Concealment
Q: What is concealment?
A: Concealment is a neglect to communicate that which a party knows and ought to communicate. (Sec. 26)
Q: What are the requisites in concealment?

A:
1. A party knows a fact which he neglects to communicate or disclose to the other party
2. Such party concealing is duty bound to disclose such fact to the other

3. Such party concealing makes no warranty as to the fact concealed

4. The other party has no means of ascertaining the fact concealed
5. The fact must be material
Q: What is the test of materiality?
A: It is determined not by the event, but solely by the probable and reasonable influence of the facts upon the
party to whom the communication is due, in forming his estimate of the advantages of the proposed contract, or in
making his inquiries. (Sec. 31)
Q: What is the presumption when the insured failed to convey the nature of the facts to the insurer?
A:
GR: The failure of the insured to communicate is intentional rather than inadvertent.
XPN: In the absence of evidence of the uninsurability of a person afflicted with chronic
cough, concealment thereof is no ground for annulment of the policy.
Q: How does it differ from materiality in marine insurance?
A: Rules on concealment are stricter since the insurer would have to depend almost entirely on the matters
communicated by the insured. Thus, in addition to material facts, each party must disclose all the information he
possesses which are material to the information of the belief or expectation of a third person, in reference to a
material fact. But a concealment in a marine insurance in any of the following matters enumerated under Section
110, Insurance Code does not vitiate the entire contract, but merely exonerates the insurer from a loss resulting
from the risk concealed.
Q: What is the test in ascertaining the existence of concealment?
A: If the applicant is aware of the existence of some circumstances which he knows would
influence the insurer in acting upon his application, good faith requires him to disclose that
circumstance, though unasked.
Q: What are the matters that need not be disclosed?
A:
1.
2.
3.
4.
5.
6.

GR: The parties are not bound to communicate information of the following matters:
Those which the other knows
Those which, in the exercise of ordinary care, the other ought to know and of which, the former has no reason to suppose
him ignorant
Those of which the other waives communication
Those which prove or tend to prove the existence of a risk excluded by a warranty, and which are not otherwise material
Those which relate to a risk excepted from the policy and which are not otherwise material;
The nature or amount of the interest of one insured (except if he is not the owner of the property insured, Sec. 34).

XPN: In answer to inquiries of the other. (Sec. 30)

Q: What are the matters that must be disclosed even in the absence of inquiry?
A:
1. Those material to the contract
2. Those which the other has no means of ascertaining
3. Those as to which the party with the duty to communicate makes no warranty

Q: May the right to information of material facts be waived?

A: Yes.
1. By the terms of the contract
2. By the failure to make an inquiry as to such facts, where they are distinctly implied in other facts from which
information is communicated. (Sec. 33)
Q: What are the effects of concealment?

A:
1. If there is concealment under Section 27, the remedy of the insurer is rescission since concealment vitiates the contract of
insurance.
2. The party claiming the existence of concealment must prove that there was knowledge of the fact concealed on the part
of the party charged with concealment.
3. Good faith is not a defense in concealment. Concealment, whether intentional or unintentional entitles the injured party
to rescind the contract of insurance. (Sec. 27)
4. The matter concealed need not be the cause of loss.
5. To be guilty of concealment, a party must have knowledge of the fact concealed at the time of the effectivity of the
policy.

Q: When should concealment take place in order that the policy may be
avoided?
A: At the time the contract is entered into and not afterwards. The duty of disclosure ends
with the completion of the contract. Waiver of medical examination in a nonmedical
insurance contract renders even more material the information required of the applicant
concerning previous condition of health and diseases suffered, for such information
necessarily constitutes an important factor which the insurer takes into consideration in
deciding whether to issue the policy or not. Failure to communicate information acquired
after the effectivity of the policy will not be a ground to rescind the contract.
Q: What are the instances whereby concealment made by an agent procuring the insurance binds the
principal?
A.
1. Where it was the duty of the agent to acquire and communicate information of the facts in question;
2. Where it was possible for the agent, in the exercise of reasonable diligence to have made of the insurance contract.
Note: Failure on the part of the insured to disclose such facts known to his agent, or wholly due to the fault of the agent, will
avoid the policy, despite the good faith of the insured.
G.2. MISREPRESENTATIONS/OMISSIONS

Q: What is representation?
A: An oral or written statement of a fact or condition affecting the risk made by the insured to the insurance
company, tending to induce the insurer to assume the risk.
Q: What are the kinds of representation?
A:
1. Oral or written; (Sec. 36)
2. Affirmative; (Sec. 39) or
3. Promissory. (Sec. 42)

Q: What is an affirmative representation?

A: Any allegation as to the existence or nonexistence of a fact when the contract begins. ( e.g. the statement of the
insured that the house to be insured is used only for residential purposes is an affirmative representation).
Q: What is a promissory representation?
A: Any promise to be fulfilled after the contract has come into existence or any statement concerning what is to
happen during the existence of the insurance.
Q: When should representation be made?
A: At the time of, or before, issuance of the policy. (Sec. 37)
Q: What is misrepresentation?
A: It is an affirmative defense. To avoid liability, the insurer has the duty to establish such a defense by
satisfactory and convincing evidence. (Ng Gan Zee v. Asian Crusader Life Assn. Corp., G.R. No. L 30685, May
30, 1983)
Q: What are the requisites of a false representation (misrepresentation)?
A:

1.
2.
3.

The insured stated a fact which is untrue;

Such fact was stated with knowledge that it is untrue and with intent to deceive or which he states positively as true
without knowing it to be true and which has a tendency to mislead;
Such fact in either case is material to the risk.

Q: What is the test of materiality?

A: It is to be determined not by the event, but solely by the probable and reasonable influence of the facts upon
the party to whom the representation is made, in forming his estimates of the disadvantages of the proposed
contract or in making his inquiries (similar with concealment). (Sec. 46)
Q: What are the effects of misrepresentation?
A:
1. It renders the insurance contract voidable at the option of the insurer, although the policy is not thereby rendered void ab
initio. The injured party entitled to rescind from the time when the representation becomes false;
2. When the insurer accepted the payment of premium with the knowledge of the ground for rescission, there is waiver of
such right;
3. There is no waiver of the right of rescission if the insurer had no knowledge of the ground therefore at the time of
acceptance of premium payment

Q: What is the effect of collusion between the insurers agent and the insured?
A: It vitiates the policy even though the agent is acting within the apparent scope of his authority. The agent
ceases to represent his principal. He, thus, represents himself; so the insurer is not estopped from avoiding the
policy.
Q: What are the characteristics of representation?
A:
1.
2.
3.
4.
5.

Not a part of the contract but merely a collateral inducement to it

Oral or written
Made at the time of, or before issuing the policy and not after
Altered or withdrawn before the insurance is effected but not afterwards
Must be presumed to refer to the date the contract goes into effect. (Sec. 42)

Q: What are the similarities of concealment and representation?

A:

1.
2.
3.
4.
5.

Refer to the same subject matter and both take place before the contract is entered.
Concealment or representation prior to loss or death gives rise to the same remedy; that is rescission or cancellation.
The test of materiality is the same. (Secs. 31, 46)
The rules of concealment and representation are the same with life and nonlife insurance.
Whether intentional or not, the injured party is entitled to rescind a contract of insurance on ground of concealment or
false representation.
6. Since the contract of insurance is said to be one of utmost good faith on the part of both parties to the agreement, the
rules on concealment and representation apply likewise to the insurer.

Q: How does concealment differ from misrepresentation?

A: In concealment, the insured withholds the information of material facts from the insurer, whereas in
misrepresentation, the insured makes erroneous statements of facts with the intent of inducing the insurer to enter
into the insurance contract.
Q: How is concealment and misrepresentation applied in case of loss or death?
A:
GR: If the concealment or misrepresentation is discovered before loss or death, the insurer can cancel the
policy. If the discovery is after loss or death, the insurer can refuse to pay.
XPN: The incontestability clause under paragraph 2 of Section 48.
XPN to XPN:
1. Nonpayment of premiums. (Secs. 77, 22 [b], 228 [b], 203 [b])
2. Violation of condition. (Secs. 227 [b], 228 [b])
3. No insurable interest
4. Cause of death was excepted or not covered
5.
Fraud of a vicious type

6.
Proof of death was not given. (Sec. 242)
7. That the conditions of the policy relating to military or naval service. (Secs. 227 [b], 228 [b])
8. That the action was not bought within the time specified. (Sec. 62)
Q: What is the remedy of the injured party in case of misrepresentation?
A: If there is misrepresentation, the injured party is entitled to rescind from the time when the representation
becomes false.
Q: When should the right to rescind the contract be exercised?
A: The right to rescind must be exercised previous to the commencement of an action on the contract. (the action
referred to is that to collect a claim on the contract)
Q. What is Omission?
A. The failure to communicate information of matters proving or tending to prove the falsity of warranty.
Q. What is the effect of Omission?
A. The contract of insurance may be rescinded.
Q. In case of Omission, who is entitled to rescind the contract?
A. The insurer is entitled to rescind the contract
G.3. BREACH OF WARRANTIES
Q: What are warranties?
A: Statements or promises by the insured set forth in the policy itself or incorporated in it by proper reference, the
untruth or nonfulfillment of which in any respect, and without reference to whether the insurer was in fact
prejudiced by such untruth or nonfulfillment render the policy voidable by the insurer.
Q: What is the purpose of warranties?
A: To eliminate potentially increasing moral or physical hazards which may either be due to the acts of the
insured or to the change of the condition of the property.
Q: What is the basis of warranties?
A: The insurer took into consideration the condition of the property at the time of effectivity of the policy.
Q: What are the kinds of warranties?
A:
1. Express an agreement contained in the policy or clearly incorporated therein as part thereof whereby the insured
stipulates that certain facts relating to the risk are or shall be true, or certain acts relating to the same subject have been or
shall be done.
2. Implied It is deemed included in the contract although not expressly mentioned.
Peculiar only to marine insurance, and therefore is deemed included in the contract, although not expressly mentioned:

a. That the ship will not deviate from the agreed voyage unless deviation is proper
b. That the ship will not engage in illegal venture
c. Warranty of neutrality, that the ship will carry the requisite documents of nationality or neutrality where
such nationality or neutrality is warranted
d. Presence of insurable interest
e. That the ship is seaworthy at the time of the commencement of the insurance contract.
Q: What are the effects of breach of warranty?
A:
1. Material
GR: Violation of material warranty or of material provision of a policy will entitle the other party to rescind the
contract.
XPN:
a. Loss occurs before the time of performance of the warranty;

b. The performance becomes unlawful at the place of the contract; and

c. Performance becomes impossible.
2. Immaterial
GR: It will not avoid the policy.

XPN: When the policy expressly provides or declares that a violation thereof will avoid it.
For instance, an Other Insurance Clause which is a condition in the policy requiring the insured to
inform the insurer of any other insurance coverage of the property. A violation of the clause by the insured
will not constitute a breach unless there is an additional provision stating that the violation thereof will
avoid the policy. (Sec. 75)
Q: What is the effect of a breach of warranty without fraud?
A: The policy is avoided only from the time of breach (Sec. 76) and the insured is entitled:
1. To the return of the premium paid at a pro rata from the time of breach if it occurs after the inception of the
contract; or
2. To all premiums if it is broken during the inception of the contract.
H. CLAIMS SETTLEMENT AND SUBROGATION
H.1. Notice and Proof of Loss
Q: What is loss in insurance?
A: The injury, damage or liability sustained by the insured in consequence of the happening of one or more of the
perils against which the insurer, in consideration of the premium, has undertaken to indemnify the insured. It may
be total, partial, or constructive in Marine Insurance.
Q: What is notice of loss?
A: It is the more or less formal notice given the insurer by the insured or claimant under a policy of the
occurrence of the loss insured against.
Q: What are the conditions before the insured may recover on the policy after the loss?
A:
1. The insured or some person entitled to the benefit of the insurance, without unnecessary delay, must give notice to the
insurer; (Sec. 88)
2. When required by the policy, insured must present a preliminary proof loss which is the best evidence he has in his
power at the time. (Sec. 89)
Q: What are the purposes of notice of loss?
A:
1. To give insurer information by which he may determine the extent of his liability;
2. To afford the insurer a means of detecting any fraud that may have been practiced upon him; and
3. To operate as a check upon extravagant claims.

Q: What are the instances when the defects in the notice or proof of loss are considered waived?
A: When the insurer:
1. Writes to the insured that he considers the policy null and void as the furnishing of notice or proof of loss
would be useless;
2. Recognizes his liability to pay the claim;
3. Denies all liability under the policy
4. Joins in the proceedings for determining the amount of the loss by arbitration, making no objections on
account of notice and preliminary proof; or
5. Makes Objection on any ground other than the formal defect in the preliminary proof.
Q: When is delay in the presentation of notice or proof of loss deemed waived?
A: If caused by:
1. Any act of the insurer; and
2. By failure to take objection promptly and specifically upon that ground. (Sec. 91)

Q: What is proof of loss?

A: It is the more or less formal evidence given the company by the insured or claimant under a policy of the
occurrence of the loss, the particulars thereof and the data necessary to enable the company to determine its
liability and the amount thereof.
H.2. Guidelines on Claims Settlement
Q. What is Claim Settlement?
A. Claim settlement is the indemnification of the suffered by the insured. The claimant may be the insured or
reinsured, the insurer who is entitled to subrogation, or a third party who has a claim against the insured.
Q. What are the rules in Claim Settlement?
A.
1. No insurance company doing business in the Philippines shall refuse, without justifiable cause, to pay or settle
claims arising under coverages provided by its policies, nor shall any such company engage in unfair claim
settlement practices.
2. Evidence as to numbers and types of valid and justifiable complaints to the Commissioner against an
insurance company, and the Commissioners complaint experience with other insurance companies writing
similar lines of insurance shall be admissible in evidence in an administrative or judicial proceeding brought
under this section (Sec. 241)
Q. What is the purpose of the rule?
A. To eliminate unfair claim settlement practices.
H.2.a. Unfair Claims Settlement: Sanctions
Q. What are the acts which constitute unfair claim settlement practices?
A.

1. Knowingly misrepresenting to claimants pertinent facts or policy provisions relating to coverages at issue.
2. Failing to acknowledge with reasonable promptness pertinent communications with respect to claims arising under its
policies.

3. Failing to adopt and implement reasonable standards for the prompt investigation of claims arising under its policies.
4. Not attempting in good faith to effectuate prompt, fair and equitable settlement of calims submitted in which liability has
become reasonably clear; or

5. Compelling policyholders to institute suits to recover amounts due under its policies by offering without
justifiable reason substantially less than the amounts ultimately recovered in suits brought by them. (Sec. 241,
Par.1)
Q. What is the sanction for the insurance companies which engaged to unfair settlement practices?
A. Sec. 241 enumerates the grounds which shall be considered as sufficient as sufficient cause of the suspension
or revocation of an insurance companys certificate of authority.
Q. What is the obligation of the insurer with regard to the insureds decision to compromise third party
claim?
A. Where a policy gives the insurer a control of the decision to settle claim or to litigate it, the insurer
nevertheless is required to observe a certain measure of consideration for the interest of the insured. The rule has
come to be generally accepted that while the express terms of the policy do not impose of the insurer the duty to
claim settle the claim at all costs, there is an implied duty on his part to give due consideration to the interest of
the insured in its exercise of the option to reject a compromise settlement and proceed with litigation. In insurance
contracts, the law requires strict observance of the standards of good faith and fair dealing on the part of the
insurer.
Q: What is the effect of refusal or failure to pay the claim within the time prescribed?
A: Secs. 242, 243 and 244 provide that the insurer shall be liable to pay interest twice the ceiling prescribed by
the Monetary Board which means twice 12% per annum (legal rate of interest prescribed in CB No. 416) or 24%
per annum interest on the proceeds of the insurance from the date following the time prescribed in Secs. 242 or

243 until the claim is fully satisfied (Prudential Guarantee and Assurance, Inc. v. TransAsia Shipping Lines, Inc.
G. R. No. 151890, June 20, 2006)
H.2.b. Prescription of Action
Q: What are the rules on the prescriptive period?
A:
1. The parties to a contract of insurance may validly agree that an action on the policy should be brought
within a limited period of time, provided such period is not less than 1 year from the time the cause of
action accrues. If the period agreed upon is less than 1 year from the time the cause of action accrues, such
agreement is void. (Sec. 63)
a. The stipulated prescriptive period shall begin to run from the date of the insurers rejection of the claim filed by
the insured or beneficiary and not from the time of loss.
b. In case the claim was denied by the insurer but the insured filed a petition for reconsideration, the prescriptive
period should be counted from the date the claim was denied at the first instance and not from the denial of the
reconsideration (Sun Life Office, Ltd. vs. CA, GR. No. 89741, Mar 13, 1991)
2. If there is no stipulation or the stipulation is void, the insured may bring the action within 10 years in case
the contract is written.
3. In a comprehensive motor vehicle liability insurance (CMVLI), the written notice of claim must be filed
within 6 months from the date of the accident; otherwise, the claim is deemed waived even if the same is
brought within 1 year from its rejection. (Vda. De Gabriel vs. CA, GR No. 103883, Nov 14, 1996)
4. The suit for damages, either with the proper court or with the Insurance Commissioner, should be filed within
1 year from the date of the denial of the claim by the insurer, otherwise, claimants right of action shall
prescribe. (Sec. 384)
Q: What is the prescriptive period in commencing an action?
A: Within one year from time cause of action accrues.
Q. From what time shall the period of prescription be computed in case the insured asked for
reconsideration of the denial of claim?
A. In case the claim was denied by the insurer but the insured file a petition for reconsideration, the prescriptive
period should be counted from the date the claim was denied at the first instance and not from the denial of the
reconsideration. To rule otherwise would give the insured a scheme or devise to waste time until any evidence
which may be considered against him is destroyed. (Sun life Office, Ltd. vs. CA, 195 SCRA 193; Asked, V [a},
1996 Bar Exams.).
Q. What is the prescriptive period of prescription in motor vehicle insurance?
A. It is one year from denial of the claim and not from the date of the accident.
Q. What is the Principle of Subrogation?
A. If the plaintiffs property has been insured, and he has received indemnity from the insurance company for the
injury or loss arising out of wrong or breach of contract complained of, the insurance company shall be
subrogated to the rights of the insured against the wrongdoer or the person who has violated the contract. ( Art.
2207, NCC)
Q: Should there be a contract before the insurer be subrogated?
A: The principle of subrogation inures to the insurer without any formal assignment or any express stipulation to
that effect in the policy. Said right is not dependent upon nor does it grow out of any private contract. Payment to
the insured makes the insurer a subrogee in equity. (Malayan Insurance Co., Inc. v. CA, G.R. No. L36413, Sept.
26, 1988)
Q: What are the rules on indemnity?
A:

1.
2.

Applies only to property insurance except when the creditor insures the life of his debtor
Insurance contracts are not wagering contracts or gambling contracts.

Q: What are the purposes of subrogation?

A:
1. To make the person who caused the loss legally responsible for it
2. To prevent the insured from receiving double recovery from the wrongdoer and the insurer
3. To prevent the tortfeasors from being free from liability and is thus founded on consideration of public policy
Q: What are the rules on subrogation?
A:
1. Applicable only to property insurance the value of human life is regarded as unlimited and therefore, no recovery from
a third party can be deemed adequate to compensate the insureds beneficiary.
2. The right of insurer against a third party is limited to the amount recoverable from latter by the insured.

Q: What if the amount paid by the insurance company does not fully cover the injury or loss?
A: The aggrieved party shall be entitled to recover the deficiency from the person causing the loss or injury. (Art.
2207, NCC)
Q: What are the instances where the right of subrogation does not apply? A:
1. Where the insured by his own act releases the wrongdoer or third party liable for loss or damage from liability
2. The insurer loses his rights against the wrongdoer since the insurer can only be subrogated to only such rights as the
insured may have

3. Where the insurer pays the insured the value of the loss without notifying the carrier who has in good faith settled the
insured claim for loss

4. Where the insurer pays the insured for a loss or risk not covered by the policy
5. Life insurance
For recovery of loss in excess of insurance coverage.

V. Transportation Laws

A. Common Carriers
Common carriers are persons, corporations, firms or associations engaged in the
business of carrying or transporting passengers or goods or both, by land, water or
air, for compensation, offering their services to the public.
1. Diligence required of common carriers
Extraordinary diligence or that extreme measure of care or caution which persons
of unusual prudence and circumspection use for securing and preserving their
own property or rights. The law requires common carriers to render service with
the greatest care and utmost foresight.
2. Liabilities of common carriers
With respect to the transfer of goods: liability begins with the actual delivery of
the goods for transportation, and not merely with the formal execution of a
receipt or bill of lading; the issuance of a bill of lading is not necessary to
complete delivery and acceptance.
With respect to the transport of passengers: begins from the moment the person
who purchases the ticket from the carrier presents himself at the proper place
and in a proper manner to be transported. The relation of carrier and passenger
continues until the passenger has been landed at the port of destination and has
left the vessel owners dock or premises. Once created, the relationship will not
ordinarily terminate until the passenger has, after reaching his destination, safely
alighted from the carriers conveyance or had a reasonable opportunity to leave
the carriers premises.

B. Vigilance over goods

1. Exempting causes
GR: the common carrier is presumed to have been at fault or to have acted
negligently when the goods transported are lost, destroyed or deteriorated,
XPN:
1.
2.
3.
a.

when the same is due to any of the following causes only:

Caso Fortuito
Act of the public enemy in war, whether international or civil
Act or omission of the shipper or owner of the goods

Requirement of absence of negligence

GR: it is the express obligation of common carriers to carry the passengers
safely as far as human care and foresight can provide, using the utmost
diligence of very cautious persons, with a due regard for all the
circumstances.
XPN: being a mere presumption, however, the same is rebuttable by proof
that the common carrier had exercised extraordinary diligence as required by
law in the performance of its contractual obligation, or that the injury suffered
by the passenger was solely due to a fortuitous event.

b. Absence of delay
The absence of delay is important in case of natural disaster because if a
common carrier incurs in delay in transporting the foods, such disaster shall
not free such carriers from responsibility.
c.

Due diligence to prevent or lessen the loss

To be exempted from liability, the common carrier must prove:
1. The natural disaster was the proximate and only cause of the loss
2. That the common carrier has exercised due diligence to prevent or
minimize loss before, during and after the occurrence of flood, storm,
other natural disasters or acts of war.

2. Contributory negligence
GR: if the shipper or owner merely contributed to the loss, destruction or
deterioration of the goods, the proximate cause thereof being the negligence of
the common carrier, the latter shall be liable for damages, which however, shall
be equitably reduced.
XPN: in a collision case and allision cases, the parties are liable for their own
damages.
3. Duration of liability
a. Delivery of goods to common carrier
Delivery must be made, actual or constructive, to the consignee or to the
person who has a right to receive them.
b. Actual or constructive delivery
It is the delivery of a representation of property or means of possession
that is construed by a court as sufficient to show the transferors intent or
to put the property under the transferees control
c.

Temporary unloading or storage

GR: the common carriers duty to observe extraordinary diligence in the

vigilance over the goods remain in full force and effect even when they are
temporarily unloaded or stored in transit.
XPN: when the shipper or owner has made use of the right of stoppage in
transitu.
4. Stipulation for limitation of liability
a. Void stipulations
i. That the goods are transported at the risk of the owner or shipper
ii. Any similar stipulation that is unreasonable, unjust and contrary to
public policy
iii. That the common carrier will not be liable for any loss, destruction or
deterioration of the goods
iv. That the common carrier need not observe any diligence in the custody
of the goods
v. That the common carrier shall exercise a degree of diligence less than
that of a good father of a family or a man of ordinary prudence in the
vigilance over the movables transported
vi. That the common carrier is not responsible for the loss, destruction or
deterioration of goods on account of the defective condition of the car,
vehicle, etc.
b. Limitation of liability to fixed amount
GR: under the warsaw convention, a stipulation limiting the maximum
recoverable amount of airlines as common carriers is valid provided that
the provisions of the convention limiting the liability are printed in the
airway bill.
XPN: the warsaw convention shall not apply in:
a. Willful misconduct by the common carrier
b. Default amounting to willful misconduct
c. Accepting goods without airway bill
c.

Limitation of liability in absence of declaration of greater value

GR: the liability of the common carrier shall not exceed the stipulation in a
contract of carriage even if the loss or damage results from the carriers
negligence.
XPN: where the shipper or owner of the goods declare a greater value and
corresponding freight.

5. Liability for baggage of passengers

a. Checked-in baggage
b. Baggage in possession of passengers
C. Safety of Passengers
1. Void stipulations
The following are void stipulations in a contract of carriage of goods:
1. That the goods are transported at the risk of the owner or shipper
2. Any similar stipulation that is unreasonable, unjust and contrary to public
policy
3. That the common carrier will not be liable for any loss, destruction or
deterioration of the goods
4. That the common carrier need not observe any diligence in the custody of
the goods

5. That the common carrier shall exercise a degree of diligence less than that
of a good father of a family or a man of ordinary prudence in the vigilance
over the movables transported
6. That the common carrier is not responsible for the loss, destruction or
deterioration of goods on account of the defective condition of the car,
vehicle, ship, airplane or other equipment used in the contract of carriage.
7. That the common carriers liability for acts committed by thieves or of
robbers who do not act with grave or irresistible threat, violence or force, is
dispensed with or diminished
8. That the common carrier shall not be responsible for the acts or omissions
of his or its employees.
2. Duration of liability
The duty exists from the moment the person offers to be transported places
himself in the care and control of the common carrier who accepts him as such
passenger. The duty continues until the passenger has, after reaching his
destination, safely alighted from the carriers conveyance or has had a reasonable
opportunity to leave the carriers premises and to look after his baggage and
prepare for his departure.
a.

Waiting for carrier or boarding of carrier

It is the duty of common carriers of passengers, including common carriers by
railroad train, streetcar or motorbus, to stop their conveyances a reasonable
length of time in order to afford passengers an opportunity to board and
enter, and they are liable for injuries suffered by boarding passengers
resulting from the sudden starting up or jerking of their conveyances while
they are doing so.

b. Arrival at destination
Once created, the relationship will not ordinarily terminate until the
passenger has, after reaching his destination, safely alighted from the
carriers conveyance or had a reasonable opportunity to leave the carriers
premises. All persons who remain on the premises a reasonable time after
leaving the conveyance are to be deemed passengers, and what is a
reasonable time or a reasonable delay within this rule is to be determined
from all the circumstances, and included a reasonable time to see after his
baggage and prepare for his departure.
3. Liability of acts of others
a. Employees
Common carriers are liable for the death of or injuries to passengers through
the negligence or willful acts of the formers employees although such
employees may have acted beyond the scope of their authority or in violation
of the orders of the common carriers. The liability of the common carriers
does not cease upon proof that they exercised all the diligence of a good
father of a family in the selection and supervision of their employees.
b. Other passengers and strangers
A common carrier is responsible for injuries suffered by a passenger on
account of the willful acts or negligence of other passengers or of strangers,
if the carriers employees through the exercise of the diligence of a good
father of a family would have prevented or stopped the act or omission.
4. Extent of liability for damages
The following are the kinds of damages that may be recovered in case of
death of a passenger:

1.
2.
3.
4.
5.
6.

Indemnity for the death of the victim

Indemnity for loss of earning capacity of the deceased
Moral damages
Exemplary damages
Attorneys fees and expenses of litigation
Interest in proper cases

D. Bill of Lading
1. Three-Fold character
It is a receipt for the goods shipped and a contract to transport and deliver the
same as therein stipulated.
1. As a receipt, it recites the date and place of shipment, described the goods
as to quantity, weight, dimensions, identification marks and condition,
quality and value.
2. As a contract, it names the contracting parties, which include the
consignee, fixes the route, destination, and freight rate or charges and
stipulated the rights and obligations assumed by the parties.
3. As a document of title it regulated the relations between a carrier and a
holder of the same.
2. Delivery of goods
a. Period of delivery
If a period has been fixed for the delivery of the goods, it must be made
within such time, and, for failure to do so, the carrier shall pay the indemnity
stipulated in the bill of lading, neither the shipper nor the consignee being
entitled to anything else.
b. Delivery without surrender of bill of lading
c. Refusal of consignee to take delivery
1. When a part of the goods transported are delivered and the consignee
is able to prove that he cannot make use of the part without the others
2. If the cargo consists of liquids and they have leaked out, nothing
remaining in the containers but 1/4 of their contents, on account of
inherent defect of cargo.
3. If the goods are damaged and such damage renders the foods useless
for the particular purpose for which they are to be used.
4. If there is delay on account of the fault of the carrier
3. Period for filing claims
1. Immediately after delivery - if the damage is apparent or
2. Within 24 hours from delivery - if the damage is not apparent
4. Period for filing actions
Fir coastwise or carriage within the Philippines, within 6 years if no bill of lading
has been issued or within 10 years if a bill of lading has been issued. For
international carriage from foreign port to the Philippines within 1 year from
delivery of goods or the date when the goods have been delivered.

E. Maritime Commerce
1. Charter Parties
a. Bareboat/ Demise Charter
The ship owner gives possession of the entire vessel to the charterer. In turn, the
charterer supplies, equips, and mans the vessel. The charterer is the owner pro
hac vice.
b. Time Charter
Vessel is chartered for a particular time or duration. While the ship owner still
retains possession and control of the vessel, the charterer has the right to use all
vessels facilities. The charterer may likewise designate vessels destination.
c. Voyage /Trip Charter
A voyage charter is a contract wherein the ship was leased for a single voyage
for the conveyance of goods, in consideration of the payment of freight. The
shipowner retains the possession, command and navigation of the ship, the
charterer merely having use of the space in the vessel in return for his payment
of freight. An owner who retains possession of the ship remains liable as carrier
and must answer for loss or nondelivery of the goods received for
transportation. (Cebu Salvage Corp. vs. Philippine Home Assurance Corp., G.R.
No. 150403, Jan. 25, 2007)
2. Liability of ship Owners and Shipping Agents
a. Liability of Acts of Captain
Shipowner /shipping agents are liable for the following acts of captain :
1. Damages suffered by the vessel and its cargo by reason of want of skill or
negligence on his part;
2. Thefts committed by the crew, reserving his right of action against the guilty
parties;
3. Losses, fines, and confiscations imposed an account of violation of customs,
police, health, and navigation laws and regulations;
4. Losses and damages caused by mutinies on board the vessel or by reason of
faults committed by the crew in the service and defense of the same, if he
does not prove that he made timely use of all his authority to prevent or
avoid them;
5. Those caused by the misuse of the powers;
6. For those arising by reason of his going out of his course or taking a course
which he should not have taken without sufficient cause, in the opinion of the
officers of the vessel, at a meeting with the shippers or supercargoes who
may be on board. No exceptions whatsoever shall exempt him from this
obligation;

7. For those arising by reason of his voluntarily entering a port other than that
of his destination, outside of the cases or without the formalities referred to in
Article 612; and
8. For those arising by reason of nonobservance of the provisions contained in
the regulations on situation of lights and maneuvers for the purpose of
preventing collisions (Art. 618).
b. Exceptions to Limited Liability
1. Repairs and provisioning of the vessel before the loss of the vessel; (Art. 586)
2. Insurance proceeds. If the vessel is insured, the proceeds will go to the
persons entitled to claim from the shipowner; (Vasquez v. CA, G.R. No. L
42926, Sept. 13, 1985)
3. Workmens Compensation cases (now Employees Compensation under the
Labor Code); (Oching v. San Diego, G.R. No. 775, Dec. 17, 1946)
4. When the shipowner is guilty of fault or negligence;
Note: But if the captain is the one who is guilty, doctrine may still be invoked,
hence, abandonment is still an option.
5. Private carrier; or
6. Voyage is not maritime in character.

3. Accidents and Damages in Maritime Commerce

a. General Average
Damages or expenses deliberately caused in order to save the vessel, its
cargo or both from real and known risk All persons having an interest in the
vessel and cargo therein at the time of the occurrence of the average shall
contribute.
b. Collisions
Collision is the impact of two moving vessels. The governing liabilities of
parties in case of collision are as follows:
1. One vessel at fault The ship owner of such vessel shall be liable for all
resulting damages.
2. Both vessels at fault Each vessel shall suffer their respective losses but
as regards the owners of the cargoes, both vessels shall be jointly and
severally liable.
3. Vessel at fault not known Each vessel shall suffer its own losses and both
shall be solidarily liable for loses or damages on the cargo. (Doctrine of
Inscrutable Fault).
4. Fortuitous event Each shall bear its own damage.
5. Third vessel at fault The third vessel shall be liable for losses and
damages sustained.

4. Carriage of Goods by Sea Act

a. Application
It will only be applied in terms of loss or damage of goods transported to and
from Philippine ports in foreign trade. It may also apply to domestic trade
when there is a paramount clause in the contract.
b. Notice of Loss or Damage
1. If the damage is apparent Notice must be immediately given. The notice
may either be in writing or orally.
2. If the damage is not apparent Notice must be given within 3 days after
delivery.
c. Period of Prescription
The suit should be brought within one year from:
1.Delivery of the goods, in case of damage; or
2.The date when the goods should have been delivered, in case of loss.
d. Limitation of Liability
1.The liability limit is set at $500 per package or customary freight unless
he nature and value of such goods is declared by the shipper.
2.Shipper and carrier may agree on another maximum amount, but not
more that amount of damage actually sustained..
F. The Warsaw Convention
1. applicability
This Convention applies to all international carriage of persons, luggage or goods
performed by aircraft for reward. It applies equally to gratuitous carriage by aircraft
performed by an air transport undertaking
2. Limitation of Liability
a. liability to Passengers
In the carriage of passengers the liability of the carrier for each passenger is
limited to the sum of 125,000 francs. Where, in accordance with the law of
the Court seised of the case, damages may be awarded in the form of
periodical payments, the equivalent capital value of the said payments shall
not exceed 125,000 francs. Nevertheless, by special contract, the carrier and
the passenger may agree to a higher limit of liability. (article 22 warsaw
convention)
b. liability for Checked Baggage
The air carrier is liable for destruction, loss or damage to baggage up to 1000
SDRs (approximate amount in local currency). In the case of checked
baggage, it is liable even if not at fault, unless the baggage was defective.
c. Liability for Handcarried Baggage

Hand luggage or cabin baggage (also commonly referred to as carry-on

baggage) is the type of luggage that passengers are allowed to carry along in
the passenger compartment of a vehicle and contain valuables and items
needed during the journey. The carriers liability for cabin luggage is limited
to 2,250 SDRs per passenger.
3. Willful Misconduct
The definition of "willful misconduct" depends in some measure on which court
is deciding the issue. Some common factors that courts will consider are:
1. Knowledge that an action will probably result in injury or damage
2. Reckless disregard of the consequences of an action, or
3. Deliberately failing to discharge a duty related to safety. Courts may also
consider other factors.

VI. The Corporation Code

A. Corporation
1. Definition
(Section 2; Articles 44(3), 45, 46, and 1775, Civil Code)
Sec. 2 Corporation defined A corporation is an artificial being created by operation of
law, having the rights of succession and the powers attributes and properties, expressly
authorized by law or incident to its existence.
Art. 44(3) The following are juridical persons Corporations, partnerships and associations
for private interest or purpose to which the law grants a juridical personality, separate and
distinct from that of each shareholder, partner or member.
Art. 45 Juridical persons mentioned in Nos.1 and 2 of the preceding article are governed by
laws creating or recognizing them. Private corporations are regulated by laws of general
application on the subject. Partnerships and associations for private interest or purpose
are governed by the provisions of this Code concerning partnerships.
Art. 46 Juridical persons may acquire and possess property of all kinds, as well as incur
obligations and bring civil or criminal actions, in conformity with the laws and regulations
of their organization.
Art. 1775 Association and societies, whose articles are kept secret among the members,
and wherein any one of the members may contract in his own name with third persons,
shall have no juridical personality, and shall be governed by the provisions relating to coownership.
corporation is an artificial being created by operation of law. It has a personality separate
and distinct from the persons composing it, as well as from any other legal entity to which
it may be related. PNB v. Andrada Electric & Engring Co., 381 SCRA 244 (2002).
an artificial being - a person created by law or by state; legal fiction
created by law its existence is dependent upon the consent or grant of the state
EXCEPT corporation by estoppel and de facto corporation
the definition of a corporation is merely a guide and does not really provide for
thebasis of a corporation
Q. Why is it important to know that the corporation is a juridical person?
A. To be able to know that the corporation is able to contract with others
Q. Why does the definition of a corporation involve a statement creature of the
law?
A. To reiterate the fact that the corporation can only do acts given to it by the law. It is of
limited existence, outside its powers, it does not exist
2. Four Corporate Attributes
(based on Section 2)

A ) A CORPORATION IS AN ARTIFICIAL BEING ( Ability to Contract and Transact )

- a person created by law or by state; a legal fiction
B) CREATED BY OPERATION OF LAW (Creature of the Law)
-its existence is dependent upon the consent or grant of the state EXCEPT
corporation by estoppel and de facto corporation
C) WITH RIGHT OF SUCCESSION (Strong Juridical Personality)
-the corporation exist despite the death of its members as a corporation has a
personality separate and distinct from that of its individual stockholders. The
separate personality remains even if there has been a change in the members and
stockholders of the corporation
D ) HAS THE POWERS ATTRIBUTES AND PROPERTIES EXPRESSLY AUTHORIZED
BY LAW OR INCIDENT TO ITS EXISTENCE (Creature of Limited Powers)
B. Classes of Corporations
What are the classifications of corporation?
1. As to Corporation Code:
a. STOCK CORPORATION one which have capital stock divided into shares and are
authorized to distribute to the holders of such shares dividends or allotments or the
surplus profits on the basis of the shares held. ( Sec 3 )
b. NON STOCK CORPORATION is one which do not issue shares and are created not
for profit but for public good and welfare and where no part of its income is distributable
as dividends to its members, trustees, or officers. (Sec 87)
2. As to the number of persons who compose them:
a. Corporation aggregate corporation consisting of more than one member or
corporator;
b. Corporation Sole religious corporation which consists of one member or corporator
only and his successor.
3. As to whether they are for religious purpose or not:
a. Ecclesiastical corporation one organized for religious purpose
b. Lay corporation one organized for a purpose other than for religion.
4. As to whether they are for charitable purpose or not:
a. Eleemosynary one established for religious purposes
b. Civil one established for business or profit
5. As to state or country under or by whose laws they have been created:
a. Domestic one incorporated under the laws of the Philippines
b. Foreign one formed, organized, or existing under any laws other than those of the
Philippines and whose laws allow Filipino citizens and corporations to do business in its
own country or state. (Sec 123)
6. As to their legal right to corporate existence:
a. De jure one existing both in fact and in law

b. De facto one existing in fact but not in law

7. As to whether they are open to the public or not:
a. Close one which is limited to selected persons or members of the family. (Sec 96 105
b. Open one which is open to any person who may which to become a stockholder or
member thereto
8. As to their relation to another corporation
a. Parent or Holding one which is related to another corporation that it has the power
either, directly or indirectly to, elect the majority of the director of such other corporation
b. Subsidiary one which is so related to another corporation that the majority of its
directors can be elected either, directly or indirectly, by such other corporation
9. As to whether they are corporations in a true sense or only in a limited sense:
a. True one which exists by statutory authority
b. Quasi one which exist without formal legislative grant.
i. Corporation by prescription one which has exercised corporate powers for
an indefinite period without interference on the part of the sovereign power and
which by fiction of law, is given the status of a corporation;
ii. Corporation by estoppel one which in reality is not a corporation, either de
jure or de facto, because it is so defectively formed, but is considered a
corporations in relation to those only who, by reason of theirs acts or admissions,
are precluded from asserting that it is not a corporation.
10. As to whether they are for public (government) or private purpose:

a. Public one formed or organized for the government or a portion of the State
b. one formed for some provate purpose, benefit or end

What are the requisites of a de facto corporation?

1. Organized under a valid law.
2. Attempt in good faith to form a corporation according to the requirements of the law.
Note: The Supreme Court requires that Articles of Incorporation have already been
filed with the SEC and the corresponding certificate of incorporation is obtained.
Use of corporate powers.
Note: The corporation must have performed the acts which are peculiar to a
corporation like entering into a subscription agreement, adopting bylaws, and
electing directors.
How is the status of a de facto corporation attacked?
A: The existence of a de facto corporation shall not be inquired into collaterally in any
private suit to which such corporation may be a party. Such inquiry may be made by the
Solicitor General in a quo warranto proceeding. (Sec. 20)
Note: However, as long as it exists, a de facto corporation enjoys all attributes of a
corporation until the State questions its existence.
In comparison with a corporation by estoppel where the stockholders are liable as general
partners, stockholders in a de facto corporation are liable as a de jure corporation. Hence,
up to the extent of their share holdings.
Distinguish de facto corporation from corporation by estoppel.

A: DE FACTO CORPORATION
a) There is existence in law;
b) The dealings among the parties on a corporate basis is not required;
c) When requisites are lacking, it can be corporation by estoppels;
Whereas:
B. CORPORATION BY ESTOPPEL
a) There is no existence in law;
b) The dealings among the parties on a corporate basis is required;
c) It will be considered a corporation in any shape or form
CORPORATE POWERS
The kinds of powers of corporation?
1. Express powers Granted by law, Corporation Code, and its Articles of
Incorporation or Charter, and administrative regulations
2. Inherent/incidental powers Not expressly stated but are deemed to be within
the capacity of corporate entities.
3. Implied/necessary powers Exists as a necessary consequence of the exercise of
the express powers of the corporation or the pursuit of its purposes as provided for
in the Charter
General powers of a corporation:
1. To sue and be sued
2. Of succession
3. To adopt and use of Corporate seal
4. To amend its Articles of Incorporation
5. To adopt its Bylaws
6. For Stock corporations: issue and sell stocks to subscribers and treasury stocks; for nonstock corporations: admit members
7. To Purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and deal with real and personal property,
securities and bonds;
8. To Enter into merger or consolidation
9. To Make reasonable Donations for public welfare, hospital, charitable, cultural, scientific, civic or similar purposes,
provided that no donation is given to any
a. Political party,
b. Candidate and
c. Partisan political activity.
10. To establish Pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees basis of
which is the labor code
11. To exercise Other powers essential or necessary to carry out its purposes.
When does the power to sue and be sued commence?
A: Upon issuance by SEC of Certificate of Incorporation.
What are the limitations of the corporation in dealing with property?
1. In dealing with any kind of property, it must be in the furtherance of the purpose for which the
corporation was organized.
2. Constitutional limitations cannot acquire public lands except by lease.
With regard to private land, 60% of the corporation must be owned by the Filipinos, same with the acquisition of a
condo unit.
Note: No law disqualifies a person from purchasing shares in a landholding corporation even if the latter will exceed
the allowed foreign equity, what the law disqualifies is the corporation from owning land.

Special law subject to the provisions of the Bulk Sales Law

What are the requisites for a valid donation?
A:
1. Donation must be reasonable
2. Must be for valid purposes including public welfare, hospital, charitable, cultural, scientific, civic or similar purposes
3. Must not be an aid in any
a. Political party,
b. Candidate and
c. Partisan political activity
4. Donation must bear a reasonable relation to the corporations interest and not be so remote and fanciful.

The specific powers of a corporation:

1. Power to extend or shorten corporate term. (Sec. 37)
2. Increase or decrease corporate stock. (Sec. 38)
3. Incur, create, or increase bonded indebtedness. (Sec. 38)
4. Deny preemptive right. (Sec. 39)
5. Sell, dispose, lease, encumber all or substantially all of corporate assets.
(Sec. 40)
6. Purchase or acquire shares. (Sec. 41)
7. Invest corporate funds in another corporation or business for other
purpose other than primary purpose .(Sec. 42)
8. Declare dividends out of unrestricted retained earnings. (Sec. 43)
9. Enter into management contract with another corporation (not with an
individual or a partnership within general powers) whereby one
corporation undertakes to manage all or substantially all of the business
of the other corporation for a period not longer than five (5) years for any
one term. (Sec. 44)
10.Amend Articles of Incorporation. (Sec. 16)
SPECIFIC POWERS
POWER TO EXTEND OR SHORTEN CORPORATE TERM
Note: May be used as means to voluntarily dissolve a corporation
The procedural requirements in extending/shortening corporate term are the following:
1. Majority vote of the Board of Directors or Board of Trustees;
2. Ratification by 2/3 of the SH representing outstanding capital stock or by at least 2/3 of
the members in case of nonstock corporation;
3. Written notice of the proposed action and of the time and place of the meeting shall be
addressed to each stockholder or member at his place of residence as shown on the
books of the corporation and deposited to the addressee in the post office with postage
prepaid, or served personally;
4. Copy of the amended AOI shall be submitted to the SEC for its approval; and
5. In case of special corporation, a favorable recommendation of appropriate government
agency. (Sec. 37)
Note: The extension must be done during the lifetime of the corporation not earlier than 5
years prior to the expiry date unless exempted. The extension must not exceed 50 years.
After the term had expired without extension, the corporation is dissolved. The remedy of
the stockholders is reincorporation.
Any dissenting stockholder may exercise his appraisal right in case of shortening or
extending corporate term (Sec. 37).
POWER TO INCREASE OR DECREASE CAPITAL STOCK
The procedural requirements in increasing or decreasing capital stock are the following:
1. Majority vote of the BOD;
2. Ratification by stockholders representing 2/3 of the outstanding capital stock;
3. Written notice of the proposed increase or diminution of the capital stock and of the
time and place of the stockholders meeting at which the proposed increase or

diminution of the capital stock must be addressed to each stockholder at his place
of residence as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served personally
4. A certificate in duplicate must be signed by a majority vote of the directors of the
corporation and countersigned by the chairman and the secretary of the
stockholders meeting, setting forth:
A. That the foregoing requirements have been complied with;
B. The amount of increase or diminution of the capital stock;
C. If an increase of the capital stock, the amount of capital stock or
number of shares of no par stock actually subscribed, the names,
nationalities and residences of the persons subscribing, the amount
D. of capital stock or number of no par stock subscribed by each, and
the amount paid by each on his subscription in cash or property, or the
amount of capital stock or number of shares of no par stock allotted to
each stockholder if such increase is for the purpose of making effective
stock dividend authorized;
E. The amount of stock represented at the meeting; and
F.
The vote authorizing the increase or diminution of the capital stock
Note: The increase or decrease in the capital stock or the incurring, creating or
increasing bonded indebtedness shall require prior approval of the SEC.
*Additional requirement with respect to the increase of capital stock:
The application to be filed with the SEC shall be accompanied by the sworn
statement of the treasurer of the corporation, showing that at least 25% of the amount
subscribed has been paid either in cash or property or that there has been transferred to
the corporation property the valuation of which is equal to 25% of the subscription.
*The basis of the required 25% subscription:
It shall be based on the additional amount by which the capital stock increased and not on
the total capital stock as increased.
Note: There will be no treasurers affidavit in case of decrease in capital stock.
Corporation need not exhaust its original capital before increasing capital stock.
*Additional requirement with respect to the decrease of capital stock:
The same must not prejudice the right of the creditors.
*The ways of increasing or decreasing the capital stock?
By increasing or decreasing the:
1.
Number of shares and retaining the par value;
2.
Par value of existing shares without increasing or decreasing the
number of shares;
3.
Number of shares and increasing or decreasing the par value.
POWER TO DENY PRE-EMPTIVE-RIGHTS
Preemptive right:
It is the preferential right of shareholders to subscribe to all issues or disposition of
shares of any class in proportion to their present shareholdings. (Sec. 39)
Purpose of preemptive right:
To enable the shareholder to retain his proportionate control in the corporation and
to retain his equity in the surplus.

Questions:
1) Is there preemptive right on the reissuance of treasury shares?
Yes. When a corporation reacquires its own shares which thereby become treasury
shares, all shareholders are entitled to preemptive right when the corporation reissues or
sells these treasury shares. The reissuance of treasury shares is not among the exception
provided by Sec. 39 when preemptive right does not exist.
2) May preemptive right be waived by the stockholder?
Yes when the stockholder fails to exercise his preemptive right after being notified
and given an opportunity to avail of such right.
3) Is the preemptive right of a stockholder transferable?
Yes, unless there is an express restriction in the AOI.
4) When can the corporation deny preemptive right?
The corporation can deny preemptive right if the articles of incorporation or
amendment thereto denies such right.
Distinguish preemptive right from right of first refusal.
A:
PREEMPTIVE
RIGHT
May be exercised
even when there is
no express provision
of law

Pertains
to
unsubscribed portion
of the authorized
capital stock. A right
that may be claimed
against
the
corporation.
It
includes
treasury
shares.

RIGHT
OF
FIRST REFUSAL
Arises only by
virtue
of
contractual
stipulations but
is also granted
under
the
provisions
on
close corporation
Exercisable
against another
stockholder
of
the corporation
of his shares of
stock

POWER TO SELL OR DISPOSE OF CORPORATE ASSETS:

Procedural requirements are the following:
1. Majority vote of the Board of Directors or Board of Trustees
2. Ratification by stockholders representing at least 2/3 of the outstanding capital
stock or by at least 2/3 of the members in case of nonstock corporation
3. Written notice of the proposed action and of the time and place of the meeting
addressed to each stockholder or member at his place of residence as shown on
the books of the corporation and deposited to the addressee in the post office
with postage prepaid, or served personally. (Sec. 40)
Note:
*The sale of the assets shall be subject to the provisions of existing laws on illegal
combinations and monopolies.

After such authorization or approval by the stockholders the board may, nevertheless, in
its discretion, abandon such SLEMPO. (Sec. 40)
*Any dissenting stockholder shall have the option to exercise his appraisal right.
Questions:
What is meant by substantially all of corporate assets?
If the corporation would be:
a) rendered incapable of continuing the business, or
b) accomplishing the purpose for which it was incorporated.
When may the corporation forgo the ratification by Stockholders/ members?
1. If sale is necessary in the usual and regular course of business;
2. If the proceeds of the sale or other disposition of such property and assets are to be
appropriated for the conduct of the remaining business;
3. If the transaction does not cover all or substantially all of the assets.
What is the effect of sale of all or substantially all of assets of one corporation
to another corporation?
General Rule:
The selling corporation of all or substantially all of the assets of the purchasing
corporation shall not be liable for the debts of the transferor corporation.
Exception:
Express or implied assumption of liabilities;
Merger or consolidation;
If the purchase was in fraud of creditors;
If the purchaser becomes a continuation of the seller;

If there is violation of the Bulk Sales Law.

POWER TO ACQUIRE SHARES:
Can a corporation acquire its own shares?
General Rule:
In the absence of statutory authority, the corporation cannot acquire its own shares;
Exception:
SEC Opinion, Oct. 12, 1992, imposed the following conditions on its exercise:
a) The capital of the corporation must not be impaired;
b) Legitimate and proper corporate objective is advanced;
c) Condition of the corporate affairs warrants it;
d) Transaction is designed and carried out in good faith
e) Interest of creditors not impaired, that is, not violative of the trust fund doctrine.
Note: Sec. 41 of the Code requires that:
a) the acquisition should be for a legitimate corporate purpose; and
b) there should be unrestricted retained earnings [URE].
Instances where corporation may acquire its own shares:
1.
2.
3.

To eliminate fractional shares out of stock dividends;

To collect or compromise an indebtedness to the corporation, arising out of unpaid
subscription, in a delinquency sale and to purchase delinquent shares sold during said sale;
To pay dissenting or withdrawing stockholders (in the exercise of the stockholders appraisal
right);

4.
5.
6.
7.

To acquire treasury shares;

Redeemable shares regardless of existence of retained earnings;
To effect a decrease of capital stock;
In close corporations, when there is a deadlock in the management of the business.

POWER TO INVEST CORPORATE FUNDS IN ANOTHER CORPORATION OR BUSINESS:

What are the requirements?
1. Approval by the majority vote of the Board of Directors or
Board of Trustee
2. Ratification by stockholders representing at least 2/3 of the
outstanding capital stock or by at least 2/3 of the members
in case of nonstock corporation
3. Ratification must be made at a meeting duly called for the
purposes, and
4. Prior written notice of the proposed investment and the time
and place of the meeting shall be made addressed to each
stockholder or member by mail or by personal service.
Note: Investment of a corporation in a business which is in line with its primary purpose
requires only the approval of the board.
Any dissenting stockholder shall have appraisal right.
POWER TO DECLARE DIVIDENDS OUT OF UNRESTRICTED RETAINED EARNINGS (URE)
The following are the requirements?
1. Existence of unrestricted retained earnings
2. Resolution of the board
3. In case of stock dividend, resolution of the board with the concurrence of votes
representing 2/3 of outstanding capital.
Questions:
*What are unrestricted retained earnings?
These are retained earnings which have not been reserved or set aside by the board
of directors for some corporate purpose.
*Who are entitled to receive dividends?
The stockholders of record date in so far as the corporation is concerned; if there is
no record date, the stockholders at the time of declaration of dividends (not at the time of
payment).
Note: In case of transfer, dividends declared before the transfer of shares belong to
the transferor and those declared after the transfer belongs to the transferee.
*Who are entitled to receive dividends in case of mortgaged or pledged shares?
General Rule:
The mortgagor or the pledgor has the right to receive the dividends.
Exception:
When the mortage or pledge is recorded in the books of the corporation, in such
a case then the mortgagee or pledgee is entitled to receive the dividends.
Forms of Dividends:

1) Cash
Cash dividends due on delinquent stock shall first be applied to the unpaid balance
on the subscription plus cost and expenses.
2) Stock
Stock dividends are withheld from the delinquent stockholder until his unpaid
subscription is fully paid.
3) Property
Stockholders are entitled to dividends PRORATA based on the total number of
shares and not on the amount paid on shares.
Questions:
When may corporation declare dividends?
General Rule: Even if there are existing profits, BOD has discretion to determine whether dividends are to be declared.
Exception: Stock corporations are prohibited from retaining surplus profits in excess of 100% of their paid in capital
stock.
Exception to Exception:
a. Definite corporate expansion projects approved by the board of directors;
b. Corporation is prohibited under any loan agreement with any financial institution or creditor from declaring
dividends without its/his consent and such consent has not yet been secured;
c. The retention is necessary under special circumstances obtaining in the corporation, such as when there is a need for
special reserve for probable contingencies.
What if there is a wrongful or illegal declaration of dividends?
The Board of Directors is liable. The stockholders should return the dividends to the corporation (solutio indebiti).
What are the sources of dividends?
General Rule:
Dividends can only be declared out of actual and bona fide unrestricted retained earnings.
Exception: Dividends can be declared out of capital in the following instances:
a. Dividends from investments wasting assets corporation;
b. Liquidating dividends
What are the sources of retained earnings? Is it available for dividends?

SOURCES
OF
RETAINED EARNINGS
Paidin surplus It is the
difference between the par
value and the issued value
or selling price of the
shares
Revaluation
surplus

Increase in the value of a

fixed asset as a result of
its appreciation. They are
by
nature
subject
to
fluctuations.
Reduction
surplusthe
surplus arises from the
reduction of the par value
of the issued shares of
stocks.
Gain from Sale of Real
A:

AVAILABILITY FOR
DIVIDENDS
It cannot be declared
as cash dividend but
can be declared only
as stock dividends
Cannot be declared
as dividends because
there is no actual
gain (gain in paper
only).
It cannot be declared
as cash dividend but
can be declared only
as stock dividends
Available

as

Property
Treasury Shares

Operational
Income

Income

dividends
Cannot be declared
as stock or cash
dividends but it may
be
declared
as
property dividend
Available
as
dividends

Distinguish cash and stock dividends?

CASH DIVIDENDS

STOCK DIVIDENDS

Part of general
fund
Results in cash
outlay
Not subject to
levy
by
corporate
creditors

Part of capital

Declared
only
by the board of
directors at its
discretion
(majority of the
quorum
only,
not majority of
all the board)
Does
not
increase
the
corporate
capital
Its
declaration
creates a debt
from
the
corporation
to
each
of
its
stockholders
If received by
individual:
subject to tax;
If received by
corporation: not
subject to tax
Cannot
be
revoked
after
announcement

No cash outlay
Once issued, can be
levied by corporate
creditors
because
theyre
part
of
corporate capital
Declared
by
the
board
with
the
concurrence of the
stockholders
representing at least
2/3
of
the
outstanding
capital
stock
at
a
regular/special
meeting
Corporate capital is
increased
No debt is created by
its declaration

Not subject to tax

either received by
individual
or
a
corporation

Can
be
revoked
despite
announcement
but
before issuance
Applied to the Can be withheld until
unpaid balance payment of unpaid
of
delinquent balance of delinquent
shares
shares

POWER TO ENTER INTO MANAGEMENT CONTRACT

Management contract:
It is any contract whereby a corporation undertakes to manage or operate all or substantially all of the business of
another corporation, whether such contracts are called service contracts, operating agreements or otherwise. (Sec. 44)
Note: Sec. 44 refers only to a management contract with another corporation. Hence, it does not apply to
management contracts entered into by a corporation with natural persons.
The following are the requirements:
1. Contract must be approved by the majority of the BOD or BOT of both managing and managed corporation;
2. Ratified by the stockholders owning at least the majority of the outstanding capital stock, or members in case of a non
stock corporation, of both the managing and the managed corporation, at a meeting duly called for the purpose
3. Contract must be approved by the stockholders of the managed corporation owning at least 2/3 of the outstanding capital
stock entitled to vote, 2/3 members when:
a.
b.

Stockholders representing the same interest in both of the managing and the managed corporation own or
control more than 1/3 of the total outstanding capital stock entitled to vote of the managing corporation;
Majority of the members of the BOD of the managing corporation also constitute a majority of the BOD of the
managed corporation.

What is the allowed period for every management contract entered into by the corporation?
General Rule:
Management contract shall be entered into for a period not longer than 5 years for any one term.
Exception:
In cases of service contracts or operating agreements which relate to the exploitation, development, exploration or
utilization of natural resources, it may be entered for such periods as may be provided by the pertinent laws or regulations.

ULTRA VIRES ACTS:

Ultra Vires acts:
Those powers that are not conferred to the corporation by law, by its AOI and those that
are not implied or necessary or incidental to the exercise of the powers so conferred. (Sec
45)
Types of ultra vires acts:
1. Acts done beyond the powers of the corporation (through BOD)
2. Ultra vires acts by corporate officers
3. Acts or contracts which are per se illegal as being contrary to law.
Doctrine of apparent authority:
If a corporation knowingly permits one of its officers, or any other agent, to act within the
scope of an apparent authority, it holds him out to the public possessing the power to do
those acts; and thus, the corporation will, as against anyone who has in good faith dealt
with it through such agent, be estopped from denying the agents authority.
When is the corporation estopped to deny ratification of contracts or acts entered by
its officers or agents?

Generally, when the corporation has knowledge that its officers or agents exceed their
power, it must promptly disaffirm the contract or act, and allow the other party or third
person to act in the belief that it was authorized or has been ratified. Otherwise, if it
acquiesces, with knowledge of the facts, or if it fails to disaffirm, ratification will be
implied. (Premiere Development Bank vs. CA, G.R. No. 159352, Apr. 14, 2004)
Consequences of an ultra vires act:
Ultra vires acts entered into by the board of directors binds the corporation and the courts
will not interfere unless terms are oppressive and unconscionable.
These are the effects for the specific acts:
1. Executed contract courts will not set aside or interfere with such contracts
2. Executory contracts no enforcement even at the suit of either party (void and
unenforceable)
3. Partly executed and partly executory principle of no unjust enrichment at
expense of another shall apply
4. Executory contracts apparently authorized but ultra vires the principle of
estoppel shall apply.
(Gamboa vs. Victoriano, G.R. No. L43324. May 5, 1979)
Distinctions between ultra vires acts and illegal acts:
ULTRA VIRES ACT
Not
necessarily
unlawful, but outside
the powers of the
corporation
Can be ratified
Can bind the parties if
wholly
or
partly
executed

ILLEGAL ACTS
Unlawful;
against
law, morals, public
policy, and public
order
Cannot be ratified
Cannot
bind
the
parties

What are the remedies in case of ultra vires act?

1. State
a. Obtain a judgment of forfeiture; or
b. The SEC may suspend or revoke the certificate of registration
2. Stockholders
a. Injunction; or
b. Derivative suit
3.Creditors
Nullification of contract in fraud of creditors.

Doctrine of Individuality of Subscription:

A subscription is one entire and indivisible whole contract. It cannot be divided

into portions. (Sec. 64)

Doctrine of equality of shares?

Where the articles of incorporation do not provide for any distinction of the
shares of stock, all shares issued by the corporation are presumed to be equal and
enjoy the same rights and privileges and are also subject to the same liabilities.
(Sec. 6)
TRUST FUND DOCTRINE:
Trust fund doctrine:
The subscribed capital stock of the corporation is a trust fund for the payment of debts of
the corporation which the creditors have the right to look up to satisfy their credits, and
which the corporation may not dissipate. The creditors may sue the stockholders directly
for the latters unpaid subscription.
Exceptions to the trust fund doctrine:
The Code allows distribution of corporate capital only in these instances:
1. Amendment of the Article of Incorporation to reduce authorized capital stock;
2. Purchase of redeemable shares by the corporation regardless of existence of
unrestricted retained earnings;
3. Dissolution and eventual liquidation of the corporation.
How are corporate powers exercised?
1. By the shareholders The shareholders participate in controlling the affairs of the
corporation by exercising their right to vote. They can elect the directors who will
actually govern the important matters that are still reserved to them by the
Corporation Code. (Aquino, 2006)
2. By the Board of Directors The Board of Directors is primarily responsible for the
governance of the corporation. Their primary duty is to set the policies for the
accomplishment of the corporate objectives. (Art. 3, Revised Code of Corporate
Governance). They elect the officers who carry out the policies
3. By the Officers They are elected by the Board of Directors tasked to carry out the
policies laid down by the Board, the articles of incorporation and the by-laws;
J. DISSOLUTION AND LIQUIDATION:
Dissolution of Corporation:
It is the extinguishment of the franchise of a corporation and the termination of its
corporate existence.
Modes of dissolution of corporation:
a) Voluntary; and
b) Involuntary dissolution.
Voluntary modes of dissolution of a corporation:
1. Where no creditors are affected
Procedure:
a) Majority vote of the board of directors or trustees; and
b) Resolution duly adopted by the affirmative vote of the stockholders owning at least
2/3 of the outstanding capital stock or at least 2/3 of the members at a meeting
duly called for that purpose.

c) A copy of the resolution authorizing the dissolution shall be certified by a majority of

the board of directors or trustees and countersigned by the secretary of the
corporation.
d) Such copy shall be filed with SEC. (Sec. 118)
2. Where creditors are affected
Procedure:
a. Filing a petition for dissolution with the SEC
b. Such petition must be signed by majority of the board of directors or trustees
c. Must also be verified by the president or secretary or one of its directors
d. The dissolution was resolved upon by the affirmative vote of the stockholders
representing at least 2/3 of the outstanding capital stock or at least 2/3 of the
members at a meeting duly called for that purpose.
e. If there is no sufficient objection, and the material allegations of the petition are
true, a judgment shall be rendered dissolving the corporation and directing such
disposition of its assets as justice requires, and may appoint a receiver to collect
such assets and pay the debts of the corporation. (Sec. 119)
3.By shortening the corporate term
A voluntary dissolution may be effected by amending the AOI to shorten its
corporate term pursuant to the provisions of the Code. A copy of the amended AOI shall be
submitted to the SEC. Upon approval of the amended AOI of the expiration of the
shortened term, the corporation shall be deemed dissolved without any further
proceedings, subject to the provisions of the Code on liquidation. As an additional
requirement, the SEC requires to submit the final audited financial statement not older
than 60 days before the application for shortening the corporate term.
4. In case of a corporation sole, by submitting to the SEC for approval, a verified
declaration of dissolution (Sec.115). This merely needs the affidavit of the presiding elder.
No need for a board resolution.
5. By merger or consolidation, whereby the constituent corporations automatically
cease upon issuance by the SEC of the certificate of merger or consolidation, except the
surviving or consolidated corporation which shall continue to exist. (Secs. 79 and 80)
6. Expiration of the corporate term (Sec. 11).
Involuntary modes of dissolution of a corporation:

1. By expiration of corporate term

2. Failure to organize and commence transaction of its business
within 2 years from date of incorporation (Sec. 22).
3. Continuous inoperation for a period of at least 5 years.
4. Legislative dissolution. In this case, a corporation created by
special law is dissolved also by a special law.
5. Dissolution of SEC on grounds under existing laws.
What are examples of dissolution by the SEC under existing laws?
Examples of dissolution by the SEC under special laws are:
1. Failure to file bylaws within the required period but, according to a SEC
Opinion, SEC will give it the opportunity to explain such failure and not
automatically dissolve the corporation.
2. By order of the SEC upon a verified petition and after proper notice and
hearing on the ground of serious misrepresentation as to what the

corporation can do or is doing to the great prejudice of or damage to the

general public.
3. Revocation or forfeiture of the franchise or certificate of incorporation due
to its misuse or nonuse pursuant to quo warranto proceedings filed by the
Solicitor General.
4. Failure to file required reports
Modes of liquidation?
1. By the corporation itself or its board of directors or trustees;
(Sec. 122, par. 1)
2. By a trustee to whom the assets of the corporation had been
conveyed. (Sec. 122, par. 2); (Board of Liquidators v. Kalaw, G.R.
No. L18805, Aug. 14, 1967)
3. By a management committee or rehabilitation receiver
appointed by SEC; (Sec. 119, last par.)
Questions:
*Does a corporation in the process of liquidation have legal authority to engage
in any new business?
No, a corporation in the process of liquidation has no legal authority to engage in any
new business, even if the same
is in accordance with the primary purpose stated in its article of incorporation.
*What are the consequences if the liquidation is not terminated within the 3
year period?
1.

Pending suits for or against the corporation which were initiated prior to the expiration of the 3 year period shall
continue. (Gelano v. CA, G.R. No. L39050, Feb. 24, 1981)
2.
New actions may still be filed against the trustee of the corporation even after the expiration of the 3 year period
but before the affairs of said corporation have been finally liquidated or settled by the trustee. (Republic v. Marsman,
G.R. No. L18956 Apr. 27, 1972)

3.

A corporation which has a pending action which cannot be finished within the 3year
period is authorized to convey all its property, including pending choses of action, of a
trustee to enable it to prosecute and defend suits by or against the corporation beyond
the 3year period. Where no trustee is appointed, its counsel who prosecuted and
represented the interest of the corporation may be considered as trustee of said
corporation, at least with respect to the matter in litigation (Gelano v. CA, G.R. No. L
39050, Feb. 24, 1981). The directors may also be permitted to continue as trustees to
complete the liquidation. (Clemente v. CA, G.R. No. 82407, Mar. 27, 199

4. The creditors of the corporation who were not paid may follow the property of the
corporation that may have passed to its stockholders unless barred by prescription or
laches or disposition of said property in favor
*What is the rationale behind the 3year period?
The continuance of a corporations legal existence for three years for the purpose of
enabling it to close up its business is necessary to enable the corporation to collect the
demands due it as well as to allow its creditors to assert the demands against it.

*May the corporation, through its president condone penalties and charges after
it had been placed under receivership?
No. The appointment of a receiver operates to suspend the authority of a
corporation and of its directors and officers over its property and effects, such
authority being reposed in the receiver (Yam v. CA, G.R. No. 104726 Feb 11, 1999).
*When may the Commission appoint a receiver to undertake the winding up and
liquidation of a corporation?
Where the application for dissolution of a corporation is upon application, affecting
rights of creditors, or involuntarily initiated by verified complaint, the Commission
may appoint a receiver to undertake the winding up rather than entrust the
responsibility to directors and corporate officers.
*What is the effect if the corporation appoints a trustee and convey all its
property to him for the benefit of stockholders, members, creditors and other
persons in interest?
After such conveyance to the trustee, all interest which the corporation had in the
property terminates and the legal interests vests in the trustee, subject to the
beneficial interest of stockholders, members, creditors or other persons in interest.

Q: When does the act of the officers bind the corporation?

A:
1. If it is provided in the bylaws
2. If authorized by the board

The charges are brought by the plaintiff. If

the defendant loses, the defendant has
to pay damages to the plaintiff.

A: If a corporation knowingly permits one of its officers, or

any other agent, to act within the scope of an apparent
authority, it holds him out to the public possessing the power
to do those acts; and thus, the corporation will, as against
anyone who has in good faith dealt with it through such agent,
be estopped from denying the agents authority.
Q: When is the corporation estopped to deny ratification of
contracts or acts entered by its officers or agents?

CRIMES: A crime is a wrongful act

that the state or federal government has
identified as a crime. A criminal case is a
criminal proceeding. The accused is also
called a 'defendant". The victim is the
person who has been hurt or the state of
Georgia or other governmental entity. The
charges are brought by the government. If
the
defendant loses, the defendant must
serve a sentence. A fine is paid to the
government
and
there
is
possible
restitution to the victim.

C. Nationality of Corporations
1. Place of Incorporation Test
This means that corporate
nationality shall be in accordance with
the laws of the country where it was
created or organized.
Example: If X-Corp is organized in
accordance with Philippine laws, then
it is a Filipino corporation; if in
accordance with Chinese laws, it is a
Chinese corporation.
2. Control Test
The citizenship of the corporation is
determined by the citizenship of its
controlling
stockholders.
If
the
controlling
stockholders
of
a
corporation are American corporation;
it is an American corporation.
A corporation shall be considered a
Filipino corporation if the Filipino
ownership of its capital stock is at
least 60% and where the 60-40
Filipino-alien is not in doubt.
3. Grandfather Rule
Applied in determining the
nationality of a corporation. It traces
the nationality of the stockholders of
investors so as to ascertain the
nationality of the corporation where
the investment is made.
D. Corporate Juridical Personality
1. Doctrine of Separate Juridical
Personality
- A Corporation has a personality
Separate and Distinct from its Stockholders
or Members
a. Liability for Torts and Crimes
- TORTS: A tort is a wrongful act
that injures or interferes with another's
person or property. A tort case is a civil
court proceeding. The accused is the
"defendant" and the victim is a "plaintiff."

b. Recovery of Moral Damages

2.
Doctrine
of
Piercing
the
Corporate Veil
- While a corporation cannot
generally be made liable for acts or liabilities
of its stockholders or members, and vice
versa because a corporation has a
personality separate and distinct from its
stockholders or members, however, the
corporate existence is disregarded under this
doctrine where the corporation is formed or
used for illegitimate purposes or justify
wrong or evade a just and valid obligation.
In such a case, the corporation and the
stockholders shall be considered as one and
the same.
-

Separate
and
Distinct
personality
of
the
corporation
and
its
stockholders are pierced and
treated as one in case the
corporation is used as cloak
for illegal acts.

a. Grounds for Application of

Doctrine
- corporation is formed or
used
for
illegitimate
purposes
- justify wrong
- evade a just and valid
obligation
b. Test
in
Determining
Applicability
- Avoidance on redress of
fraud

Prevention of the evasion of

statute or law
Prevention of the evasion of
contract
Internal corporate dealings
disregarding corporate entity
where third persons are not
involved
Corporate
agencies
or
affiliates
of
other
corporations

H. Stockholders and Members owner

of stocks in a corporation
1. Rights of Stockholders and Members
- right to vote at stockholders
meetings either in person or
proxy
- To receive his proportionate
share of the profits of the
corporation
by
way
of
dividends
- To approve the declaration of
stock dividends
- Pre-emptive right
- To inspect corporate books
and records
- Right to financial statements
- Right to Appraisal
- Right
to
participate
proportionately
in
the
distribution
of
corporate
assets
upon
corporate
liquidation
following
dissolution and winding up
- Right to file derivative suit
- Right to the issuance of a
certificate of stock upon
compliance
with
the
conditions which entitle him
to one
a. Doctrine of Equality of Shares The shares
issued by a corporation are presumed to be
equal.
2. Participation in Management
a. Proxy authority given by a stockholder to
another to vote for him at a shareholders
meeting.
b. Voting Trust irrevocable proxies. One
created by an agreement between a group of
the stockholders of a corporation and a
trustee, or by a group of identical
agreements between individual stockholders
and a common trustee, whereby it is
provided that for a term of years, or for a

period contingent upon a certain event, or

until the agreement is terminated, control
over the stock owned by such stockholders,
either for certain purposes or for all, shall be
lodged in the trustee, either with or without a
reservation to the owners or persons
designated by them of the power to direct
how such control shall be used.
c. Cases When Stockholders Action is
Required
i. By a Majority Vote
ii. By a Two-Thirds Vote
iii. By Cumulative Voting
3. Proprietary Rights
a. Right to Dividends
b. Right of Appraisal
c. Right to Inspect
d. Pre-Emptive Right
e. Right to Vote
f. Right to Dividends
g. Right of First Refusal
4. Remedial Rights
a. Individual Suit
b. Representative Suit
c. Derivative Suit
5. Obligation of a Stockholder
6. Meetings
a. Regular or Special
i. When and Where
ii. Notice
b. Who Calls the Meetings
c. Quorum
d. Minutes of the Meeting
L. Mergers and Consolidations
1. Definition and Concept
- Merger is the absorption of one or
more corporations by another existing
corporation,
which retains its identity and
takes over the rights, privileges, franchises
and properties,
and assumes all the
liabilities and obligations of the absorbed
corporation(s) in the same
manner as if it
had itself incurred such liabilities or
obligations. The absorbing
corporation
continues its existence while the life or lives
of the other corporation(s)
is/are
terminated. Consolidation is the union of two
or more corporations into a single
new
corporation,
called
the
consolidated
corporation, all the constituent corporations
thereby ceasing to exist as separate
entities. The consolidated corporation shall
thereupon and thereafter possess all the
rights, privileges, immunities, franchises and
properties, and assume all the liabilities
and obligations of each of the constituent

corporations in the same manner as if it

had itself incurred such liabilities or
obligations.
2. Constituent vs. Consolidated
Corporation
Constituent -A word used as
a correlative to "attorney," to denote one
who
constitutes another his agent or
invests the other with authority to act for
him. ' It is also used in the language of
politics, as a correlative to "representative,"
the
constituents
of
a legislator being
those whom he represents and whose
interests he is to care for in public affairs;
usually the electors of his district.
Consolidated
CorporationThe
combining of assets, liabilities and other
financial
items of two or more entities into
one. In the context of financial accounting,
the term consolidate
often
refers
to
the consolidation of financial statements,
where all subsidiaries report
under
the
umbrella of a parent company. These
statements are
called
consolidated
financial statements. Consolidation also
refers to the merger and acquisition
of
smaller companies into larger companies. A
consolidation, however, differs
from
a
merger in that the consolidated companies
could also result in a new entity, whereas in
a merger one company absorbs the other
and remains in existence while the
other is
dissolved.
3. Plan of Merger or Consolidation
-Two or more corporations may merge
into a single corporation which shall be one
of the constituent corporations or may
consolidate into a new single corporation
which
shall
be
the
consolidated
corporation.
4.
Article
of
Merger
or
ConsolidationA. Upon receiving the approvals
required by Sections 53-14-1, 53-14-2 and
53- 14-3 NMSA 1978, articles of merger or
articles of consolidation shall be executed by
each corporation by an authorized officer
and shall set forth: (1) the plan of merger or
the plan of consolidation; (2) as to each
corporation, either: (a) the number of shares
outstanding, and, if the shares of any
class are entitled to vote as a class, the
designation and number of outstanding
shares of each such class; or (b) a statement

that the vote of shareholders is not

required by virtue of Subsection D of Section
53-14- 3 NMSA 1978; 112 53-14-5 BUSINESS
CORPORATIONS;
MERGERS
AND
CONSOLIDATIONS 53-14-5 (3) as to each
corporation the approval of whose
shareholders is required, the number of
shares voted for and against the plan,
respectively, and, if the shares of any
class are entitled to vote as a class, the
number of shares of each such class voted
for and against the plan, respectively; and
(4) as to the acquiring corporation in a
plan of exchange, a statement that the
adoption plan and performance of its terms
were duly approved by its board of directors
and such other
requisite corporate action,
if any, as may be required of it.
B. The original of the articles of
merger, consolidation or exchange together
with
a copy, which may be signed,
photocopied or conformed, shall be delivered
to the commission [secretary of state]. If
the commission [secretary of state] finds
that the
articles conform to law, it shall,
when all fees have been paid: (1) endorse on
the
original and copy the word "filed" and
the month, day and year of the filing; (2) file
the
original in its office; and (3) issue a
certificate of merger, consolidation or
exchange to which it shall affix the filestamped copy.
C. The certificate of merger,
consolidation or
exchange, together with
the
file-stamped copy of the articles
affixed to it shall be returned by the
commission
[secretary of state] to the
surviving, new or acquiring corporation or its
representative.
5. Procedure
Any
two
or
more
domestic
corporations may consolidate into a new
corporation
pursuant to a plan of
consolidation approved in the manner
provided in the
Business
Corporation Act [Chapter 53, Articles 11 to
18 NMSA 1978]. The board
of
directors of each corporation shall, by a
resolution adopted by each such
board, approve a plan of consolidation
setting forth:
A. the names of the corporations
proposing to consolidate, and the name
of the new corporation into which
they propose to consolidate, which is

hereinafter designated as the

"new
corporation";
B. the terms and conditions of the
proposed consolidation;
C. the manner and basis of
converting the shares of each corporation
into
shares, obligations or other
securities of the new corporation or any
other
corporation or, in whole or in
part, into cash or other property;
D. with respect to the new
corporation, all of the statements required to
be set forth in articles
of
incorporation for corporations organized
under the
Business Corporation Act
[Chapter 53, Articles 11 to 18 NMSA
1978]; and
E. other provisions with respect to
the proposed consolidation as deemed
necessary or desirable.
6. Effectivity
(A) Unless a later date is specified in
the agreement, a merger or consolidation
under
sections 1729.35 and 1729.36of the Revised
Code is effective when the certificate of
merger or consolidation is filed in accordance
with section1729.38 of the Revised Code.
If, after filing the certificate but before the
merger or consolidation is effective, the
merger or consolidation is amended or
abandoned, as provided in divisions (E) and
(F) of section 1729.35 of the Revised
Code, an authorized officer of each
constituent
association
shall
sign
a
certificate of amendment or abandonment
stating that the
agreement of merger or
consolidation
has
been
amended
or
abandoned and the date of
such
action,
and shall file the certificate in the same
manner as the certificate of merger or
consolidation. Any certificate of amendment
or abandonment shall be filed prior to
the
date the merger or consolidation would
otherwise be effective.
(B) In the case of a merger, the
surviving association or entity is the one
designated in the agreement. In the
case of a consolidation, the new association
or entity is the one designated in the
agreement. The separate existence of all
constituent associations or
entities in
the agreement, except the surviving or new
association or entity, ceases upon
the
effective date of the merger or consolidation.

(C) The surviving or new association

or entity possesses all the rights and all the
property
of
each
constituent
association or entity, and is responsible for
all their
obligations. Title to any property
is vested in the surviving or new association
or entity with no reversion or impairment
of the property caused by the merger or
consolidation. A merger or consolidation
shall not be considered an assignment. No
right of any
creditor shall be impaired by
the merger or consolidation without the
creditor's consent.
(D) If the surviving organization is an
association, the articles of incorporation are
amended to the extent provided in the
agreement of merger.

7.Limitation
A bond covenant that restricts in
some way a firm's ability to merge or
consolidate with another firm.
8.Effects
Unless the commission [secretary of
state] disapproves pursuant to Subsection A
of Section 53-18-2 NMSA 1978, a merger,
consolidation or exchange shall become
effective upon delivery of the articles of
merger, consolidation or exchange to the
commission [secretary of state] or on
such later date, not more than thirty days
subsequent to the delivery thereof to the
commission[secretary of state], as shall be
provided for in the plan. When a merger
or consolidation has become effective:
A. the several corporations parties
to the plan of merger or consolidation shall
be a single
corporation, which, in the
case of a merger, shall be that corporation
designated in the plan of merger as the
surviving corporation and, in the case of a
consolidation, shall be
the
new
corporation provided for in the plan of
consolidation;
B. the separate existence of
all
corporations parties to the plan of merger or
consolidation, except the surviving or
new corporation, shall cease;
C. the surviving or new corporation
shall have all the rights, privileges,
immunities and
powers and shall be
subject to all the duties and liabilities of a

corporation organized under the Business

Corporation Act [Chapter 53, Articles 11 to
18 NMSA 1978];
D. the surviving or new corporation
shall there upon possess all the rights,
privileges, immunities and franchises of a
public or private nature of each of the
merging
or consolidating corporations; and
all property, real, personal and mixed and all
debts due on whatever account, including
subscriptions to shares, and all other
chooses in action and every other interest of,
or belonging to, or due to, each of the
corporations so merged or consolidated
shall be taken and deemed to be transferred
to and vested in such single corporation
without further act or deed, and the title to
any real estate, or any
interest
therein,
vested in any of such corporations shall not
revert or be in any way
impaired
by
reason of the merger or consolidation;
E. the surviving or new corporation
shall thenceforth be responsible and
liable for all the liabilities and obligations of
each of the corporations so merged or
consolidated, and any claim existing or
action or proceeding pending by or against
any
of
such
corporations
may
be
prosecuted as if the merger or consolidation
had not taken place, or the surviving or new
corporation may be substituted in its place.
Neither the
rights of creditors nor any
liens upon the property of any such
corporation shall be impaired
by
the
merger or consolidation;
F. in the case of a merger, the
articles of incorporation of the surviving
corporation shall be deemed to be
amended to the extent, if any, that changes
in its articles of incorporation are stated in
the plan of merger, and, in the case of a
consolidation, the statements set forth in
the articles of consolidation and which are
required or permitted to be set forth in
the articles of incorporation of corporations
organized
under
the
Business
Corporation Act shall be deemed to be the
original articles
of incorporation of the
new corporation; and
G. when a merger, consolidation or
exchange has become effective, the shares
of the corporation or corporations party
to the plan that are, under the terms of the
plan, to be converted or exchanged shall
cease to exist, in the case of a merger or
consolidation, or be deemed to be

exchanged, in the case of an exchange, and

the
holders
of
such
shares
shall
thereafter be entitled only to the shares,
obligations, other securities, cash or other
property into which they shall have been
converted or for which
they shall have
been exchanged, in accordance with the
plan, subject to any rights
under Section
53-14-4 NMSA 1978.
E. Incorporation and Organization
1. Promoter
Who Are Promoters?
Promoter is a person who, acting alone or
with others, takes initiative in founding and
organizing the business or enterprise of the
issuer and receives consideration there for.
(Sec. 3.10, Securities Regulation Code [R.A.
8799])
The definition of promoter is important to
determine the liability for promoters
contract. Before you can make a promoter
liable, you must be able to determine who is
the promoter. He must be the one who takes
initiative on the founding and organization of
the business venture which eventually ends
up as the corporation being organized.
Q: Promoter v. Agent
A: The promoters are not the corporation
itself, and although they may be regarded,
for certain purposes as sustaining to the
corporation a relationship similar to that of
an agent, strictly speaking they cannot be
regarded as such, there being at that time no
existing principal
.Q: Promoter v. Trustee
A: A promoter is also sometimes likened to a
trustee. But a trustee is supposed to be
entirely disinterested, while persons engaged
in promotion expect to receive and seek to
obtain a liberal award or profit for their
initiative.
a. Liability of Promoter
Personal Liability of Promoter on
Pre-Incorporation Contracts
GENERAL
RULE: Promoters
are personally liable on their
contracts made on behalf of a
corporation to be formed.
EXCEPTION:
If there is an
express or implied agreement to
the contrary. It must be noted
that
the
fact
that
the

corporation when formed has

adopted or ratified the contract
does not release the promoter
from responsibility unless a
novation was intended.
WELLS VS. FAY &
EGAN CO. (143 Ga.
732, 85 S.E.
873;
1915)
Individual
promoters
cannot escape liability
where
they
buy
machinery, receive them
in their possession and
authorize one member to
issue
a
note,
in
contemplation
of
organizing a corporation
which was not formed.
(see Campos' notes p.
258-259). The agent is
personally
liable
for
contracts if there is no
principal. The making of
partial payments by the
corporation, when later
formed, does not release
the promoters here from
liability
because
the
corporation acted as a
mere stranger paying
the debt of another, the
acceptance of which by
the creditor does not
release the debtors from
liability over the balance.
Hence,
there
is
no
adoption or ratification.
HOW & ASSOCIATES
INC. VS. BOSS (222 F.
Supp. 936; 1963)
The rule is that if the
contract is partly to be
performed
before
incorporation,
the
promoters
solely
are
liable.
Even
if
the
promoter
signed
"on
behalf of corporation to
be formed, who will be
obligor," there was here
an
intention
of
the
parties to have a present
obligor, because threefourths of the payment
are to be made at the

time the drawings or

plans in the architectural
contract are completed,
with
or
without
incorporation.
A
purported adoption by
the corporation of the
contract
must
be
expressed in a novation
or agreement to that
efect. The promoter is
liable unless the contract
is to be construed to
mean:
1)
that
the
creditor agreed to look
solely
to
the
new
corporation for payment;
or 2) that the promoter
did not have any duty
toward the creditor to
form the corporation and
give the corporation the
opportunity to assume
and pay the liability.
QUAKER
HILL
VS.
PARR (148 Colo. 45,
364 P. 2d 1056; 1961)
The promoters here are
not liable because the
contract
imposed
no
obligation on them to
form a corporation and
they were not named
there
as
obligors/promissors. The
creditor-plaintif
was
aware of the inexistence
of the corporation but
insisted on naming it as
obligor
because
the
planting season was fast
approaching
and
he
needed to dispose of the
seedlings. There was no
intent here by plaintifcreditor to look to the
promoters
for
the
performance
of
the
obligation. This is an
exception to the general
rule that promoters are
personally liable on their
contracts, though made
on behalf of a corporation
to be formed.

b. Liability of Corporation
for Promoters Contracts
Liability of Corporation for
Promoters Contracts
While
a
corporation could
not have been a
party
to
a
promoter's
contract since it
did yet exist at the
time the contract
was entered into
and thus could not
possibly have had
an
agent
who
could legally bind
it, the corporation
may
make
the
contracts its own
and become bound
thereon if, after
incorporation, it:
(1)
Adopts or
ratifies the contract; or
(2)
Accepts its
benefits with knowledge
of the terms thereof.
It must be
noted,
however,
that the contract
must be adopted in
its entirety; the
corporation cannot
adopt only the part
that is beneficial to
it and discard that
which
is
burdensome.
Moreover,
the
contract must be
one which is within
the powers of the
corporation
to
enter,
and
one
which the usual
agents
of
the
company
have
express or implied
authority to enter.
McARTHUR
V.
TIMES
PRINTING
CO.
(48

Minn. 319,
51
N.W.
216; 1892)
It is not a requisite that a
corporation's adoption or
acceptance
of
a
promoter's contract be
expressed, but it may be
inferred from acts or
acquiescence on the part
of the corporation, or its
authorized agents, as
any
similar
original
contract might be shown.
The right of agents to
adopt
an
agreement
originally
made
by
promoters depends upon
the purposes of the
corporation
and
the
nature of the agreement.
The agreement must be
one
which
the
corporation itself could
make and one which the
usual agents of the
company have express or
implied authority to enter
into.
CLIFTON v. TOMB (21
F. 2d 893; 1921)
Whatever may be the
proper legal theory by
which a corporation may
be bound by the contract
(ratification,
adoption,
novation, a continuing
ofer to be accepted or
rejected
by
the
corporation),
it
is
necessary in all cases
that
the
corporation
should
have
full
knowledge of the facts,
or at least should be put
upon such notice as
would
lead,
upon
reasonable inquiry, to the
knowledge of the facts.
CAGAYAN
FISHING
DEV. CO. v. SANDIKO (65
Phil. 223; 1937)
A promoter could not
have acted as agent for a
corporation that had no
legal
existence.
A

corporation,
until
organized, has no life
therefore no faculties.
The corporation had no
juridical personality to
enter into a contract.
Also see Caram v. CA
Corporate
Rights
under
Promoters Contracts
Should the other contracting
party fail to perform its part of
the bargain, the corporation
which has adopted or ratified
the contract may either sue for:
(1)
Specific
performance; or
(2)
Damages
resulting from
breach
of
contract.
The fact of bringing an action
on the contract has been held
to constitute sufficient adoption
or ratification to give the
corporation a cause of action.
BUILDERS DUNTILE CO. v.
DUNN (229 Ky. 569, 17 S.W. 2d
715; 1929)
When the corporation
was
formed,
the
incorporators took upon
themselves the whole
thing, and ratified all that
had been done on its
behalf.
Though there
was
no
formal
assignment
of
the
contract
to
the
corporation, the acts of
the incorporators were
an
adoption
of
the
contract. Therefore the
corporation has the right
to sue for damages for
the breach of contract.
3. Corporate Name - Limitations on Use
of Corporate Name
Corporate Name (Secs. 18, 14(1) and 42; Red
Line Trans. v. Rural Transit , 60 Phil.
549[1934]).
Sec. 18 Corporate Name No corporate
name may be allowed by the SEC if the
proposed name is identical or deceptively
confusing or similar to that of any existing

corporation or to any other name already

protected by law or is patently deceptive,
confusing or contrary to existing laws. When
a change in the corporate name is approved,
the Commission shall issue an amended
certificate of incorporation under the
amended name.
Sec. 42 Power to invest corporate funds
in another corporation or business or
for any other purpose Subject to the
provisions of this Code, a private corporation
may invest its funds in any other corporation
or business or for any other purpose other
than the primary purpose for which it was
organized when approved by a majority of
the board of directors or trustees and ratified
by the stockholders representing 2/3 of the
outstanding capital stock or at least 2/3
of the members in case of non-stock
corporations, at a stockholders or members
meeting duly called for the purpose. Written
notice of the proposed investment and the
time and place of the meeting shall be
addressed to each stockholder or member at
his place of residence as shown on the books
of the corporation and deposited to the
addresse in the post office with postage
prepaid, or served personally: Provided: That
any dissenting stockholder shall have
appraisal right as provided in this Code:
Provided,
however,
That
where
the
investment by the corporation is reasonably
necessary to accomplish its primary purpose
as stated in the articles of incorporation, the
approval of the stockholders or members
shall not be necessary.
Parties organizing a corporation must choose
a name at their peril; and the use of a name
similar to one adopted by another
corporation, whether a business or a
nonprofit organization
, if misleading or likely to injure the exercise
of its corporate functions, regardless of
intent, may be prevented by the corporation
having a prior right. Ang MgaKaanib sa
Iglesia ng Dios Kay Kristo Hesus v.
Iglesia ng Dios Kay Dristo Jesus, 372
SCRA171 (2001).
Similarity in corporate names between two
corporations would cause confusion to the
public especially when the purposes stated in
their charter are also the same type
of business. Universal Mills Corp. v.

Universal Textile Mills Inc. , 78 SCRA 62

(1977).

in commercial transactions. The public may

only know the corporation through its name.

Section 18 of Corporation Code expressly

prohibits the use of a corporate name which
is identical or deceptively or confusingly
similar to that of any existing corporation or
to any other name already protected by law
or is patently deceptive, confusing or
contrary to existing laws. The policy behind
the foregoing prohibition is to avoid fraud
upon the public that will occasion to deal
with the entity concerned, the evasion of
legal obligations and duties, and the
reduction of difficulties of administration and
supervision over corporations. Industrial
Refractories Corp. v. Court of Appeals,
390 SCRA 252 (2002); Lyceum of the
Philippines v. Court of Appeals, 219
SCRA 610, 615 (1993).

The name of a corporation is (1) essential to

its existence (2) it cannot change its name
xcept in the manner provided by the statute
(3) by that name alone is it authorized to
transact business and (4) it is through its
name that a corporation can sue and be sued
and perform all other legal acts.

A corporation has no right to intervene in a

suit using a name, not even its acronym,
other than its registered name, as the law
requires and not another name which it had
not registered.
Laureano Investment and Dev. Corp. v. Court
of Appeals, 272 SCRA 253(1997).
There would be no denial of due process
when a corporation is sued and judgment is
rendered against it under its unregistered
trade name, holding that [a] corporation
maybe sued under the name by which it
makes itself known to its workers. PisonArceo Agricultural Dev. Corp. v. NLRC,
279 SCRA 312 (1997).
A corporation may change its name by the
amendment of its articles of incorporation,
but the same is not effective until approved
by the SEC. Philippine First Insurance Co.
v.Hartigan , 34 SCRA 252 (1970).
A change in the corporate name does not
make a new corporation, and has no effect
on the identity of the corporation, or on its
property, rights, or liabilities. Republic
Planters Bank v. Court of Appeals, 216
SCRA 738 (1992).
The name of a corporation is very important,
the incorporators constituting as body politic
and corporate under the name stated in the
articles of incorporation for the period of
time mentioned therein. Such name is fatal

SEC reserves the right to order a corporation

to change name when it appears that there
is an identical name.
Guidelines on Corporate Names:
1.) Name must contain Corp. or Inc.
2.) Name must not tend to mislead or
confuse the public and must not contain such
descriptive words as excellent fair
good, etc.
3.) Name must not be similar to a name
already used by another partnership or
corporation.
4.) If proposed name contains a word similar
to a word already used as a part of the firm
name of a registered corporation, proposed
name must contain two other words different
from the name of the company already
registered.
5.) If name or surname used as part of
corporate name, the incorporators must have
a basis for such surname; it being one of the
incorporators: Otherwise, consent of the
person whose name is being used must be
submitted.6.) If it contains initials, it must
contain an explanation of the meaning and
relevance or reason thereof.7.) The use of
the
words
State
Maharlika
and
Baranggay are prohibited and reserved for
the government. The following words when
used must at least relate to the line of
business namely: Financing and Investment.
The following words are prohibited from
being used namely: National, Engineer,
Architect.
4. Corporate Term
Corporate Term (Sec. 11)
Sec. 11 Corporate Term A corporation shall
exist for a period not exceeding fifty years
(50) from the date of incorporation unless
sooner dissolved or unless said period is
extended. The corporate term as originally

stated in the articles of incorporation may be

extended for periods not exceeding fifty
years (50) in any single instance by an
amendment of the articles of incorporation in
accordance with this Code; Provided, that no
extension can be made earlier than five
years (5) prior to the original or subsequent
expiry dates unless there are justifiable
reasons for an earlier extension as may be
determined by the SEC.
The purpose of the limit emphasizes the
contractual nature of the corporation the
extension must be approved by the State. No
extension of term can be effected once
dissolution stage has been reached, as it
constitutes new business. Alhambra Cigar
v. SEC, 24 SCRA 269 (1968)
5.
Minimum
Capital
Stock
Subscription Requirements

and

Sec. 12. Minimum capital stock required

of stock corporations. - Stock corporations
incorporated under this Code shall not be
required to have any minimum authorized
capital stock except as otherwise specifically
provided for by special law, and subject to
the provisions of the following section.
Sec. 13. Amount of capital stock to be
subscribed and paid for the purposes of
incorporation. - At least twenty-five
percent (25%) of the authorized capital stock
as stated in the articles of incorporation must
be subscribed at the time of incorporation,
and at least twenty-five (25%) per cent of
the total subscription must be paid upon
subscription, the balance to be payable on a
date or dates fixed in the contract of
subscription without need of call, or in the
absence of a fixed date or dates, upon call
for payment by the board of directors:
Provided, however, That in no case shall the
paid-up capital be less than five Thousand
(P5,000.00) pesos.
Q: Does the Corp. Code expressly
provide for a minimum requirement of
the authorized capital stock?
A: Under Sec. 12 there is no minimum
requirement but the Code says that in no
case shall the paid up capital be less than
P5,000 (Sec. 13). Thus it turns out that
P5,000 is theminimum.77

Q: Why is the maximum capitalization

required to be indicated?
A: (1) To protect the stockholders and also it
limits the issuance of capital stock and the
extent of the voting power or capacity of a
stockholder
(2) Because of accountability. Whether a
corporation is going to do good or bad will
depend upon the assets its holds. The only
way by which the State can look at the
accountability of a corporation in terms of
assets it receives is to get a maximum so
that if the corporation wants to go beyond
that, it has to go back to the State.
Q: What is the 25%-25% rule?
A: It means that of the authorized capital
stock applied for, 25% thereof must be
subscribed. Of the 25% subscribed thereof
must be paid up. Example, a corporation is
by 5 individuals and they ask for an
authorized capital stock of P2M, how much
must each subscribe to?P125,000.
RATIONALE: The purpose of
such a requisition is that the State
may be assured of the successful
prosecution of the work and that
creditors of the company may have to
the extent, at least, of the required
subscription, the means of obtaining
satisfaction for their claims.
Q: Must each subscribe equally?
A: No

6. Articles of Incorporation
a. Nature and Function of Articles
The article of incorporation is
1.) A CONTRACT an agreement
that gives rise to obligations:
a.)Between
the
corporation and the state
(because it is under the
AI by which the state
grants
the
primary
franchise.)
state
manifests
its
consent
through the SEC while the
corporation manifests its

consent by the filing of

the
AI,
through
the
incorporators
and
eventually through the
Board of Directors.
b.)Between the state and
stockholders
c.)Between
the
corporation
and
stockholders
->
the
stockholders
manifest
their consent through
their
subscription
of
stocks and through voting
->
as
against
the
corporation,
the
stockholders do not have
individual standing but
only standing as a group.
d.)Among stockholders ->
in this situation they now have
individual standing.
e.)Between
the
stockholders and the Board of
Directors
f.)Between
the
corporation
and
the
public (since the AI is a
public document.)
2.) A PUBLIC DOCUMENT
because it is registered with the
SEC. Such works with the doctrine
of public notice that when the public
deals with the corporation, the
contents of AI binds them whether
they in fact have seen the AI or not.
When a person enters into a
contractor any transaction with a
corporation whether or not he has
checked with the SEC the terms and
conditions of the AI, he will be
bound by it. He cannot claim
ignorance of the charter of the
corporation.
Nature of Charter: The charter is
in the nature of a contract between
the
corporation
and
the
government.
Government of P.I. v.
Manila Railroad Co.,
52
Phil.
699
(1929).GOVERNMENT

OF
P.I.
v.
MANILA
RAILROAD CO.
Facts: The GPI filed a
petition for mandamus in
the SC to compel the
Manila Railroad and Jose
Paez, its manager to
provide and equip the
telegraph poles of the
company in Tarlac and
LaUnion with crosspieces
for 6 telegraph wires
belonging
to
the
government
which,
it
alleged, are necessary for
public service between
certain
municipalities.
Petitioner relies on Sec.
84 of Act No.1459 which
provides that the railroad
company shall establish a
telegraph line for the use
of the railroad and that
such posts may be used
for government wires and
shall be sufficient for
crosspieces to carry the
number of wires which
the
government
may
consider necessary for
public service. Petitioner
contends that since 6
crosspieces
are
now
necessary
for
public
service, the company
should provide sufficient
crosspieces. Respondent
answers by saying that
the Charter of Manila
Railroad (Act No. 1510)
repealed Sec. 84 of Act
1459 and contended that
the
Government
is
entitled to only 4 wires.
Held: Petition denied.
Inasmuch as Act No. 1510
is the charter of the
Manila
Railroad
Co.
constitutes a contract
between the corporation
and the government, it
would seem that the
corporation is governed
by its contract and not by

the provisions of the

general law. But from a
reading of the charter it
will be seen that there is
no indication that the
government intended to
impose
upon
said
company
any
other
conditions or obligations
not expressly found in the
said contract or charter.
Section 84 of the Corp.
Law was intended to
apply to all railways in
the Philippines which did
not
have
a
special
charter or contract. Act
No. 1510 applies only to
Manila Railroad and being
a special charter, its
adoption had the effect of
superseding
the
provisions
of the
corporation law which are
applicable to railroads in
general. The charter of a
corporation is a contract
between three parties:
(1) it is a contract
between the state and
the corporation to which
the charter is granted (2)
it is a contract between
stockholders
and
the
state (3) it is a contract
between the corporation
and its stockholders. A
special
charter
constitutes a contract
between the corporation
and the government and
as such are both equally
bound by its provisions.
For the State to impose
an obligation or a duty
upon
the
respondent
corporation,
not
expressly provided in the
charter would amount to
a
violation
of
said
contract. The provisions
of Act 1459 relate to the
number of wires which
the
government
may
place upon poles of the
company are different

and more onerous than

the provisions of the
charter.
NOTE:
Articles
of
Incorporation
cannot
prevail over statutory
provisions. Such cannot
overcome
the
law.
However in the case of
GPI, its special charter
overruled the Gen. Law
on the ground that the
former is both a contract
and a law. Thus, its
charter as a law creates
an amendment to all
other laws. In the same
manner, if the former
were a mere contract
then the case would have
been decided differently
b. Contents
Sec. 14 Contents of the Articles
of Incorporation All corporations
organized under this code shall file
with the SEC articles of incorporation
in any of the official languages duly
signed and acknowledged by all of
the
incorporators,
containing
substantially the following matters,
except as otherwise prescribed by
this Code or by special law:
1.The name of the
corporation;
2.The specific purpose or
purposes for which the
corporation
is
being
incorporated. Where a
corporation has more
than one stated purpose,
the
articles
of
incorporation shall state
which is the primary
purpose and which is/are
the secondary purpose
or purposes: Provided,
that
a
non-stock
corporation
may
not
include a purpose which
would
change
or
contradict its nature as
such;
3.The place where the
principal office of the

corporation is to be
located, which must be
within the Philippines;
4.The term for which the
corporation is to exist;
5.The
names,
nationalities
and
residences
of
the
incorporators;
6.The
number
of
directors and trustees
which shall not be less
than five nor more than
fifteen;
7.The
names,
nationalities
and
residences of persons
who
shall
act
as
directors
or
trustees
until the first regular
directors or trustees are
duly
elected
and
qualified in accordance
with this Code;
8.If it be a stock
corporation, the amount
of its authorized capital
stock in lawful money
of the Philippines, the
number of shares to
which it is divided, and
in case the share are
parvalue shares, the par
value
of
each,
the
names, nationalities and
residences of the original
subscribers,
and
the
amount subscribed and
paid by each on his
subscription, and if some
or all of the shares are
without par value, such
fact must be stated;
9.If it be a non-stock
corporation, the amount
of its capital, the names,
nationalities
and
residences
of
the
contributors
and
the
amount contributed by
each; and
10.Such other matters
as are not inconsistent
with law and which the
incorporators may deem
necessary
and

convenient. The
SEC
shall not accept the
articles of incorporation
of any stock corporation
unless accompanied by
a sworn statement of the
Treasurer elected by the
subscribers showing that
at
least
twenty-five
percent (25%) of the
authorized capital stock
of the corporation has
been subscribed and at
least twenty-five percent
(25%)
of
the
total
subscription has been
fully paid to him in
actual cash and/or in
property
the
fair
valuation of which is
equal to at least twentyfive percent (25%) of
said subscription, such
paid-up capital being not
less than P5,000.
Sec. 15 Forms of Articles of
Incorporation Unless otherwise
prescribed by special law, articles of
incorporation
of
all
domestic
corporations
shall
comply
substantially with the following form:

NOTE: The form goes into the validity

and enforceability of the Articles of
Incorporation.
CORPORATE NAME
A corporation cannot use a
name which is:
1.
identical
or
deceptively
or
confusingly similar
to that of any
existing
corporation or to
any other name
protected by law;
or
2.
patently
deceptive,
confusing
or
contrary to law.

The law gives a corporation

no express or implied authority
to assume another name that
is unappropriated; still less that
of another corporation, which is
expressly set apart from it and
protected by law. (Red Line
Transportation Co. vs. Rural
Transit Co.)
A word or phrase originally
incapable
of
exclusive
appropriation with reference to
an article on the market,
because
geographically
or
otherwise descriptive, might
nevertheless have been used
so long and so exclusively by
one producer with reference to
his article that, in that trade
and to that branch of the
purchasing public, the word or
phrase has come to mean that
the article was his product.
(Doctrine
of
secondary
meaning,
Lyceum
of
the
Philippines, Inc. vs.CA)
A corporation's right to use
its corporate and trade name is
a property right, a right in rem,
which it may assert and protect
against the world in the same
manner as it may protect its
tangible property, real or
personal, against trespass or
conversion. It is regarded, to a
certain extent, as a property
right and one which cannot be
impaired
or
defeated
by
subsequent appropriation by
another corporation in the
same field. (Philips Export B.V.
vs. CA)
To come within the scope
of the prohibition of Sec. 18,
two requisites must be proven,
namely:
1.
That
the
complainant
corporation
acquired a prior
right over the use
of such corporate
name; and
2. The proposed
name is either: (a)
identical or (b)

deceptively
or
confusingly similar
to that of any
existing
corporation or to
any other name
already protected
by law; or (c)
patently
deceptive,
confusing
or
contrary
to
existing
law.
(Philips Export B.V.
vs. CA)
In
determining
the
existence
of
confusing
similarity in corporate names,
the test is whether the
similarity is such as to mislead
a person using ordinary care
and discrimination. Proof of
actual confusion need not be
shown.
It
suffices
that
confusion is probably or likely
to occur. (Philips Export B.V. vs.
CA)
A
corporation
has
an
exclusive right to the use of its
name, which may be protected
by injunction upon a principle
similar to that upon which
persons are protected in the
use
of
trademarks
and
tradenames. (Philips Export
B.V. vs. CA)
A mere change in the name
of a corporation, either by the
legislature
or
by
the
corporators or stockholders
under
legislative
authority,
does not, generally speaking,
affect the identity of the
corporation, nor in any way
affect the rights, privileges or
obligations previously acquired
or incurred by it.
PURPOSE CLAUSE
A corporation has only such
powers
as
are
expressly
granted to it by law and by its

articles
of
incorporation
including those which are
incidental to such conferred
powers,
those
reasonably
necessary to accomplish its
purpose and those which may
be incidental to its existence.
Reasons for requiring a
statement of purposes or
objects:
1. In order that
the
stockholder
who contemplates
on an investment
in
a
business
enterprise
shall
know within what
lines of business
his money is to be
put at risk.
2. So that the
board of directors
and management
may know within
what
lines
of
business they are
authorized to act.
3. So that anyone
who deals with
the company may
ascertain whether
a
contract
or
transaction
into
which
he
contemplates
entering is one
within the general
authority of the
management.
If the corporate purpose or
objective includes any purpose
under
the
supervision
of
another government agency,
prior clearance and/or approval
of the concerned government
agencies or instrumentalities
will be required.
General limitations on the
purpose clause:
1. The purpose
must be lawful.
2. The purpose
must be specific
or
stated
concisely although

in
broad
or
general terms.
3. If there is more
than one purpose,
the primary as
well
as
the
secondary
ones
must be specified.
4. The purpose
must be capable
of being lawfully
combined.
THE PRINCIPAL OFFICE
The
residence
of
the
corporation is the place of its
principal office as may be
indicated in its articles of
incorporation
and
may,
therefore, be sued only at that
place. (CRS vs. Antillon)
TERM OF EXISTENCE
Sec. 11. Corporate term. A corporation shall exist for a
period not exceeding fifty (50)
years
from
the
date
of
incorporation unless sooner
dissolved or unless said period
is extended. The corporate
term as originally stated in the
articles of incorporation may
be extended for periods not
exceeding fifty (50) years in
any single instance by an
amendment of the articles of
incorporation, in accordance
with this Code; Provided, That
no extension can be made
earlier than five (5) years prior
to the original or subsequent
expiry date(s) unless there are
justifiable reasons for an earlier
extension
as
may
be
determined by the Securities
and Exchange Commission.
INCORPORATORS
Sec. 10. Number and
qualifications of incorporators.
- Any number of natural
persons not less than five (5)
but not more than fifteen (15),

all of legal age and a majority

of whom are residents of the
Philippines, may form a private
corporation for any lawful
purpose or purposes. Each of
the incorporators of a stock
corporation must own or be a
subscriber to at least one (1)
share of the capital stock of the
corporation.
General rule: Only natural
persons can be incorporators.
Exception:
Cooperatives
and
corporations
primarily
organized to hold equities in
rural banks.
Minors are not qualified to
become incorporators.
THE DIRECTORS/TRUSTEES
General rule: There must
be at least 5 but not more than
15 directors or trustees in a
private corporation.
Exceptions:
1.
Educational
corporations
registered as a
non-stock
corporation whose
number
of
trustees, though
not less than 5
and not more than
15
should
be
divisible by 5;
2.
In
close
corporations
where
all
the
stockholders are
considered
as
members of the
board of directors
thereby effectively
allowing
20
members in the
board; and
3.
Corporation
sole.
The by-laws may provide
for additional qualifications and
disqualifications. However, it
may not do away with the

minimum disqualifications laid

down by the Code.
Qualifications:
1. Directors must
own at least one
(1) share of the
capital stock of
the
corporation.
Trustees must be
members.
2. A majority of
the directors or
trustees must be
residents of the
Philippines.
Disqualifications:
1. Conviction by
final judgment of
an
offense
punishable
by
imprisonment for
a
period
exceeding six (6)
years,
or
a
violation of this
Code committed
within
five
(5)
years prior to the
date of election or
appointment.
2.
Other
disqualifications
under applicable
special laws.
A by-laws may validly
provide that no person may be
elected as director unless he
owns a specified number of
shares
required
for
the
directorate qualification.
It may likewise disqualify a
stockholder from being elected
into office if he has a
substantial
interest
in
a
competitor corporation to avoid
any possible adverse effects of
conflicting
interest
of
a
director.
In order to be eligible as a
director, what is material is the
legal title to, not beneficial
ownership, of the stock as
appearing on the books of the
corporation. (Lee vs. CA)
If no election is conducted
or no qualified candidate is

elected, the incumbent director

shall continue to act as such in
a hold over capacity until the
election is held and a qualified
candidate
is
so
elected.
(Detective
and
Protective
Bureau vs. Cloribel)
CAPITALIZATION
Authorized capital the
maximum amount fixed in the
articles to be subscribed and
paid-in or secured to be paid
by the subscribers.
Subscribed capital stock
the total number of shares and
its total value for which there
are
contracts
for
their
acquisition or subscription.
Paid-up capital stock the
actual amount or value which
has been actually contributed
or paid to the corporation in
consideration
of
the
subscriptions made thereon.
Stocks shall not be issued
for a consideration less than
the par or issued price thereof.
Consideration
for
the
issuance of stock may be any
or a combination of any two or
more of the ff:
1.
Actual
cash
paid
to
the
corporation;
2.
Property,
tangible
or
intangible,
actually received
by the corporation
and necessary or
convenient for its
use and lawful
purposes at a fair
valuation equal to
the par or issued
value of the stock
issued;
3.
Labor
performed
or
services actually
rendered to the
corporation;

4.
Previously
incurred
indebtedness by
the corporation;
5.
Amounts
transferred
from
unrestricted
retained earnings
to stated capital;
and
6.
Outstanding
shares
in
exchange
for
stocks
in
the
event
of
reclassification or
conversion.
Stocks shall not be issued
in exchange of promissory
notes or future services.
Shares of stock and their
classification
Shares of stock designate
the interest or right which the
stockholder
has
in
the
management of the corporation,
and in the surplus profits and, in
case of distribution, in all assets
remaining after the payment of
its debts.
Stock
certificate
is
a
document
or
instrument
evidencing the interest of a
stockholder in the corporation.
The shares of stock of stock
corporations may be divided
into classes or series of shares,
or both, any of which classes or
series of shares may have such
rights, privileges or restrictions
as may be stated in the articles
of incorporation.
Purpose of classification:
1. To specify and
define the rights
and privileges of
the stockholders.
2. For regulation
and control of the
issuance of sale of
corporate
securities for the
protection
of

purchasers
and
stockholders.
3.
As
a
management
control device.
4. To comply with
statutory
requirements.
5. To better insure
return
on
investment.
6. For flexibility in
price.
Except
as
otherwise
provided in the articles of
incorporation and stated in the
certificate of stock, each share
shall be equal in all respects to
every other share.
Common
shares

and

preferred

Common stock a stock

which entitles its owner to an
equal
pro-rata
division
of
profits, if there be any, but
without any preference or
advantage in that respect over
any other stockholder or class
of stockholders.
Preferred stock a stock
that
gives
the
holder
a
preference over the holder of
common stocks with respect to
the payment of dividends
and/or
with
respect
to
distribution of capital upon
liquidation.
Limitations on preferred
stock:
1. Must be issued
with a stated par
value; and
2. The preferences
must be stated in
the
articles
of
incorporation and
in the certificate of
stock,
otherwise,
each share shall
be, in all respect,
equal
to
every
other share.
The
guarantee
to
preference as to dividends does

not create a relation of debtor

and
creditor
between
the
corporation and the holders of
such stock. The board has the
discretion to determine whether
or not to declare dividends.
Preferred
shares
are
presumed
to
be
nonparticipating.
Participating
preferred
shares the holders thereof are
still
given
the
right
to
participate with the common
stockholders
in
dividends
beyond their stated preference.
Cumulative preferred share
those that entitle the owner
thereof to payment not only of
current dividends but also back
dividends not previously paid
whether or not, during the past
years, dividends were declared
or paid.
In absence of express
stipulation, preferred shares are
presumed to be non-cumulative.
Non-cumulative
preferred
shares those which grant the
holders of such shares only to
the
payment
of
current
dividends
but
not
back
dividends,
when
and
if
dividends are paid, to the
extent agreed upon before any
other stockholders are paid the
same.
Types of non-cumulative
preferred shares:
1.
Discretionary
dividend type
gives the holder of
such shares the
right
to
have
dividends
paid
thereon
in
a
particular
year
depending on the
judgment
or
discretion of the
board of directors.
2. Mandatory if
earned
type

impose a positive
duty on directors
to
declare

dividends
every
year when profits
are earned.
3.
Earned
cumulative
or
dividend credit
gives the holder
thereof the right to
arrears
in
dividends if there
were profits earned
during the previous
years
but
dividends were not
declared.
Unless the right to vote is
clearly withheld, a preferred
stockholder has the right to
vote.
Preference upon liquidation
must
be
clearly
indicated
otherwise they shall be placed
on equal footing with other
shares.
Par and no par value shares
Par value shares those
whose value are fixed in the
articles of incorporation.
Par value shares cannot be
issued
nor
sold
by
the
corporation at less than par.
No par value shares those
whose issued price are not
stated in the certificate of stock
but which may be fixed in the
articles of incorporation, or by
the board of directors when so
authorized by the said articles
or by the by-laws, or in the
absence
thereof,
by
the
stockholders themselves.
Limitations of no par value
shares:
1. Such shares,
once issued, are
deemed fully paid
and
thus,
non
assessable;
2.
The
consideration
for
its issuance should
not be less than
P5.00;

3.
The
entire
consideration
for
its
issuance
constitutes capital,
hence,
not
available
for
dividend
declaration;
4. They cannot be
issued as preferred
stock; and
5. They cannot be
issued by banks,
trust
companies,
insurance
companies, public
utilities
and
building and loan
associations.
Advantages to the issuance
of no par value shares:
1.
Flexibility
in
price;
2. Evasion of the
danger of liability
upon
watered
stock; and
3. Disappearance
of personal liability
on the part of the
holder thereof for
unpaid
subscription.
Voting and non-voting shares
Voting shares gives the
holder thereof the right to vote
and
participate
in
the
management of the corporation
through the exercise of such
right, either at the election of
the board of directors, or in any
manner
requiring
the
stockholders approval.
Non-voting shares do not
grant the holder thereof the
right to vote except under the
penultimate paragraph of Sec.
6.
Only
preferred
and
redeemable shares may be
denied the right to vote.
There must always be a
class or series of shares which
have complete voting rights.

Non-voting
shares
shall
nevertheless be entitled to vote on the
following matters:
1. Amendment of
the
articles
of
incorporation;
2. Adoption and
amendment of bylaws;
3.
Sale,
lease,
exchange,
mortgage, pledge
or other disposition
of
all
or
substantially all of
the
corporate
property;
4.
Incurring,
creating
or
increasing bonded
indebtedness;
5.
Increase
or
decrease of capital
stock;
6.
Merger
or
consolidation
of
the
corporation
with
another
corporation
or
other corporations;
7. Investment of
corporate funds in
another
corporation
or
business
in
accordance
with
this Code; and
8. Dissolution of
the corporation.
Except as provided in the
penultimate paragraph of Sec.
6, the vote necessary to
approve a particular corporate
act as provided in this Code
shall be deemed to refer only to
stocks with voting rights.
Founders shares
Sec. 7. Founders shares. Founders' shares classified as
such
in
the
articles
of
incorporation may be given
certain rights and privileges not
enjoyed by the owners of other
stocks, provided that where the

exclusive right to vote and be

voted for in the election of
directors is granted, it must be
for a limited period not to
exceed five (5) years subject to
the approval of the Securities
and Exchange Commission. The
five-year
period
shall
commence from the date of the
aforesaid
approval
by the
Securities
and
Exchange
Commission.
Redeemable shares
Redeemable shares may be
issued by the corporation when
expressly so provided in the
articles of incorporation.
They may be purchased or
taken up by the corporation
upon the expiration of a fixed
period,
regardless
of
the
existence
of
unrestricted
retained earnings in the books
of the corporation, and upon
such other terms and conditions
as may be stated in the articles
of incorporation, which terms
and conditions must also be
stated in the certificate of stock
representing said shares.
Treasury shares
Treasury shares are shares
of stock which have been issued
and
fully
paid
for,
but
subsequently reacquired by the
issuing corporation by purchase,
redemption,
donation
or
through some other lawful
means. Such shares may again
be disposed of for a reasonable
price fixed by the board of
directors.
Treasury shares may again
be issued for a price less than
par.
Treasury shares have no
voting and dividend rights. Such
rights are only granted to
outstanding shares of stock.
(CIR vs. Manning)
OTHER MATTERS

Classes of shares, as well as the

preferences or restrictions on
any such class (6)
Denial or restriction of preemptive right (39)
Prohibition against transfer of
stock which would reduce stock
ownership to less than the
required minimum in the case of
a
nationalized
business
or
activity (15(11))

c. Amendment
Amendments to the Articles
of Incorporation
Sec.
16
Amendment
of
Articles of Incorporation
Unless otherwise prescribed by
this Code or by special law and
for legitimate purposes, any
provision or matter stated in the
articles of incorporation may be
amended by a majority vote of
the board of directors or
trustees and the vote or written
assent of the stockholders
representing at least 2/3 of the
outstanding
capital
stock,
without
prejudice
to
the
appraisal right of dissenting
stockholders in accordance with
the provisions of this Code, or
the vote or written assent of at
least 2/3 of the members if it be
a non-stock corporation.
The original and amended
articles together shall contain
all provisions required by law to
set out in the articles of
incorporation. Such articles, as
amended shall be indicated by
underscoring the change or
changes made, and a copy
thereof duly certified under oath
by the corporate secretary and
a majority of the directors or
trustees stating the fact that
said
amendment
or
amendments have been duly
approved by the required vote
of the stockholders or members
shall be submitted to the

SEC. The amendments shall

take effect upon their approval
by the SEC or from the date of
the
filing
with
the
said
Commission if not acted upon
within six (6) months from the
date of filing for a cause not
attributable to the corporation.
NOTES: The matter to be
amended, even if it does not
concern the Board, must always
be concurred with by the Board.
More importantly, the impetus
to amend must always come
from
the
Board.
The
stockholders merely ratify such
amendment. Such is the case
because he Board constitutes
the centralized management.
The impetus of the Board
comprises the obligatory force
of the contracts entered into.
2/3 votes are needed in AI while
a
majority
is
needed
in
amending by laws -> Such is
the case to make it easier to
amend by-laws
d. Non-Amenable Items
Information
about
the
original incorporators
o Names
of
incorporators listed in
original
Articles
of
Incorporation
o Citizenship
and
residences
of
the
Incorporators
o Names,
citizenship
and
original
subscription of the
incorporators
o Names
and
contribution of each
member. If you want
to change names and
contribution of each
member,
you
can
update it in your
General
Information
Sheet (GIS).
Name of the designated
Treasurer. If you want to
change your corporations

treasurer, you can update it

in the General Information
Sheet (GIS).
7.
Registration
and
Issuance
of
Certificate of Incorporation
FILING OF ARTICLES AND PAYMENT OF
FEES

Corporations governed by special laws

have to submit a recommendation
from the appropriate government
agency to the effect that such articles
are in accordance with law
a) banks, banking and quasibanking institutions,
b)
building
and
loan
associations,
c) trust companies and other
financial intermediaries,
d) insurance companies,
e) public utilities,
f) educational institutions, and
g) other corporations governed
by special laws (17)

The SEC may reject any AOI thereto if

the same is not in compliance with
the requirements of this Code (17)

The SEC shall give the incorporators a

reasonable time within which to
correct or modify the objectionable
portions
of
the
articles
or
amendment. ( 17)

GROUNDS FOR DISAPPROVINF ARTICLES

OF INCORPORATION
a) AOI does not substantially the form
prescribed
b)
Purpose
is
patently
unconstitutional,
illegal,
immoral,
contrary to government rules and
regulations
c) Treasurers Affidavit concerning the
amount of capital subscribed and or
paid is false
d)
Percentage
requirement
of
ownership
of Filipino
citizens
as
required by the Constitution not
complied with.

After consulting with BOI,

NEDA,
appropriate
government agency, SEC
may deny registration of any
corporation
if
its
establishment will not be
consistent
with
declared
national policies

Certificate
of
authority
required of the following:
a) Insurance CompaniesInsurance Commission
b) Banks, Building and
Loan
Associations,
Finance
CompaniesMonetary Board
c)
Educational
Institutions- Secretary of
Education
d) Public Utilities- Board
of
Power,
Board
of
Transportation, National
telecommunication
Commission, etc..

Remedy in case of rejection

of AOI: by petition for review
in accordance with the Rules

Non-stock corporations that intend to

solicit
gifts,
donations,
and
contributions from the public at large
for the benefit of an indefinite number
of persons must secure a Certificate of
Registration
from
the
Insurance
Commissioner.

Failure to file AOI will prevent due

incorporation
of
the
proposed
corporation and will not give rise to its
juridical personality (19). It will not
even be a defacto corporation (20)
1.
Unless
the
certificate
of incorporation
has
been
issued, there can be no d facto
corporation (Hall vs. Piccio,
1950)
2.
Camposthis
statement
should not be taken as an
absolute principle, but in the
light of the circumstances
before the court.

EXAMINATION OF ARTICLES
APPROVAL OR REJECTION

BY

SEC;

of Court (6, last par., PD

902-A)

ISSUANCE
OF
INCORPORATION

CERTIFICATE

OF

A private corporation formed or

organized under this Code commences
to have corporate existence and
juridical personality and is deemed
incorporated from the date the
Securities and Exchange Commission
issues a certificate of incorporation
under its official seal (19)

Thereupon
the
incorporators,
stockholders/members
and
their
successors shall constitute a body
politic and corporate under the name
stated in the articles of incorporation
for the period of time mentioned
therein, unless said period is extended
or the corporation is sooner dissolved
in accordance with law. (Ibid)

If incorporators are found guilty of

fraud in procuring Certificate of
Incorporation, SEC may revoke the
same after proper notice and hearing
(6(I), PD 902-A)

8. Adoption of By-Laws
a. Nature and Functions of ByLaws
By-laws are rules and ordinances
made by a corporation for its own
government; to regulate the conduct
and define the duties of the
stockholders or members towards the
corporation and among themselves.
They are rules and regulations or
private
laws
enacted
by
the
corporation to regulate, govern and
control its own actions, affairs and
concerns and its stockholders or
member and directors and officers
with relation thereto and among
themselves in their relation to it.
Q. Distinguish by-laws from AoI
A. The AoI is not an internal document
that binds the parties to a corporate

setting. It is also a document that

binds the State. The BL is an
intramural document, its supposed to
bind the inner workings of a corp.
Q. Are the AoI and BL public
documents?
A. Yes, both are public documents
because they are not valid and
binding without the approval of the
SEC
Q. Does the BL have to be
approved by the SEC?
A. Yes, prior to the approval of the
SEC, the by-laws are not binding since
the code expressly requires the
approval of the SEC to be binding
upon the SHs and members. Absent
the codal provision, it is binding
because of a corp.s inherent power
to adopt its own by-laws.
Q. Do BL bind the public?
A. As a general rule, BL provisions do
not bind the public, except if the third
person has knowledge of the BL
provision.
Gokongwei v. SEC, 89 SCRA 337
[1979];
FACTS: In 1972, Universal Robina
Corp acquired 622,987 share in San
Miguel
Corp.
In
1972
also,
Consolidated Foods Corp. acquired
SMC shares amounting to P543,959.
John Gokongwei, the president and
controlling stockholder of URC &
CFC purchased 5,000 SMC shares.
Gokongwei tried to get a seat in the
SMC BoD but was rejected by the
SHs n the grounds that he was
engaged in a competitive business
and his securing a seat in the BoD
would subject SMC to great
disadvantages. On September 18,
1976 respondent SHs amended the
by-laws
of
SMC,
Gokongwei
contends that:
1. the BoD acted without
authority & in usurpation of the
power of the SHs since the
computation of 2/3 vote was
based on the authorized capital
stock as of 1961 & not as
of 1976
2. The authority granted in
1961 was also extended in

1962 & 1963 when said

authority was supposed to
cease to exist
3. Prior to said amendment,
petitioner
had
all
the
qualifications as Director & that
as a substitute SH he has the
right to vote & be voted as
director & that in amending the
by-laws, the corp. purposely
provided
for
Gokongweis
disqualification& deprived him
of his vested right.
4. Gokongwei further alleges
that the corp. has no inherent
power to disqualify a SH & that
provision allowing the BoD to
consider
such
factors
as
business & family relations is
unreasonable & oppressive,
thus void.
Gokongwei prays that the amended
by laws be declared null & void. He
also wanted to inspect and get a
copy
of
certain
documents
pertaining to the corp. The SEC
allowed him to see the minutes of
the meeting only. So he filed an MR
& a petition with the SC due to the
alleged deliberate inability of the
SCE to action on his petition. The
SEC had earlier ruled in denying the
MR, allowing Gokongwei to run as
director but he should not sit as
such if elected until there is a
decision on the validity of the bylaws. The SMC answered by saying
that he is engaged in a business
antagonistic to SMC & that in
allowing him to sit in the BoD, he
would have access to SMC trade
secrets and plans. It says that the
amended by laws were adopted to
preserve & protect SMC from
danger which was based in its right
for self-preservation.
ISSUE:
Whether
or
not
the
amended
by-laws
of
SMC
disqualifying a competitor from
nomination or election to the BoD of
SMC are valid and reasonable?
HELD:

1.Every corp. has the inherent right

to adopt by-laws for its internal
government & to regulate the
conduct & prescribe the rights and
duties of its members towards itself
&among themselves in reference to
the management of its affairs. This
is expressly recognized by Sec. 21
of the Corp. Code & has been
enunciated in Govt vs. El Hogar.
2.Any person who buys stocks in a
corp. does so with the knowledge
that its affairs are dominated by a
majority of the stockholders & that
he impliedly contracts that the will
of the majority shall govern in all
matters within the limits of the AoI
& By-laws. A stockholder is said to
have parted with his right to
regulate the disposition of his
property which he invested in the
corporation. Thus, no contract
between
the
SHs
and
corp.
wasinfringed.
3.Pursuant to Sec. 18 of the Corp.
Law, any corp. may amend its AoI
by a vote or written assent of the
Shs representing at least t 2/3 of
the subscribed capital stock. If it
changes, diminishes or restricts the
rights of SHs, the dissenting
minority has only the right to object
in writing & demand payment of
their share. Petitioner has no vested
right to be elected director.
4.A director stands in a fiduciary
relation to the corp. & its SHs. He
has control & guidance of corporate
affairs & property & hence, of the
property interests of SHs. Equity
recognizes that SHs are properties
of
corporate
interest
&
are
ultimately the only beneficiaries
thereof. Thus, he cannot serve 2
adverse masters without detriment
to one of them He cannot utilize his
inside
information
& strategic
position to his own preferment.
5.An amendment to the by-laws
which renders a SH ineligible to be a
director, if he be also director in a
competitor corp. has been sustained
valid. This is based on the principle

that where the director is employed

in the service of a rival corp. he
cannot serve both but must betray
one or the other. Such an
enactment merely advances the
benefit of the corp. & for its own
good. Corporate officers are not
permitted to use their position of
trust &confidence to further their
private interests.
6.DOCTRINE
OF
CORPORATE
OPORTUNITY

rests
on
the
unfairness of an officer or director
taking advantage of an opportunity
for his own personal profit where
the interest of the corporation calls
for protection. Here BoD members
have
access
to
marketing
strategies, pricing structure, budget
for expansion, R&D sources of
funding, availability of personnel,
mergers & tie-ups, etc. The
questioned amendment of the bylaws was done to prevent the
creation or an oppositor for an
officer or director of SMC, also an
officer of a competing corp. from
taking advantage of the information
which he as director to promote his
individual corporate interests to the
detriment of SMC, it would be hard
to
avoid
any
possibility
of
Gokongweis taking advantage of
his position as SMC director.
7.The SC grants the petition
regarding Gokongweis petition to
examine the book and records of
SMC
8.However, it sustained the validity
of the amendment to the by-laws
without prejudice to the question of
actual disqualification of Gokongwei
to run if elected to sit as SMC
director being decided, after proper
hearing by the SMC BoD, whose
decisions shall be appealable to the
SEC & to the SC, unless disqualified,
the prohibition in the said by-laws
will not apply to Gokongwei.
Pea v.
(1991)

CA,

193

SCRA

717

FACTS: PAMBUSCO original owners

of the lots in question, mortgaged
the same to DBP inconsideration of
P935,000. This mortgage
was
foreclosed and said properties were
awarded to Rosita Pea as highest
bidder in the foreclosure sale. The
Board of PAMBUSCO, through three
of itsmembers resolved to assign its
to one of its members, Atty. Joaquin
Briones, to execute and sign a deed
of assignment for and in behalf of
PAMBUSCO
in
favor
of
any
interested party. Thus, Briones
executed a deed of Assignment of
PAMBUSCOs redemption right over
the subject lots in favor of Marelino
Enriquez. The latter then redeemed
the said properties and a certificate
of redemption dated Aug. 15, 1975
was issued. Enriquez executed a
deed of absolute sale of the subject
properties in favor of plaintiffappellants, the spouses Rising T. Yap
and Catalina Lugue. Pea wrote the
sheriff notifying him that the
redemption was not valid as it was
made
under
avoid
deed
of
assignment. She then requested the
recall of the said redemption and a
restraint on any registration or
transaction regarding the lots.
Defendant Pea through counsel
wrote
the
sheriff asking
for
execution of a deed of final sale in
her favor on the ground that the
one year period of redemption has
long elapsed without any valid
redemption having been exercised.
Plaintiff Yap wrote defendant Pea
asking for payment for back rentals
in the amount of P42,750.00 for the
use and occupancy of the land and
house. Later, the spouses Yap were
prompted to file the instant caseon
the ground that being registered
owners, they have the right to
enforce their right to possession
against defendant who has been
allegedly in unlawful possession
thereof. It was contended that
plaintiffs could not have acquired
ownership
over
the
subject
properties under a deed of absolute
sale executed in their favor by one
Marcelino Enriquez who likewise

could not have become the owner of

the properties in question by
redeeming the same under a void
deed of assignment. The defense
was that since the deed of
assignment executed by PAMBUSCO
in favor of Enriquez was void ab
initio for being an ultra vires act of
its board of directors and for being
without any valuable consideration,
it could not have had any legal
effect. TC found for petitioner.CA
reversed.
HELD: In order that the SEC can
take cognizance of a case, the
controversy must pertain to any
of the following relationships:
a. between corp., partnership
or assoc. and the public
b. between the corp. and its
SH, members, officers
c. between corp. and the
state in so far as its
franchise, permit or license
to operate is concerned
d. among the stockholders,
partners
or
associates
themselves.
Neither
petitioner nor respondents
Yap
spouses
are
stockholders or officers of
PAMBUSCO. Consequently,
the issue of the validity of
the series of transactions
may be resolved only byte
regular courts. The by-laws
of a corporation are its own
private
laws
which
substantially
have
the
same effect as the laws of
the corporation. They are
in effect written into the
charter. In this sense, they
become
art
of
the
fundamental law of the
corporation
which
the
corporation
and
its
directors and officers must
comply with. Only three
out of five directors of
PAMBUSCO convened on
November 19, 1974 by
virtue of a prior notice of a
special meeting. There was
no quorum to validly

transact business since,

under Section 4 of the
amended
by-laws
hereinabove
reproduced;
at least 4 members must
be present to constitute a
quorum
in
a
special
meeting of the BoD. The
AoI or by-laws of the corp.
may fix a greater number
than the majority than the
majority of the number of
board
members
to
constitute
the
quorum
necessary for the valid
transaction
f
business.
Being a dormant corp. for
several years, it was highly
irregular, if not anomalous,
for a group of three
individuals
representing
themselves to be the
directors of respondent
PAMBUSCO to pass a
resolution disposing of the
only remaining asset of the
corporation in favor of a
former corporate officer.
The latest list of SH of
respondent PAMBUSCO on
file with the SEC does not
show that the said alleged
directors were among the
SHs
of
respondent
PAMBUSCO.
Since
the
disposition
of
said
redemption
right
of
PAMBUSCO by virtue of the
questions ed resolution
was not approved by the
required number of SHs
under the law, the said
resolution, as well as the
subsequent
assignment
executed
assigning
to
respondent Enriquez the
said right of redemption
should be struck down as
null and void.
As
the
rules
and
regulations or private laws
enacted by the corporation
to regulate, govern and
control its own actions,
affairs and concerns and its

stockholders or members
and directors and officers
with relation thereto and
among themselves in their
relation to it, by-laws are
indispensable
to
corporations. These may
not
be
essential
to
corporate
birth
but
certainly,
these
are
required by law for an
orderly governance and
management
of corporations.
Loyola
Grand Villas Homeowners
v. CA,276 SCRA 681 (1997)
b. Requisites of Valid ByLaws
Requirements and procedure for
adoption of by-laws:
1. The by laws must not be
inconsistent with the Code;
2.
If
adopted
prior
to
incorporation:
a. Approved and signed
by all the incorporators;
b. Submitted together
with
the
articles
of
incorporation to the SEC;
3. If adopted subsequent to
incorporation:
a. Adopted within one (1)
month after receipt of
official notice of the
issuance of its certificate
of incorporation by the
SEC;
b. Affirmative vote of the
stockholders representing
at least a majority of the
outstanding capital stock,
or of at least a majority of
the members in case of
non-stock corporations,
c.
Signed
by
the
stockholders or members
voting for them
d. Kept in the principal
office of the corporation,
subject to the inspection
of the stockholders or
members during office
hours.

e. A copy thereof, duly

certified to by a majority
of
the
directors
or
trustees
countersigned
by the secretary of the
corporation, must be filed
with the SEC which shall
be
attached
to
the
original
articles
of
incorporation.
4.
Certification
of
the
appropriate government agency
concerned to the effect that
such by-laws or amendments
are in accordance with law.
5. Issuance by the Securities
and Exchange Commission of a
certification that the by-laws are
not inconsistent with this Code.
Contents of by-laws:
1. The time, place and manner
of
calling
and
conducting
regular or special meetings of
the directors or trustees;
2. The time and manner of
calling and conducting regular
or special meetings of the
stockholders or members;
3. The required quorum in
meetings of stockholders or
members and the manner of
voting therein;
4. The form for proxies of
stockholders and members and
the manner of voting them;
5. The qualifications, duties and
compensation of directors or
trustees,
officers
and
employees;
6. The time for holding the
annual election of directors of
trustees and the mode or
manner of giving notice thereof;
7. The manner of election or
appointment and the term of
office of all officers other than
directors or trustees;
8. The penalties for violation of
the by-laws;
9. In the case of stock
corporations, the manner of
issuing stock certificates; and
10. Such other matters as may
be necessary for the proper or
convenient transaction of its
corporate business and affairs.

By-laws are subordinate to the

articles
of
incorporation,
the
Corporation Code and other statutes
which form part of the corporate
charter.
By-laws become effective only
upon the approval of the SEC
Time of filing:
1. Prior to incorporation must
be
signed
by
all
the
incorporators, must be filed
together with the articles of
incorporation
2. After incorporation approval
of at least a majority of the
outstanding capital stock
I.
Failure to file by-laws may
result to suspension or
revocation of corporate
franchise after proper
notice and hearing
II.
Failure to file by-laws
does
not
result
in
automatic
dissolution.
(LGVHA vs. CA)
III.
By-laws are internal rules
an cannot bind, effect or
prejudice third persons
without
knowledge.
(Fleisher
vs.
Botica
Nolasco)
Elements of a valid by laws:
1. It must not be contrary to
law, public policy or morals.
2. It must not be inconsistent
with the articles of incorporate.
3. It must be general and
uniform
in
its
effect
or
applicable to all alike or those
similarly situated.
4. It must not impair obligations
and contracts or vested rights.
5. It must be reasonable.
c. Binding Effects
China Banking Corp. v.
Court of Appeals, 270
SCRA 503(1997).
FACTS:
Calapatia,
a
stockholder of PR Valley Golf

and Country Club pledged his

Stock Certificate to petitioner
China
Banking.
Petitioner
wrote VGCCI requesting that
the aforementioned pledge
agreement be recorded in its
books.
Later,
Calapatia
obtained a loan of P20,000
from petitioner, payment of
which was secured by the
aforestated
pledge
agreement
still
existing
between
Calapatia
and
petitioner. Due to Calapatias
failure to pay his obligation,
petitioner filed a petition for
extra-judicial
foreclosure.
Petitioner informed VGCCI of
the
above-mentioned
foreclosure proceedings and
requested that the pledged
stock be transferred to its
name. However, VGCCI wrote
petitioner
expressing
its
inability
to
accede
to
petitioners request due to
Calapatias
unsettled
accounts with the club.
Despite the foregoing, Notary
Public de Vera held a public
auction
and
petitioner
emerged as the highest
bidder, VGCCI sent Calapatia
a notice demanding full
payment of his overdue
account in the amount of
P18,783.24. VGCCI caused to
be
published
in
the
newspaper Daily Express a
notice of auction sale by
VGCCI of its subject share of
stock and thereafter filed a
case with the RTC of Makati
for the nullification. The RTC
dismissed the case for lack of
jurisdiction over the subject
matter on the theory that it
involves an intra-corporate
dispute.
Petitioner filed a complaint
with
the
SEC.
The
Commission en banc believed
that appellant-petitioner had
a prior right over the pledged

share
and
because
of
pledgors failure to pay the
principal debt upon maturity,
appellant-petitioner
could
proceed with the foreclosure
sale of the pledged share.
The auction sale conducted
by appellee-respondent Club
was
declared
null
and
void. The CA rendered its
decision nullifying and setting
aside the orders of the SEC
and its hearing officers on the
ground of lack of jurisdiction
over the subject. The CA
declared that the controversy
between CBC and VGCCI is
not intra-corporate.

constructive knowledge of
the same. In the case at bar,
petitioner
had
actual
knowledge of the by-laws of
private
respondent
when
petitioner
foreclosed
the
pledge made by Calapatia
and
when
petitioner
purchased
the
share
foreclosed.
Thus,
the
petitioner purchased the said
share subject to the right of
the PR to sell the said shares
for reasons of delinquency
and the right of PR to have a
first lien on said shares as
these rights are provided for
in the by-laws very clearly.

HELD: VGCCI claims a prior

right over the subject share
anchored mainly on Sec. 3,
Art. VIII of its by-laws which
provides that after a member
shall have been posted as
delinquent, the Board may
order his/her/its share sold to
satisfy the claims of the club.
It is pursuant to this provision
that VGCCI also sold the
subject
share
at
public
auction, of which it was the
highest bidder. VGCCI caps its
argument by asserting that
its corporate by-laws could
prevail. The SEC therefore
took proper cognizance of the
instant case.

In order to be bound, the 3 rd

party must have acquired
knowledge of the pertinent
by-laws at the time the
transaction
or agreement
between said 3rd
party and the shareholder
was entered into, in this case,
at the time the pledge
agreement was executed.
Petitioners belated notice of
said by-laws at the time of
the
foreclosure
will
not
suffice. By-laws signify the
rules
and
regulations
of private laws enacted by
the corporation to regulate,
govern and control its own
actions, affairs and concerns
and
its
stockholders
or
members and directors and
officers with relation thereto
and among themselves in
their relation to it. The
purpose of a by-law is to
regulate the conduct and
define the duties of the
members
towards
the
corporation
and
among
themselves.

Moreover, VGCCI completely

disregarded petitioners right
as pledgee. It even failed to
give petitioner notice of said
auction sale. Such actuations
of VGCCI thus belie its claim
of good faith. In defending its
actions,
VGCCI
likewise
maintains that petitioner is
bound by its by-laws. It
argues that the G.R. is that
third persons are not bound
by
the
by-laws
of
a
corporation since they are not
privy
to
thereto.
The
exception to this is when 3 rd
persons
have
actual
or

Note: Knowledge of the bylaws must be present at the

time of the perfection of the
contract. Such is not the case
here, knowledge of the bylaws was had only during the

proceedings, as such, it
cannot bind China Bank.
However, one may argue in
the same way in Land Titles,
where banks are required to
go beyond the face of the
title as they are institutions
endowed with public interest;
in this case China Bank
should have inquired into
such by-laws before entering
into
the
transactions
mentioned.
Neither can we concede that
such contract would be
invalid just because the
signatory thereon was not the
Chairman of the Board which
allegedly
violated
the
corporations by-laws. Since
by-laws operate merely as
internal rules among the
stockholders, they cannot
affect or prejudice third
persons who deal with the
corporation, unless they have
knowledge of the same.
PMI Colleges v. NLRC,
277SCRA 462 (1997)
FACTS: PMI is an educational
institution offering courses on
basic seaman training and
other marine-related courses
hired private respondent as
contractual instructor with an
agreement that the latter
shall be paid at an hourly rte
of P30 t P50. PR then
organized classes in marine
engineering.
PR
another
instructors
were
compensated for services
rendered during the first
three periods of the abovementioned
contract.
However,
for
reasons
unknown to PR, he stopped
receiving payment for the
succeeding
rendition
of
services. Repeated demands
having likewise failed, PR was
soon constrained to file a

complaint seeking payment

for salaries earned. PMI
contended that classes in the
courses
offered
which
complainant claimed to have
remained unpaid were not
held in the school premises of
PMI. Only PR knew whether
classes
were
indeed
conducted. Later in the
proceedings,
petitioner
manifested that Mr. Tomas
Cloma Jr., a member of the
petitioners BoD wrote a letter
to the Chairman of the Board
clarifying the case of PR and
stating therein that under
PMIs
by-laws,
only
the
Chairman is authorized to
sign
any
employment
contract. A decision was
rendered by the Labor Arbiter
finding for PR. The NLRC
affirmed.
HELD: The contract would be
invalid just because the
signatory
was
not
the
chairman
which
allegedly
violated PMI by-laws but since
by-laws operate merely as
internal rules among the
stockholders, they cannot
affect or prejudice 3rd persons
who deal with the corporation
in good faith unless they
have knowledge of the same.
No proof appears on record
that PR ever knew anything
about the provisions of said
by-laws.
Petitioner
itself
merely asserts the same
without even bothering to
attach a copy or excerpt
thereof to show that there is
such a provision. That this
allegation has never been
denied by PR does not
necessarily signify admission
d. Amendment or Revision
Two modes of amending or
repealing
by
laws
or
adopting a new one:

1. By a majority vote of the

directors or trustees and the
majority vote of the outstanding
capital stock or members, at a
regular or special meeting
called for that purpose; or
2. By the board of directors
alone when delegated by 2/3 of
the outstanding capital stock or
members
Delegated power to amend,
repeal or adopt by-laws may
be revoked
Incorporation of an invalid
by-law provision is not a
misdemeanor. It does not
justify the dissolution of the
corporation. (Govt. vs. El
Hogar)
The by-laws may disqualify a
stockholder
from
being
elected into office if he has a
substantial interest in a
competitor corporation to
avoid any possible adverse
effects of conflicting interest
of a director. (Gokongwei, Jr.
vs. SEC)

F. Corporate Powers
1. General Powers, Theory of
General Capacity
2. Specific Powers, Theory of
Specific Capacity
a. Power to Extend or
Shorten Corporate Term
b. Power to Increase or
Decrease Capital Stock or
Incur, Create, Increase

Bonded Indebtedness
c. Power to Deny PreEmptive Rights
d. Power to Sell or Dispose
of Corporate Assets
e. Power to Acquire Own
Shares
f. Power to Invest Corporate
Funds
in
Another
Corporation or Business
g.
Power
to
Declare
Dividends
h. Power to Enter Into
Management Contract
i. Ultra Vires Acts
i. Applicability of Ultra
ViresDoctrine
ii. Consequences of
Ultra Vires Acts
3. How Exercised
a. By the Shareholders
b. By the Board of Directors
c. By the Officers
4. Trust Fund Doctrine

G. Board of Directors and Trustees

Composition & Qualification of
Directors.
- the board of directors of a
corporation organized in accordance
with Philippine must be composed of
not less than five (5) but not more
than fifteen (15) directors.

Qualifications:
1.) he must be a natural person;
2.) he must be capacitated to enter
into contracts;
3.) he must have at least one (1) share
of stock which shall stand as his
own name in the books of the
corporation.
The director need not have both
the legal and beneficial interests of
the shares registered in his name.
The legal title to the one (1) share
is sufficient to qualify him as a
director, provided he is the
registered owner of such share in
the stock and transfer book of the
corporation.
4.) Majority of the directors must be
residents of the Philippines;
5.) A director must not be convicted of
any
offense
punishable
by
imprisonment of more than six (6)
years, or a violation of the
corporation code within five (5)
years prior to his election.
PRINCIPAL FUNCTIONS OF THE BOARD
OF DIRECTORS
The principal functions of board of
directors:
1.) It is governing body of the
corporation. The board, unless
restricted by its charter or by-laws,
shall
have
full
control
and
management of the corporate
business
property.
The
shareholders
may,
however,
override the decision of the board
by unanimous vote. (not only
majority)
2.) It is the custodian of all corporate
properties; and,
3.) It formulates all corporate policies
and controls management.
1.
Doctrine
of
Centralized
Management
Management of corporation business
is vested in the board of directors
which is the governing and controlling
body of the corporation. Stockholders
are not required to participate directly
in the management of the corporation.

2. Business Judgment Rule

or
Doctrine
of
Business
opportunity
This doctrine refers to the case when
a director or officer of the corporation
is presented with a business venture
which can very well be handled
profitably by the corporation, he must
give that business opportunity to the
corporation and not to appropriate it
for himself. If he fails to turn it over to
the corporation, he shall be held liable
to refund to the corporation whatever
profits and benefits he may have
derived
from
such
business
opportunity.
3.
Tenure,
Qualifications
and
Disqualifications
of
Directors
or
Trustees
No
person
convicted
by
final
judgment of an offense punishable by
imprisonment for a period exceeding
six (6) years, or a violation of this
code, committed within five (5) years
prior to the date of his election or
appointment, shall qualify as a
director, trustee or officer of any
corporation.
4. Elections
a. Cumulative Voting/Straight
Voting
The manner of voting may be
straight
or
cumulative.
However, present corporations
are resorting to the cumulative
voting in order to insure the
election of more directors to
represent their interests in the
board.
Stockholders align themselves
as the majority or minority
group and they apply the
cumulative system so that they
can get elected as many
directors as they can possibly
get with their pooled or
accumulated votes to represent
each groups interest in the
Board of Directors.
The term of office of the
directors is only for one (1)
year, but they are entitled to

run for reelection if they so

desire.
b. Quorum
The quorum in a Board of
Directors meeting shall be
constituted by a majority of
directors, and every decision of
at least a majority of the
directors present in the meeting
shall be considered a valid
corporate act. All things taken
up in a meeting without a
quorum shall be null and void.
5. Removal
Directors may be removed with
or without cause by the
prescribed vote of 2/3 of the
outstanding capital stock of a
stock corporation, or by vote of
members
of
a
non-stock
corporation either at a regular
meeting or at a special meeting
called
for
the
purpose.
However, this section prohibits
removal without cause of any
director
representing
the
minority stockholders.
SEC jurisdiction over removal
it is the SEC and not the NLRC
which has original and exclusive
jurisdiction over cases involving
the removal from employment
of corporate officers.
A corporate officers dismissal is
always a corporate act and/or
an intra-corporate controversy.
In intra-corporate matters, such
as those affecting the corporate
matters, such as those affecting
the corporation, its directors,
trustees,
officers
and
shareholders, the issue of
consequential damages may be
resolved and adjudicated by the
SEC.
6. Filling of Vacancies
Vacancies in the board of
directors due to causes other
than
removal,
such
as
expiration of the term or death,
are filled up by a majority vote

of the remaining directors if

they still constitute a quorum,
or by the stockholders in a
regular meeting called for that
purpose. The director elected to
fill a vacancy shall serve only
for the unexpired term of his
predecessor in office.
Cases when vacancies in the
board of directors may be filled
up by stockholders only:
i.
In case of removal of a
director;
ii.
If the remaining directors
do
not
constitute
a
quorum;
iii.
If there is to be an
increase in the number of
directors.
7. Compensation
As a rule, directors are not paid any
compensation for performing their
duties and functions as members of
the Board. They receive per diem only
for every meeting they attend.
However, by the vote of stockholders
representing at least a majority of the
outstanding capital stock at a regular
or special stockholders meeting, the
directors may be granted extra
compensation in addition to regular
per diems. Or as long may be provided
in the by-laws.
Instances when directors may be
additional granted compensation:
1.) When there is an express
provision in the by-laws fixing
their composition;
2.) When approved by at least
a majority of the outstanding
capital stock at a regular or
special meeting;
3.) In no case shall the total
yearly
compensation
of
directors exceed 10% of the net
income before income tax of the
corporation
during
the
preceding year.
8. Fiduciaries Duties and Liability
Rules

Directors are fiduciary officers

and occupy as a board the position of
trusteeship
in
relation
to
the
stockholders from whom they derive
their power to control and direct the
affairs of the corporation, and
therefore shall exercise not only care
and diligence but utmost good faith in
the management of corporate affairs.
Thus, directors shall be solitarily liable
for
damages
suffered
by
the
corporation,
its
stockholders
or
members and other persons due to:
a.) their willful vote or assent to
unlawful
acts
of
the
corporation;
b.) their gross negligence or bad
faith in directing the affairs
of the corporation;
c.) for acquiring any personal or
pecuniary interest in conflict
with their duties as directors
and
officers
of
the
corporation.
A director, trustee or officer of
the corporation shall also be liable as
trustee for the corporation:
a.) he acquires personal and
adverse interest In the
corporate matters;
b.) he fails to turn over to the
corporation all profits which
otherwise
would
have
accrued to the corporation.
9. Responsibility for Crimes
A corporation, being a juridical entity
may act only through its directors,
officers and employees. Obligations
incurred in them, acting as such
corporate agents, are not theirs but
the direct accountabilities of the
corporation they represent.
10. Inside Information
According to the Securities
Regulations Code, insider means (a)
the issuer; (b) a director or officer (or
person performing similar functions)
of, or a person controlling the issuer;
(c) a person whose relationship or
former relationship to the issuer gives
or gave him access to material
information about the issuer or the
security that is not generally available
tote
public;
(d)
a
government

employee, or director, or officer of an

exchange, clearing agency and/or selfregulatory organization or who has
access to material information about
an issuer or a security that is not
generally available to the public; (e) a
person who learns such information by
a communication from any of the
foregoing insiders.
11. Contracts
a. By Self-Dealing Directors with
the Corporation
A director or trustee may
validly enter into a contract with
hold own corporation if:
(1.)
his presence in
the board
is not
required to constitute
a quorum in the board
meeting
for
the
approval
of
his
contract;
(2.)
his vote is not
necessary
for
the
approval
of
the
contract;
(3.)
the contract is fair
and reasonable; and,
(4.)
if it is an officer
who is dealing with
the corporation he has
the
authorization
given by the board of
directors.
b. Between Corporations with
Interlocking Directors
An interlocking director is
one who serves as a director in
two or more corporations. Such
contract is subject to following
conditions:
(a) that the contract is
fair and reasonable;
(b) that there is no fraud;
(c) that the interlocking
directors presence is
not
necessary
to
constitute a quorum in
both corporations;
(d) that his vote is not
necessary
for
the
approval
of
the
contract.

c. Management Contracts
Management
contracts
are agreements whereby as
corporation, subject to some
legal requirements, delegates
the power of its management to
another person or to another
corporation for a certain period
as stipulated in the agreement,
but not exceeding five (5) years
for any one term.
12. Executive Committee
It is a committee created
by the BOD as authorized in the
by-laws and is composed of
three (3) directors. Its principal
function is to assist the Board in
the
governance
of
the
corporation, the execution of its
management policies, and in
the performance of such other
matters as may be delegated it
in the by-laws or by a majority
vote of the Board.
However, the Executive
Committee cannot perform any
of the following:
1.) approval of any
action for which
shareholders
approval is also
required;
2.) the filling of
vacancies
in
the board;
3.) the amendment
or repeal of bylaws
or
the
adoption of new
by-laws;
4.) the amendment
or repeal of any
resolution
of
the board which
by its express
terms is not so
amendable or
repealable;
5.) a distribution of
cash dividends
tot
the
shareholders.
13. Meetings

Meetings of directors, trustees,

stockholders, or members may be
regular or special.
a. Regular or Special
i. When and Where
In
case
of
regular
meetings,
in
case
of
stockholders may be held
annually on the date fixed in the
by-laws or on any date in April
each year as determined by the
BOD. In the case of the
directors, regular meetings may
be held monthly or as provided
in the by-laws.
These are held at the
principal place of business of
the corporation but for the BOD
may be held also at any
specified place.
On the other hand, in the
case of special meetings of
either
the
BOD
or
the
stockholders may be provided
in the by-laws or from time to
time as deemed necessary.
ii. Notice
Written notice of the
meeting must be sent two (2)
weeks prior to the scheduled
meeting to all stockholders of
record. In special meetings, it is
sent one (1) week prior to the
meeting.
b. Who Presides
When there is no person
authorized to call a meeting, a
stockholder or member may
petition the SEC to authorize
the calling of a meeting. Upon
showing
of
good
cause
therefore, the SEC may issue an
order
to
the
petitioning
stockholder
or
member
authorizing him to call a
meeting of the corporation after
first giving the proper notice to
the stockholders required by
this Code or the by-laws.
c. Quorum
Quorum is a majority of
the members or officers of an
organization or body that, when

duly assembled, is a requisite

number to do business. It shall
consist of the stockholders
representing a majority of the
outstanding capital stock or
majority of the members in a
non-stock corporation.
d.
Rule
on
Abstention
Considered as not counted.

a. Individual Suit
b. Representative Suit
c. Derivative Suit
5. Obligation of a Stockholder
6. Meetings
a. Regular or Special
i. When and Where
ii. Notice
b. Who Calls the Meetings
c. Quorum
d. Minutes of the Meetings

I. Capital Structure
1. Subscription Agreements
H. Stockholders and Members
1. Rights of a Stockholder and
Members
a. Doctrine of Equality of
Shares
2. Participation in Management
a. Proxy
b. Voting Trust
c. Cases When Stockholders
Action is Required
i. By a Majority Vote
ii. By a Two-Thirds
Vote
iii.
By
Cumulative
Voting
3. Proprietary Rights
a. Right to Dividends
b. Right of Appraisal
c. Right to Inspect
d. Pre-Emptive Right
e. Right to Vote
f. Right to Dividends
g. Right of First Refusal
4. Remedial Rights

Q: What is a subscription
contract?
A: It is a contract for the
acquisition of unissued stock in
an existing corporation or a
corporation still to be formed. It
is
considered
as
such
notwithstanding the fact that
the parties refer to it as
purchase
or
some
other
contract. (Sec. 60)
Q: What are the kinds of
subscription contracts?
A:
1. GR: Preincorporation subscription
entered into before the incorporation
and irrevocable for a period of six (6)
months from the date of subscription
unless all other subscribers consent or if
the corporation failed to materialize. It
cannot also be revoked after filing the
Articles of Incorporation with the SEC
(Sec. 61)

2.

than actual cash,

or
consists
of
intangible property
such as patents of
copyrights

initially
be
determined by the
incorporators
or
the
board
of
directors, subject
to approval by the
SEC.
o Note: Property
should
not
be
encumbered.
Otherwise, it would
impair
the
consideration
c) Labor performed for or
services actually rendered to
the
corporation
(must
be
capable of being valuated);
d)
Previously
incurred
indebtedness
of
the
corporation;
e) Amounts transferred from
unrestricted retained earnings
to stated capital (declaration of
stock dividends); andOL LAW
f)
Outstanding
shares
exchanged for stocks in the
event of reclassification or
conversion.

XPN: When creditors will be

prejudiced thereby.
Postincorporation
subscription

entered into after incorporation.

Transfer
for
consideration
of
treasury shares is a sale by the
corporation (not subscription). A
transfer of fully paid shares by a
stockholder to a third person is a
sale. But it seems that assignment
by a subscriber of his unpaid
subscription would require that the
requisites for valid release from
subscription must be complied with
Shareholders are not creditors of
the corporation with respect to
their shareholdings thereto and the
principle of compensation or set-off
has no application
Not necessarily required to be in
writing
Once subscription contract is
perfected, SH becomes the debtor
of the corporation. He is liable to
pay any unpaid portion of the
subscription. He can also be made
personally liable to the creditors of
the corporation to the extent of his
unpaid subscription
General Rule: SH is not liable to
pay
interest
on
his
unpaid
subscription.
Exception: if required
by the by-laws (66)

2. Consideration for Stocks

Stocks shall not be issued for a

consideration less than the par or
issued price thereof.
Consideration for the issuance of
stock may be any or a combination
of any two or more of the following:
a) Actual cash paid to the
corporation;
b)
Property,
tangible
or
intangible, actually received by
the corporation and necessary
or convenient for its use and
lawful purposes at a fair
valuation equal to the par or
issued value of the stock issued
o
Valuation
of
consideration other

Prohibited consideration: Shares of

stock shall not be issued in
exchange for promissory notes or
future service (because realization
is uncertain)
Future service may be used as
consideration
provided
that
certificates of stock will be issued
only after the performance of such
services.
Same consideration applies for the
issuance
of
bonds
by
the
corporation.
Fixing of issued price of no-par
value shares:
The issued price of no-par
value shares may be
fixed:
a) in the AOI or
b) by the BOD pursuant
to authority conferred

upon it by the AOI or the

by-laws, or
c) in the absence thereof,
by the SHs representing
at least a majority of the
outstanding capital stock
at a meeting duly called
for the purpose.

The value of the consideration

received must be equal to the issue
price of the shares of stocks which
in no case shall be less than par

3. Shares of Stock
a. Nature of Stock
b. Subscription Agreements
It is a contract for the
acquisition of unissued
stock in an existing
corporation
or
a
corporation still to be
formed. It is considered
as such notwithstanding
the fact that the parties
refer to it as purchase or
some
other
contract.
(Sec. 60)
c. Consideration for Shares
of Stock
Consideration
for
the
issuance of stock may be
any or a combination of
any two or more of the ff:
1. Actual cash paid to the
corporation;
2. Property, tangible or
intangible,
actually
received
by
the
corporation
and
necessary or convenient
for its use and lawful
purposes
at
a
fair
valuation equal to the par
or issued value of the
stock issued;
3. Labor performed or
services
actually
rendered
to
the
corporation;
4. Previously incurred
indebtedness
by
the
corporation;

5. Amounts transferred
from
unrestricted
retained
earnings
to
stated capital; and
6. Outstanding shares in
exchange for stocks in
the
event
of
reclassification
or
conversion.
Stocks shall not be
issued in exchange
of
promissory
notes
or future
services.
d. Watered Stock
i. Definition
Q: What is a
watered stock?
A: A stock issued
in exchange for
cash,
property,
share,
stock
dividends,
or
services
lesser
than its par value.
Watered
Stocks
include
stocks:
1. Issued
without
considera
tion
(bonus
share)
2. Issued
for
a
considera
tion other
than
cash, the
fair
valuation
of which
is
less
than its
par
or
issued
value
(discount
share)
3. Issued as
stock
dividend

when
there are
no
sufficient
retained
earnings
to justify
it
4. Issued as
fully paid
when the
corporati
on
has
received
a lesser
sum
of
money
than its
par
or
issued
value
Note: Water in
the
stock
represents
the
difference between
the fair market
value at the time
of the issuance of
the stock and the
par or issued value
of said stock. Both
par and no par
stocks can thus be
watered stocks.
Watered
stocks
refer
only
to
original issue of
stocks but not to a
subsequent
transfer of such
stocks
by
the
corporation.
ii. Liability of Directors
for Watered Stocks
Q: What is the
extent
of
the
liability
of
directors
who
consented to the
issuance
of
a
watered stock?

A: Directors who
consent
to
the
issuance
of
a
watered stock are
personally
liable.
Although
the
general rule is that
directors, trustees
or officers are not
solidarily
liable
with
the
corporation,
consenting to the
issuance
of
a
watered stock is
one
of
the
exceptions.
Note: Pursuant to
Sec. 65 of the
Corporation Code,
a director or officer
who consents to
the issuance of a
watered stock or
having knowledge
thereof does not
forthwith express
his
written
objection with the
corporate
secretary is liable
jointly
and
severally with the
stockholder
concerned for the
water in the stock
in favor of the
corporation and its
creditors.
iii. Trust Fund Doctrine
for
Liability
for
Watered Stocks
Q: What is the
trust
fund
doctrine?
A: The subscribed
capital stock of the
corporation is a
trust fund for the
payment of debts
of the corporation
which the creditors
have the right to

look up to satisfy
their credits, and
which
the
corporation
may
not dissipate.
Q: Where does
the
solidary
liability
of
directors
consenting
to
the issuance of
watered
stock
emanates?
A: The solidary
liability
of
the
directors emanates
from the fiduciary
character of the
position of director
or
corporate
officer.
e. Situs of the Shares of
Stock
Q: Where is the
situs of shares of
stock?
A: The situs of
shares of stock is
the country where
the corporation is
domiciled.
Note:
For
purposes
of
execution,
attachment,
garnishment
or
auction sale, it is
not the domicile or
the residence of
the owner of the
shares
but
the
domicile
or
residence of the
corporation, which
is the place of its
principal business,
which determines
the situs of the
shares of stock.
f. Classes of Shares of Stock

Common stock a stock which

entitles its owner to an equal
pro-rata division of profits, if
there be any, but without any
preference or advantage in that
respect
over
any
other
stockholder
or
class
of
stockholders.
Preferred stock a stock that
gives the holder a preference
over the holder of common
stocks with respect to the
payment of dividends and/or
with respect to distribution of
capital upon liquidation.
Limitations
on
preferred stock:
1. Must be issued
with a stated par
value; and
2. The preferences
must be stated in
the
articles
of
incorporation and
in the certificate of
stock,
otherwise,
each share shall
be, in all respect,
equal
to
every
other share.
The
guarantee
to
preference
as
to
dividends does not create
a relation of debtor and
creditor
between
the
corporation
and
the
holders of such stock.
The
board
has
the
discretion to determine
whether or not to declare
dividends.
Preferred shares are
presumed to be nonparticipating.
Participating preferred shares
the holders thereof are still
given the right to participate
with the common stockholders
in dividends beyond their stated
preference.
Cumulative preferred share
those that entitle the owner
thereof to payment not only of
current dividends but also back

dividends not previously paid

whether or not, during the past
years, dividends were declared
or paid.
In absence of express
stipulation, preferred shares are
presumed to be non-cumulative.
Non-cumulative
preferred
shares those which grant the
holders of such shares only to
the
payment
of
current
dividends
but
not
back
dividends,
when
and
if
dividends are paid, to the
extent agreed upon before any
other stockholders are paid the
same.
Types
of
noncumulative preferred shares:
1.
Discretionary
dividend type
gives the holder of
such shares the
right
to
have
dividends
paid
thereon
in
a
particular
year
depending on the
judgment
or
discretion of the
board of directors.
2. Mandatory if
earned
type

impose a positive
duty on directors
to
declare
dividends
every
year when profits
are earned.
3.
Earned
cumulative
or
dividend credit
gives the holder
thereof the right to
arrears
in
dividends if there
were profits earned
during the previous
years
but
dividends were not
declared.
Unless the right to
vote is clearly withheld, a
preferred stockholder has
the right to vote.

Preference
upon
liquidation
must
be
clearly
indicated
otherwise they shall be
placed on equal footing
with other shares.
Par and no par value shares
Par value shares
those whose value are
fixed in the articles of
incorporation.
Par
value
shares
cannot be issued nor sold
by the corporation at less
than par.
No par value shares
those whose issued price
are not stated in the
certificate of stock but
which may be fixed in the
articles of incorporation,
or by the board of
directors
when
so
authorized by the said
articles or by the by-laws,
or in the absence thereof,
by
the
stockholders
themselves.
Limitations of no par
value shares:
1. Such shares,
once issued, are
deemed fully paid
and
thus,
non
assessable;
2.
The
consideration
for
its issuance should
not be less than
P5.00;
3.
The
entire
consideration
for
its
issuance
constitutes capital,
hence,
not
available
for
dividend
declaration;
4. They cannot be
issued as preferred
stock; and
5. They cannot be
issued by banks,
trust
companies,
insurance

companies, public
utilities
and
building and loan
associations.
Advantages to the
issuance of no par value
shares:
1.
Flexibility
in
price;
2. Evasion of the
danger of liability
upon
watered
stock; and
3. Disappearance
of personal liability
on the part of the
holder thereof for
unpaid
subscription.
Voting and non-voting shares
Voting shares gives
the holder thereof the
right
to
vote
and
participate
in
the
management
of
the
corporation through the
exercise of such right,
either at the election of
the board of directors, or
in any manner requiring
the
stockholders
approval.
Non-voting shares
do not grant the holder
thereof the right to vote
except
under
the
penultimate paragraph of
Sec. 6.
Only preferred and
redeemable shares may
be denied the right to
vote.
There must always be
a class or series of shares
which
have
complete
voting rights.
Non-voting
shares
shall
nevertheless
be
entitled to vote on the
following matters:
1. Amendment of
the
articles
of
incorporation;

2. Adoption and
amendment of bylaws;
3.
Sale,
lease,
exchange,
mortgage, pledge
or other disposition
of
all
or
substantially all of
the
corporate
property;
4.
Incurring,
creating
or
increasing bonded
indebtedness;
5.
Increase
or
decrease of capital
stock;
6.
Merger
or
consolidation
of
the
corporation
with
another
corporation
or
other corporations;
7. Investment of
corporate funds in
another
corporation
or
business
in
accordance
with
this Code; and
8. Dissolution of
the corporation.
Except as provided in
the
penultimate
paragraph of Sec. 6, the
vote
necessary
to
approve
a
particular
corporate act as provided
in this Code shall be
deemed to refer only to
stocks with voting rights.
Founders shares
Sec. 7. Founders shares. Founders' shares classified as
such
in
the
articles
of
incorporation may be given
certain rights and privileges not
enjoyed by the owners of other
stocks, provided that where the
exclusive right to vote and be
voted for in the election of
directors is granted, it must be
for a limited period not to

exceed five (5) years subject to

the approval of the Securities
and Exchange Commission. The
five-year
period
shall
commence from the date of the
aforesaid
approval
by the
Securities
and
Exchange
Commission.
Redeemable shares
Redeemable shares may be
issued by the corporation when
expressly so provided in the
articles of incorporation.
They may be purchased or
taken up by the corporation
upon the expiration of a fixed
period,
regardless
of
the
existence
of
unrestricted
retained earnings in the books
of the corporation, and upon
such other terms and conditions
as may be stated in the articles
of incorporation, which terms
and conditions must also be
stated in the certificate of stock
representing said shares.
Treasury shares
Treasury shares are
shares of stock which
have been issued and
fully
paid
for,
but
subsequently reacquired
by the issuing corporation
by purchase, redemption,
donation or through some
other lawful means. Such
shares may again be
disposed
of
for
a
reasonable price fixed by
the board of directors.
Treasury shares may
again be issued for a
price less than par.
Treasury shares have
no voting and dividend
rights. Such rights are
only
granted
to
outstanding shares of
stock. (CIR vs. Manning)

4.
Payment
Subscription

of

Balance

of

a. Call by Board of Directors

Q: How does the board of
directors call for the payment of
unpaid subscription?
A: A call is made in a form of
board resolution that unpaid
subscription to the capital stock
are due and payable and the
same
or
such
percentage
thereof shall be collected,
together
with
all
accrued
interest, on a specified date and
that if no payment is made
within 30 days from said date,
all stocks covered by said
subscription shall thereupon
become delinquent and shall be
subject to public auction sale.
Q: Is the call of the board of
directors always necessary
to
collect
payment
for
unpaid subscription?
A: No. A call is not necessary
where
the
subscription
contract
specifies the date of payment.
b. Notice Requirement
Q: What is the notice
requirement in case there is
a call of the board of
directors for payment of
subscription?
A: The notice of the call has to
be served on the stockholders
concerned
in
the
manner
prescribed in the call, which
may either be by registered
mail and/or personal delivery
and publication.
c. Sale of Delinquent Shares
i.
Effect
of
Delinquency
Q: What are the
effects of stock
delinquency?
A:
1. Upon the stockholder
a. Accelerates the
entire
amount
of
the unpaid
subscription;

2.

b. Subjects the
shares
to
interest
expenses and
costs;
c.
Disenfranchi
ses
the
shares from
any right that
inheres to the
to
a
stockholder,
except
the
right
to
dividends
(but which
shall
be
applied
to
any amount
due on said
shares, or, in
the case of
stock
dividends, to
be withheld
by
the
corporation
until
full
payment of
the
delinquent
shares. (Sec.
43)
Upon the director
owning
delinquent
shares
a.
If
the
delinquent
stockholder
is a director,
the director
shall
continue to
be a director
but he cannot
run for re
election
(Sundiang
and Aquino,
Reviewer in
Commercial
Law, 2006)
b. A delinquent
stockholder
seeking to be
elected
as
director may
not be a
candidate
for, not be

duly elected
to, the board.

ii. Call by Resolution of

the Board of Directors
Q: Does a call of the board
of directors required to
declare
a
stock
delinquent?
A: No. Stocks become
delinquent
when
the
unpaid subscription and
accrued interests thereon
are not paid within 30
days from their due date
as specified in the
subscription contract or in
the call by the board of
directors.
The
delinquency
is
automatic after said 30
day period and does not
need a declaration by the
board making the stock
delinquent.

iii. Notice of Sale

Q: What is the notice
requirement in case of sale
of delinquent stock?
A: The notice of sale and
copy of
the
board
resolution ordering the
sale shall be:
1. Sent
to
every
delinquent
stockholder
either
personally or by
registered mail or;
2. Published once a
week
for
2
consecutive weeks in
a
newspaper
of
general circulation in
the province or city
where the principal
office
of
the
corporation,
as
specified in its articles
of incorporation, is
located.

iv. Auction Sale and

the Highest Bidder
Q: What is the procedure
for the auction sale of a
delinquent share?

A: The procedure is as
follows:
1. The board of directors
shall pass a board
resolution
ordering
the sale of delinquent
stock.
2. A notice of sale and
copy of the board
resolution
ordering
the sale shall be sent
to every delinquent
stockholder
either
personally or by
registered mail or;
published once a
week
for
2
consecutive weeks in
a
newspaper
of
general circulation in
the province or city
where the principal
office
of
the
corporation,
as
specified in its articles
of incorporation, is
located.
3. The minimum bid
shall be the full
amount of the balance
on the subscription
plus the accrued
interest,
cost
of
advertisement
and
expenses of sale for
the smallest number
of shares.
4. The sale will be
awarded
to
the
highest bidder who
will be given a
certificate of sale and
the same will be
registered
in
the
books
of
the
corporation.
5. Should there be no
bidder,
the
corporation may bid
for the same if it

has unrestricted
earnings
to
cover
the
amount.
5. Certificate of Stock
a. Nature of the Certificate
A certificate of stock is
the best evidence of the
rights and status of a SH

(although not a condition

precedent
to
the
acquisition
of
such
rights), and is convenient
for
the
purposes
of
transfer (Campos).
Contents
of
a
certificate:
- certifies that the
person named is a
holder
or owner of a
stated number of
shares
- kind of shares
issued
- date of issuance
- par value, if par
value shares
- signed by the
proper officer of
the corp.
(usually the pres.,
and the sec.)
bears
the
corporate seal
A
certificate
of
stock is a prima
facie proof that the
stock
described
therein is valid and
genuine
in
the
absence
of
an
evidence to the
contrary
b. Uncertificated Shares
Q: What is an uncertificated
share?
A: An uncertificated share is a
subscription duly recorded in
the corporate books but has no
corresponding
certificate
of
stock yet issued.
Q:
May
a
stockholder
alienate his shares even if
there is no certificate of
stock
issued
by
the
corporation?
A: Yes. The absence of a
certificate of stock does not
preclude the stock holder from
alienating or transferring his
shares of stock.

Q: In case of a fully paid

subscription
but
the
corporations has not yet
issued a certificate of stock,
how can the transfer be
effected?
A: In case of a fully paid
subscription,
without
the
corporation having issued a
certificate of stock, the transfer
may be effected by the
subscriber
or
stockholder
executing a contract of sale of
deed of assignment covering
the number of shares sold and
submitting said contract or
deed to the corporate secretary
for recordal.
Q: How are transfers of
subscription not fully paid
done?
A: In case of subscription not
fully paid, the corporation may
record such transfer, provided
that the transfer is approved by
the board of directors and the
transferee executes a verified
assumption of obligation to pay
the unpaid balance of the
subscription.
c. Negotiability
i. Requirements
Valid Transfer of Stocks

for

Q: Is a stock certificate
negotiable?
A: No. It is regarded as
quasinegotiable in the
sense that it may be
transferred
by
endorsement
coupled
with delivery.
Q: Why is a stock
certificate
not
negotiable?
A: Because the holder
thereof takes it without
prejudice to such rights
or
defenses
as
the
registered
owners
or
transferors creditor may
have under the law,
except insofar as such
rights or defenses are

subject to the limitations

imposed by the principles
governing estoppel. (De
los Santos v. Republic,
G.R. No. L4818, Feb. 28,
1955)
Q:
What
are
the
requirements
for
a
valid transfer of stock?
1.
2.
3.

A:
The certificate of stock must be duly
endorsed by the transferor or his legal
representative.
There must be delivery of the stock
certificate.
To be valid against third parties, the
transfer must be recorded in the books
of the corporation. (G.R. No. 124535,
September 28, 2001)

d. Issuance
i. Full Payment
A corporation may
now, in the absence of
provisions in their by
laws to the contrary,
apply payments made
by
subscribers
stockholders,
either
as:
Full payment for
the corresponding
number of shares
of stock, the par
value of each of
which is covered
by such payment;
or
ii. Payment Pro-Rata
Payment prorata
to each and all the
entire number of
shares subscribed
for. (Baltazar v.
Lingayen
Gulf
Electric Power Co.,
Inc, G.R. No. L
1623638, June 30,
1965)
Q:
What
Doctrine

is

the
of

Individuality
of
Subscription?
A: A subscription is one
entire
and
indivisible
whole contract. It cannot
be divided into portions.
(Sec. 64)
e.
Lost
Certificates

or

Destroyed

Requirements
and
procedure for issuance of
new certificates of stock
in lieu of those lost,
stolen or destroyed:
1. The registered owner
of a certificate of stock in
a corporation or his legal
representative shall file
with the corporation an
affidavit
in
triplicate
setting forth:
a.
The
circumstances as
to
how
the
certificate was lost,
stolen
or
destroyed;
b. The number of
shares represented
by such certificate;
c.
The
serial
number
of
the
certificate; and
d. The name of the
corporation which issued
the same.
2. He shall also submit
such other information
and evidence which he
may deem necessary.
3. Publication of a notice
in a newspaper of general
circulation published in
the place where the
corporation
has
its
principal office, once a
week for 3 consecutive
weeks at the expense of
the registered owner of
such certificate of stock.
4. If no contest has been
presented within 1 year
from the date of the last

publication, the right to

make such contest shall
be
barred
and
said
corporation shall cancel
in its books the certificate
of stock which has been
lost, stolen or destroyed
and issue in lieu thereof
new certificate of stock.
However, the registered
owner may file a bond or
other security, effective
for a period of 1 year, for
such amount and in such
form and with such
sureties
as
may
be
satisfactory to the board
of directors, in which case
a new certificate may be
issued even before the
expiration of the one 1
year period.
5. If a contest has been
presented
to
said
corporation or if an action
is
pending
in
court
regarding the ownership
of said certificate of
stock, the issuance of the
new certificate of stock
shall be suspended until
the final decision by the
court
regarding
the
ownership
of
said
certificate of stock.
Except in case of
fraud,
bad
faith,
or
negligence on the part of
the corporation and its
officers, no action may be
brought
against
any
corporation which shall
have issued certificate of
stock in lieu of those lost,
stolen
or
destroyed
pursuant
to
the
procedure
abovedescribed.
6. Stock and Transfer Book
a. Contents
Q:
What
are
the
contents of a stock
and transfer book?

2.

A:
1. All stocks in the name of the
stockholders
alphabetically
arranged
Amount paid and unpaid on all stocks and the date of
payment of any installment

3. Alienation,
sale
or
transfer of stocks
4. Other entries as the
bylaws may prescribe
b. Who
Entries

May

Make

Valid

Q: Who may make

proper entries in stock and
transfer books?
A: The obligation and
duty
falls
on
the
corporate secretary. If the
corporate
secretary
refuses to comply, the
stockholder
may
rightfully bring suit to
compel performance. The
stockholder cannot take
the law on to his hands;
otherwise
such
entry
shall be void. (Torres, Jr.
v. CA, G.R. No. 120138,
Sept. 5, 1997)
7. Disposition and Encumbrance of
Shares
a. Allowable Restrictions on
the Sale of Shares
Q: Can a stockholder
dispose of his shares
without
any
restriction?
A: Shares of stock are
regarded
as
personal
property
of
the
stockholder and as a
general rule, he may
dispose of them as he
sees
fit
unless
the
corporation
has
been
dissolved, or unless the
right to do so has been
restricted in the articles
of incorporation and in
the stock certificate or
the owners right of

disposing his shares has

been hampered by his
own actions.
Q: Can the corporation
provide regulations to
the sale/transfer of
the
shares
of
stockholders?
A: Yes, but the authority
granted to a corporation
to regulate the transfer of
its
stock
does
not
empower it to restrict the
right of a stockholder to
transfer his shares, but
merely authorizes the
adoption of regulations as
to the formalities and
procedure to be followed
in
effecting
transfer
(Thomson vs. CA, G.R.
No. 116631, October 28,
1998).
Q:
What
are
the
requisites
for
a
restriction to be valid?
A:
To
be
valid,
restrictions
on
the
sale/transfer of shares
must be:
1. Provided
in
the
articles
of
incorporation and
2. it must be printed at
the
back
of
the
certificate of stock.
Note:
The
latter
requirement is needed to
bind third persons who
may buy or deal with the
shares of stock.
b. Sale of Partially Paid
Shares
Q: May a shareholder
sell his shares if the
payment
of
his
subscription
is
incomplete?
A: Yes. The incomplete
payment
of
the
subscription does not
preclude the subscriber
from alienating his shares

of stock. Since in this

case, there is still no
stock certificates that can
be issued (See Sec. 64),
the transfer may thru a
Share
Purchase
Agreement Contract.
c. Sale of a Portion of
Shares Not Fully Paid
Q: Is the sale of a
portion of shares not
fully paid allowed?
A: Yes, in case of
delinquent shares.
d. Sale of All of Shares Not
Fully Paid
Q: Is the sale of shares
of not fully paid subscription
allowed?
A: Yes but to bind the
corporation, consent of
the corporation shall be
obtained
unless
not
allowed by AOI.
e. Sale of Fully Paid Shares
Q: Is the sale of fully
paid shares allowed?
A: Yes, even without the
consent
of
the
corporation as long as
the requisites for the
valid transfer of shares
are complied.
f. Requisites of a Valid
Transfer
Q:
What
are
the
requirements
for
a
valid transfer of stock
already fully paid and
covered
by
stock
certificates?
1.
2.
3.

A:
There must be a delivery of the stock
certificate.
The certificate of stock must be duly
endorsed by the transferor or his legal
representative.
To be valid against third parties, the
transfer must be recorded in the books
of the corporation (Rural Bank of Lipa
vs. CA, G.R. No. 124535, September
28, 2001).

g. Involuntary Dealings with

Shares
Q: What is involuntary
dealing?
A: It refers to such writ,
order or process issued
by a court of record
affecting shares of stocks
which by law should be
registered to be effective,
and
also
to
such
instruments which are
not the willful acts of the
registered
owner
and
which may have been
executed even without
his knowledge or against
his consent.
J. Dissolution and Liquidation
1. Modes of Dissolution
a. Voluntary
i. Where No Creditors
Are Affected
ii. Where Creditors Are
Affected
iii. By Shortening of
Corporate Term
b. Involuntary
i. By Expiration of
Corporate Term
ii. Failure to Organize
and
Commence
Business
Within
2
Years
from
Incorporation
iii.
Legislative
Dissolution
iv. Dissolution by the
SEC
on
Grounds
under
Existing Laws
2. Methods of Liquidation
a. By the Corporation Itself
b. Conveyance to a Trustee
within a Three-Year Period
c.
By
Management
Committee or Rehabilitation
Receiver
d. Liquidation after Three
Years

K. Other Corporations
1. Close Corporations
Requirements
to
be
a
Close
Corporation:
a.) all of the corporations
stocks issued of all classes
shall be held or owned by
not more than twenty (20)
persons;
b.) all stocks issued shall be
subject to one or more
restrictions
on
transfer
permitted by this title;
c.) the corporation shall not list
in any stock exchange or
make any public offering of
any of its stocks of any class.
A corporation is not a close
corporation when at least twothirds (2/3) of its voting stock or
voting rights are owned or
controlled
by
another
corporation.
Any
corporation
may
be
incorporated
as
a
close
corporation except the following
which
vested
with
public
interest:
i.)
mining
or
oil
companies;
ii.)
stock exchanges;
iii.)
banks
and
insurance
companies;
iv.)
public
utilities,
educational,
and
other corporations
vested with public
interest.
a. Characteristics of a Close
Corporation

Management of corporate
business
is
by
the
stockholders and not by the
board of directors, in which
case:
i.)
stockholders
do
not need to meet
to elect directors;
ii.)
stockholders shall
be deemed to be
the directors;
iii.)
stockholders shall
be
subject
to
liabilities
pertaining
to
directors.
b. Validity of Restrictions on
Transfer of Shares
All charter restrictions on
the transfer of shares
must appear in:
1.) the
articles
of
incorporation;
2.) the by-laws;
3.) the
certificate
of
stock;
Otherwise,
such
restrictions will not be
binding
on
any
purchaser
in
good
faith.
The
most
common restriction is
similar to the right of
pre-emption
of
stockholders in an
open
stock
corporation.
c. Issuance or Transfer of Stock
in Breach of Qualifying
Conditions
Stock of a close corporation
is not transferrable when
issued for transferred to:
1.) a
person
not
entitled to be a
holder under the
articles
of
incorporation;
2.) to a person not
qualified as per the
certificate of stock;
3.) to
persons
exceeding
the

required
twenty
(20);
4.) in violation of the
restrictions
specified in the
certificate;
5.) to a person who
has notice that
a. he is not
eligible;
b. that
the
issue to him
would
exceed the
required
twenty
stockholders
permitted to
hold stock;
or,
c. the transfer
to him is in
violation of
the
restriction or
transfer
of
stock.
d. When Board Meeting is
Unnecessary or Improperly Held
When Unnecessary:
(1.) Before or after
such action is
taken
written
consent
thereto
is
signed by all
the directors;
(2.) All
the
stockholders
have actual or
implied
knowledge of
the action and
make
no
prompt
objection
thereto
in
writing;
(3.) The
directors
are
accustomed to
take
informal
action with the
express
or
implied

acquiescence
of
all
the
stockholders;
(4.) All
the
directors have
express
or
implied
knowledge of
the action in
question
and
none of them
makes prompt
objection
thereto
in
writing.
When Improperly Held
If a directors meeting
is held without proper call
or notice, an action taken
therein within corporate
powers is deemed ratified
by a director who failed
to attend, unless he
promptly files his written
objection
with
the
secretary
of
the
corporation after having
knowledge thereof.
e. Pre-Emptive Right
The
pre-emptive
right of stockholders in
close corporation shall
extend to all stock to be
issued,
including
reissuance of treasury
shares,
whether
for
money,
property
or
personal services, or in
payment of corporate
debts, unless the articles
of incorporation provide
otherwise.
f. Amendment of Articles of
Incorporation
Any
amendment
to
the
articles of Incorporation to:
1.) Delete
or
remove
any
provision in the
articles
of
incorporation;
or

2.) Reduce
a
quorum
or
voting
requirement in
the
Articles
requires
the
affirmative
vote of at least
two-thirds (2/3)
of
the
outstanding
capital
stock,
whether with or
without voting
rights, or of
such
greater
proportion
of
shares
as
provided in the
Articles
of
Incorporation.
g. Deadlocks
Deadlock
means
stagnation
in
the
management
of
the
corporations
business
and affairs due to the
split and divided action of
directors or stockholders
such that the required
vote for the approval of
any corporate act cannot
be obtained.
2. Non-Stock Corporations
a. Definition
A
non-stock
corporation is one where
no part of its income is
distributable as dividends
to its members, trustees,
or officers, subject to the
provisions of the Code on
dissolution.
b. Purposes
Non-stock
corporations
may
be
formed or organized for
charitable,
religious,
educational, professional,
cultural,
fraternal,
literary, scientific, social,
civic, service, or similar
purposes,
like
trade,

industry, agricultural and

like chambers, or any
combination
thereof,
subject to the special
provisions of this title
governing
particular
classes
of
non-stock
corporations.
c. Treatment of Profits
The
provisions
governing
stock
corporations,
when
pertinent,
shall
be
applicable to non-stock
corporations, except as
may be covered by
specific provisions of this
title.
d. Distribution of Assets upon
Dissolution
Rules for Distribution:
1.) All
liabilities
and obligations
of
the
corporation
shall be made
therefor;
2.) Assets held by
the corporation
upon
a
condition
requiring
return, transfer,
or conveyance,
and
which
condition
occurs
by
reason of this
dissolution,
shall
be
returned,
transferred, or
conveyed
in
accordance
with
the
requirements;
3.) Assets received
and held by the
corporation
subject
to
limitations
permitting their
use only for

charitable,
religious,
benevolent,
educational, or
similar
purposes;
4.) Assets
other
than
those
mentioned
in
the preceding
paragraphs, if
any, shall be
distributed
in
accordance
with
the
provisions
of
the articles of
incorporation or
the by-laws;
5.) In any other
case,
assets
may
be
distributed such
people,
societies,
organizations or
corporations,
whether or not
organized
for
profit.

3. Religious Corporations
Religious
corporations
may be incorporated by one or
more persons, such corporation
may
be
classified
into
corporation sole and religious
societies.
4. Foreign Corporations
Foreign Corporation is
one which is organized or
chartered under the laws of an
outside state or country.
a. Bases of Authority over
Foreign Corporations
i. Consent
Obtaining
of
license,
which
is
tantamount to consent, is
required to subject the
foreign corporation doing
business
in
the

Philippines
to
the
jurisdiction of the courts.
ii. Doctrine of Doing
Business
(related
to
definition under the
Foreign
Investments Act, R.A. No.
7042)
Under
R.A.
5455,
doing business in the
Philippines
means
soliciting
of
orders,
purchases,
service
contracts, opening offices
management,
has
supervision or control of
any domestic subsidiary,
or performing any other
act which implies a
continuity of commercial
dealings
or
arrangements.
b. Necessity of a License to Do
Business
i. Requisites for Issuance
of a License
Foreign Corporations
are required to get a license by
the Bureau of Investments if:
(a) It owns more
than 40% of the
voting stocks of
a
domestic
corporation; or,
(b) It owns more
than 30% of the
authorized
capital stock of
a
domestic
corporation.
ii. Resident Agent
A resident agent
maybe
either
an
individual residing in the
Philippines or a domestic
corporation
lawfully
transacting business I the
Philippines;
provided,
that in the case of an
individual, he must be of
good moral character and
of
sound
financial
standing.

c. Personality to Sue
No foreign corporation
transacting business in the
Philippines without a license, or
its successor or assigns, shall be
permitted
to
maintain
or
intervene in any action, suit or
proceeding in any court or
administrative agency of the
Philippines. Such corporation
maybe sued, or proceeded
against, before the Philippine
courts
or
administrative
tribunals on any valid cause of
action recognized under the
Philippine laws.
d.
Suability
of
Foreign
Corporations/ e. Instances When
Unlicensed
Foreign Corporations May
Be
Allowed
to
Sue
Isolated Transactions
The basis of suability is
that any foreign corporation
lawfully doing business in the
Philippines shall be bound by all
laws, rules and regulations
applicable
to
domestic
corporations of the same class,
save and except such as only
provided
for
the
creation,
formation,
organization
or
dissolution of corporations or
such as fix the relations,
liabilities,
responsibilities
or
duties
of
stockholders,
members,
or
officers,
of
corporations to each other or to
other corporation.
f. Grounds for Revocation of
License
Among other others, they are,
as follows:
1.) Failure to file its
annual report or
pay any fees as
required by this
code;
2.) Failure
to
appoint
and
maintain
a
resident agent
in
the
Philippines
as

required by this
title;
3.) Failure,
after
change of its
resident agent
or
of
his
address,
to
submit
to
submit to the
SEC
a
statement
of
such change as
required by this
title;
4.) Failure
to
submit to the
SEC
an
authenticated
copy
of any
amendment to
its articles of
incorporation or
by-laws or of
any articles of
merger
or
consolidation
within the time
prescribed
by
this title;
A misrepresentation of any material matter
in any application, report, affidavit or other
document submitted such corporation
pursuant to this title.

VII. Securities
Regulation
Code
(R.A. No. 8799)

A. State Policy, Purpose

The establishment of a socially
conscious, free market that:
(1) Regulates itself;
(2)Encourage
the
widest
participation of ownership in
enterprises;
(3)
Enhance
the
democratization of wealth;
(4) Promote the development of
the capital market;
(5) Protect investors;
(6)
Ensure
full
and
fair
disclosure about securities;
(7) Minimize if not totally
eliminate insider trading and
other
fraudulent
or
manipulative
devices
and
practices
which
create

distortions in the free market

(Sec. 2).
B. Securities
Required
to
Be
Registered
General rule: Securities shall not be
sold or offered for sale or
distribution to the public within the
Philippines, without a registration
statement duly filed with and
approved by the Commission (Sec.
8.1) [N.B. The Securities Regulation
Code
(SRC)
regulates
public
offering within the Philippines.]
1. Exempt Securities
1. Any security issued or
guaranteed
by
the
Government
of
the
Philippines/ its political
subdivision or agency/its
instrumentality/ or any
person
controlled
or
supervised thereby; [N.B.
Rationale
for
the
exception: The
public
does not need protection
from
the
government
itself. The government
will always be solvent to
pay
its
obligations
because of its ability to
raise revenues through
taxation.]
2. Any security issued or
guaranteed
by
the
government
of
any
country with which the
Philippines
maintains
diplomatic relations, or
by any state, province or
political
subdivision
thereof on the basis of
reciprocity: Provided, that
the
Commission
may
require compliance with
the form and content for
disclosures
the
Commission
may
prescribe; [Rationale for
the exception: This is
rooted in comity among
nations.]
3. Certificates issued by a
receiver or by a trustee in
bankruptcy
duly

approved by the proper

adjudicatory
body;
[Rationale: This is not a
public offering. Besides,
protection
is
already
afforded by that proper
adjudicatory body and
additional SEC protection
is not necessary.]
4. Any
security
or
its
derivatives the sale or
transfer of which, by law,
is under the supervision
and regulation of the
Office of the Insurance
Commission, Housing and
Land Use Rule Regulatory
Board, or the Bureau of
Internal
Revenue.
[Rationale: The issuers
are
governmental
agencies
covered
by
exception (a) above. SEC
protection would be a
duplication.]
5. Any security issued by a
bank except its own
shares of stock (Sec. 9.1)
[Rationale:
Banks
are
under the supervision of
the Bangko Sentral. SEC
protection
is
a
duplication.]
6. Any class of security with
respect to which the SEC
finds that registration is
not necessary in the
public interest and for the
protection of investors
(Sec. 9.2)
2. Exempt Transactions
1. Any judicial sale, or sale
by
an
executor,
administrator, guardian,
receiver or trustee in
insolvency or bankruptcy.
2. Those sold by a pledge,
mortgagee, or any other
similar lien holder, to
liquidate a bona fide debt
(a security pledged in
good faith as security for
such debt
3. Those sold or offered for
sale
in
an
isolated

transaction, the owner

not being an underwriter
4. Distribution
by
the
corporation of securities
to its stockholders as
dividends;
5. Sale of capital stock of a
corporation to its own
stockholders exclusively
6. Bonds or notes secured
by a mortgage are sold to
a single purchaser at a
single sale
7. Delivery of security in
exchange for any other
security pursuant to the
right of conversion
8. Brokers
transactions
executed
upon
the
customers orders
9. Share subscriptions prior
to incorporation or in
pursuance of an increase
in its authorized capital
stock
10.Exchange of securities
by the issuer with its
existing security holders
exclusively
11.Sale by issuer to fewer
than 20 persons in the
Philippines during any
12 month period
12.Sale
to
banks,
investment
houses,
insurance
companies
and any entities ruled
qualified by the SEC
C. Procedure for Registration of
Securities
1. Application All securities
required to be registered
shall be registered through
the filing by issuer with SEC,
of a sworn registration
statement.
2. Prospectus The registration
statement shall include any
prospectus
required
or
permitted to be delivered;
3. Other information The
information required for the
registration of any kind and
all securities shall include,
among others, the effect of

4.

5.

6.

7.

8.

the securities issue on

ownership, on the mix of
ownership, especially foreign
and local ownership;
Signatories to registration
statement The registration
statement shall be signed by
the issuers:
1. Executive officer
2. Principal
operating
officer
3. Comptroller
4. Principal
accounting
officer
5. Corporate secretary or
persons
performing
similar functions
Note:
it
shall
be
accompanied by a duly
verified resolution of the BoD
of the issuer
Written consent of expert
The written consent of the
expert named as having
certified any part of the
registration statement or
any
document
used
in
connection therewith shall
also be filed
Certification
by
selling
stockholders Where the
registration
statement
includes:
1. Shares to be sold by
the
selling
shareholders
2. A written certification
by
such
selling
shareholders as to the
accuracy of any part
of
the
registration
statement contributed
by
such
selling
shareholders
shall
also be filed
Fees The issuer shall pay to
the SEC; the SEC shall
prescribe
by
rule,
diminishing the fees in
inverse proportion, the value
of the aggregate price of the
offering
Notice and publication
Notice of the filing of the
registration statement shall
be immediately published by

the issuer in two newspapers

of general circulation in the
Philippines; once a week for
two
consecutive
weeks,
reciting that:
1. A
registration
statement has been
filed, and
2. The
aforesaid
registration statement
and papers attached
thereto are open to
inspection at the SEC
during business hours.
Note:
copies
shall
be
furnished
to
interested
parties at a reasonable
charge.
9. SEC Power for production of
books The SEC may:
1. Compel
the
production of all the
books and papers of
such issuer
2. Administer oaths
10. Examine the officers of such
issuer, or any other person
connected therewith as to its
business and affairs
11. Ruling Within 45 days after
the date of the filing of the
registration statement, or by
such later date to which the
issuer has consented, the
SEC
shall
declare
the
registration
statement
effective or rejected, unless
the applicant is allowed to
amend
the
registration
statement.
D. Prohibitions
on
Fraud,
Manipulation
and
Insider
Trading
1. Manipulation of Security
Prices
1. Transactions intended
to
create
active
trading:
a. Wash Sale
engaging
in
transaction
in
which there is
no
genuine
change in the
actual

ownership of a
security
b. Matched Sale
There
is
a
change
of
ownership
in
the
securities
by entering an
order for the
purchase/sale
of security with
the knowledge
that
a
simultaneous
order
of
substantially
the same size,
time, and price,
for the sale or
purchase of any
such
security,
has or will be
entered by or
for the same or
different
parties.
c. Similar
transactions
where there is
no change of
beneficial
ownership.
2. Engaging
in
transactions
which
induce
price
to
increase or decrease:
a. Marking
the
close buying
and
selling
securities at the
close
of the
market to alter
the
closing
price
of
the
security.
b. Painting
the
tape engaging
in a series of
transactions in
securities that
are
reported
publicly to give
the impression
of activity or
price

movement in a
security.
c. Squeezing the
float refers to
taking
advantage of a
shortage
of
securities in the
market
by
controlling the
demand
side
and exploiting
market
congestion
during
such
shortages in a
way to create
artificial prices.
d. Hype and dump
engaging in
buying activity
at increasingly
higher
prices
and then selling
securities in the
market at the
higher prices.
e. Boiler
room
operations the
use
of
high
pressure
sale
tactics
to
promote
purchase
and
sale
of
securities
f. Daisy chain it
refers
to
a
series
of
purchase
and
sales
of
the
same issue at
successively
higher prices by
the same group
of people with
2. Short Sales
It is the selling of shares
which the seller does not
actually own or possess and
therefore he cannot, himself,
supply the delivery.
3. Fraudulent Transactions

1. Obtaining money or
property by means of
any untrue statement
of a material fact
2. Engaging in any act,
transaction, practice
or course of business,
which operates as a
fraud or deceit upon
any person.
4. Insider Trading
A purchase or sale made by
an insider or his relative
within the second degree
shall be presumed to be
effected while in possession
of
material
nonpublic
information if transacted
after such information came
into existence but prior to
the public dissemination of
such information, and lapse
of reasonable time for the
market to absorb such
information.
An insider is a person in
possession
of
corporate
information not generally
available to the public.
E. Protection of Investors
1. Tender Offer Rule
Publicly declared intention to
buy securities of public
companies given to all
stockholders by:
1. Filing with the SEC a
declaration to that
effect, and paying the
filing fee.
2. Furnishing the issuer a
statement containing
the
information
required of the issuers
as SEC may prescribe,
including subsequent
or
additional
materials.
3. Publishing all requests
or
invitations
for
tender, or materials
making a tender offer
or
requesting
or

inviting letters of such

security.
Tender offer is in place to
protect the interest of
minority stockholders of a
target company against
any scheme that dilutes
the share value of the
investments. It affords
such
minority
shareholders
the
opportunity to withdraw
or exit from the company
under reasonable terms,
a chance to sell their
shares at the same price
as those of the majority
stockholders.
2. Rules
on
Proxy
Solicitation
Requisite for valid proxy
solicitation:
1. It must be in writing
2. It must be signed by
the stockholder or his
duly
authorized
representative
3. It must be filed before
the
scheduled
meeting
with
the
corporate
secretary
(Sec. 20)
Note: The proxy shall be
valid only for the meeting for
which it is intended. No
proxy shall be valid and
effective for a period longer
than 5 years at one time.
3. Disclosure Rule
It begins at registration and
continues periodically thru
periodic report.
May be suspended when on
the first day of the fiscal
year if it has less than 100
shareholders (Rule 17.1, SRC
IRR).
General rule: Disclosure does
not end because once a
reporting
company,
it
remains as such even when

registration of securities has

been revoked (Rule 13 SCR
IRR).
Exception:
If the primary
license is revoked.
Exception to the exception:
In case of hospitals and
educational institutions if the
primary license is revoked,
disclosure requirement still
continues because of public
interest.
F. Civil Liability
Grounds for civil liability to arise:
1. False Registration Statement.
(Sec. 56)
2. Fraud with connection to
prospectus, communications
and reports. (Sec. 57)
3. Fraud in connection with
security transactions. (Sec.
58)
4. Manipulation
of
security
prices. (Sec. 60)
5. Insider trading. (Sec. 61)
Prescriptive period for filing of
action: 2 years after the discovery
of the facts constituting the cause
of action and within 5 years after
such cause of action accrued.

VIII. Banking Laws

A. The New Central Bank Act (R.A. No.

7653)
1. State Policies
The State shall maintain a central
monetary authority that shall function
and operate as an independent and
accountable body corporate in the
discharge of its mandated
responsibilities concerning money,
banking and credit. (Sec. 1)
2. Creation of the Bangko Sentral ng
Pilipinas (BSP)
Nature of the BSP
(1) A central monetary authority;
(2) An independent and
accountable body; and
(3) A government-owned
corporation but enjoys fiscal and

administrative autonomy. (Secs. 1

& 2, NCBA)
The BSP shall have a capitalization of
P50B to be fully subscribed by the
Government. (Sec. 2)
3. Responsibility and Primary Objective
Primary Objectives
(1) To maintain price stability
conducive to a balanced and
sustainable growth of the economy.
(2) To promote and maintain monetary
stability and the convertibility of the
peso.
Other Responsibilities
(1) To provide policy directions in the
areas of money, banking, and credit
(2) To supervise operations of banks
(Sec. 3, NCBA)
All powers, duties and functions
vested by law in the Central Bank of
the Philippines not inconsistent with
the NCBA shall be deemed transferred
to the BSP. All references to the
Central Bank of the Philippines in any
law or special charters shall be
deemed to refer to the BSP. (Sec. 136,
NCBA)
4. Monetary BoardPowers and Functions
Monetary Board
The body through which the powers
and functions of the Bangko Sentral is
exercised (Sec 6, NCBA)
Powers and Functions
(1) Issue rules and regulations it
considers necessary for the efective
discharge of the responsibilities and
exercise of the powers vested in it;
(2) Direct the management,
operations, and administration of
Bangko Sentral, organize its personnel
and issue such rules and regulations
as it may deem necessary or desirable
for this purpose;
(3) Establish a human resource
management system which governs
the selection, hiring, appointment,
transfer, promotion, or dismissal of all
personnel;
(4) Adopt an annual budget for and
authorize such expenditures by
Bangko Sentral as are in the interest
of the efective administration and
operations of Bangko Sentral in
accordance with applicable laws and
regulations; and

(5) Indemnify its members and other

officials of Bangko Sentral, including
personnel of the departments
performing supervision and
examination functions, against all
costs and expenses reasonably
incurred by such persons in
connection with any civil or criminal
action, suit or proceeding, to which
any of them may be made a party by
reason of the performance of his
functions or duties, unless such
members or other officials is found to
be liable for negligence or misconduct.
(Sec. 15, NCBA)
5. How the BSP Handles Banks in Distress
Liquidity Ability of an asset to be
converted into cash. An entity is liquid
when it is able to pay its liabilities
when they fall due.
Solvency When current assets are
more than current liabilities, providing
the ability to pay debts. An entity is
solvent when it is able to meet its long
term obligations/liabilities.
Insolvency When the actual market
value of assets are insufficient to pay
its liabilities, not considering capital
stock and surplus which are not
liabilities for such purpose. An entity is
insolvent when it is unable to meet
current and long-term obligations.
a. Conservatorship
Applicability
(1) When a bank or a quasi-bank is
in a state of continuing inability or
unwillingness to maintain a
condition of liquidity deemed
adequate to protect the interest of
depositors and creditors (Sec. 29)
(2) Determination is to be made by
the MB on the basis of a report
submitted by the appropriate
supervising or examining
department (Sec. 29)
Period and termination
(1) Period: shall not exceed 1 year
(Sec. 29)
(2) The expenses attendant to the
conservatorship shall be borne by
the bank or quasi-bank concerned
(Sec. 29)
(3) Grounds for termination of
conservatorship by MB:
(a) When it is satisfied that the
institution can continue to operate

on its own and the conservatorship

is no longer necessary
(b) When, on the basis of the
report of the conservator or of its
own findings, the MB determines
that the continuance in business of
the institution would involve
probable loss to its depositors or
creditors (the bank or quasi-bank
would then be placed under
receivership) (Sec. 29)
Efects of conservatorship
(1) Bank/Quasi-bank retains
juridical personality
(2) Not a precondition to the
designation of a receiver, and;
(3) Perfected transactions cannot
be repudiated
b. Closure
Close now, hear later scheme Sec.
29 of the Central Bank Act does
NOT contemplate prior notice and
hearing before a bank may be
directed to stop operations and
placed under receivership. It is
enough that such action is made
subject of a subsequent judicial
review. When the law provides for
the filing of a case within 10 days
after the receiver takes charge of
the assets of the bank, it is
unmistakable that the assailed
actions should precede the filing of
the case. The legislature could not
have intended to authorize no
prior notice and hearing in the
banks closure and at the same
time allow a suit to annul it on the
basis of absence thereof (Central
Bank vs. Cam GR No. 76118, March
30, 1993)
c. Receivership
Grounds
Whenever the MB finds that a bank
or quasi-bank:
(1) Is unable to pay its liabilities as
they become due in the ordinary
course of business: Provided, That
this shall not include inability to
pay caused by extraordinary
demands induced by financial
panic in the banking community;
(2) Has insufficient realizable
assets, as determined by the BSP,
to meet its liabilities; or

(3) Cannot continue in business

without involving probable losses
to its depositors or creditors; or
(4) Has willfully violated a ceaseand-desist order under Sec. 37 that
has become final, involving acts or
transactions which amount to fraud
or a dissipation of the assets of the
institution
Receiver
(1) If a banking institution: the
PDIC
(2) If a quasi-bank: any person of
recognized competence in banking
or finance
The appointment of a receiver shall
be vested exclusively in the MB.
And the designation of a
conservator is not a precondition to
the designation of a receiver.
Powers and duties of a receiver
(1) Immediately gather and take
charge of all the assets and
liabilities of the institution
(2) Administer the assets for the
benefit of the creditors
(3) Exercise the general powers of
a receiver under the Revised Rules
of Court
(4) Not to pay or commit any act
that will involve the transfer or
disposition of any asset of the
institution, except:
(a) Administrative expenditures
(b) Receiver may deposit or place
funds in non-speculative
investments
(5) Subject to prior approval of the
MB, determine, as soon as
possible, but not later than 90 days
from take-over, whether the
institution may be rehabilitated or
otherwise placed in such a
condition so that it may be
permitted to resume business with
safety to its depositors and
creditors and the general public.
The assets of the institution under
receivership and liquidation shall
be deemed in custodia legis and
shall be exempt from any order of
garnishment, levy, attachment, or
execution.
d. Liquidation
Should the determination be that
the institution cannot be

rehabilitated or permitted to
resume business, the MB shall
notify in writing the board of
directors of the institution of its
findings and direct the receiver to
proceed with the liquidation of the
institution.
Procedure
(1) The receiver shall file ex parte
with the proper RTC, and without
requirement of prior notice or any
other action, a petition for
assistance in the liquidation of the
institution pursuant to the
liquidation plan adopted by the
PDIC (if quasi-bank, liquidation
plan adopted by the MB)
(2) Upon acquiring jurisdiction, the
court shall, upon motion by the
receiver after due notice,
(a) Adjudicate disputed claims
against the institution,
(b) Assist the enforcement of
individual liabilities of the
stockholders, directors, and
officers, and
(c) Decide on other issues as may
be material to implement the
liquidation plan
(3) The receiver shall convert the
assets of the institutions to money,
dispose of the same to creditors
and other parties, for the purpose
of paying the debts of such
institution in accordance with the
rules on concurrence and
preference of credit under the Civil
Code.
The assets of the institution under
receivership and liquidation shall
be deemed in custodia legis and
shall be exempt from any order of
garnishment, levy, attachment, or
execution.
Dispositions
In case of a liquidation of a bank or
quasi-bank, after payment of the
cost of proceedings, including
reasonable expenses and fees of
the receiver to be allowed by the
court, the receiver shall pay the
debts of such institution, under
order of the court, in accordance
with the rules on concurrence and
preference of credit in the Civil
Code. (Sec. 31, NCBA)

All revenues and earnings realized

by the receiver in winding up the
afairs and administering the
assets of any bank or quasi-bank
shall be used to pay the costs of
proceedings, salaries of such
personnel whose employment is
rendered necessary in the
discharge of the liquidation
together with other additional
expenses caused thereby.
The balance of revenues and
earnings, after the payment of all
said expenses, shall form part of
the assets available to creditors.
(Sec. 32, NCBA)
Efects of Appointment of
Receiver/Liquidation
(1) Retention of juridical
personality
(2) Suspension of operations/
Stoppage of business
(3) Assets are deemed in custodial
legis, i.e., exempt from
garnishment, levy or execution
(4) Stay of execution of judgment
to prevent depletion of bank assets
(5) Bank is not liable to pay
interest on deposits which accrued
during the period of suspension of
operation
(6) Restriction of banks capacity to
do new business (new loans,
deposits) but with obligation to
collect preexisting debts
6. How the BSP Handles Exchange Crisis
a. Legal Tender Power
All notes and coins issued by the
BSP shall be fully guaranteed by
the Government of the Republic of
the Philippines and shall be legal
tender in the Philippines for all
debts, both public and private.
Limitation: Coins shall be legal
tender in amounts not exceeding
P50 for denominations of 25
centavos and above, and in
amounts not exceeding P20 for
denominations of 10 centavos or
less unless otherwise fixed by the
MB.
The maximum amount of coins to
be considered as legal tender is:
[BSP Circular 537 (2006) ]

1. P1,000.00 for denominations of

1-Piso, 5-Piso and 10-Piso coins;
and
2. P100.00 for denominations of 1sentimo, 5-sentimo, 10-sentimo,
and 25-sentimo coins. (Sec. 52)
b. Rate of Exchange
The MB shall:
(1) Determine the exchange rate
policy of the country;
(2) Determine the rates at which
the Bangko Sentral shall buy and
sell spot exchange;
(3) Establish deviation limits from
the efective exchange rate or
rates as it may deem proper.
(4) Determine the rates for other
types of foreign exchange
transactions by the BSP, including
purchases and sales of foreign
notes and coins.
Limitation: The margins between
the efective exchange rates and
the rates established by the MB
may not exceed the corresponding
margins for spot exchange
transactions by more than the
additional costs or expenses
involved in each type of
transactions. (Sec. 74)
B. Law on Secrecy of Bank Deposits
(R.A. No. 1405, as amended)
1. Purpose
(1) To give encouragement to the
people to deposit their money in
banking institutions and to
discourage private hoarding; and
(2) So that the peoples money
may be properly utilized by banks
in authorized loans to assist in the
economic development of the
country. (Sec. 1)
The absolute confidentiality rule in
R.A. No. 1405 actually aims at
protection from unwarranted
inquiry or investigation if the
purpose of such inquiry or
investigation is merely to
determine the existence and
nature, as well as the amount of
the deposit in any given bank
account. (China Banking Corp. v.
Ortega, 1973)
2. Prohibited Acts
(1) No person, government official,
bureau or office may examine,

inquire into or look into such

deposits; and
(2) No official or employee of any
banking institution may disclose to
any unauthorized person any
information concerning said
deposits. (Sec. 3)
3. Deposits Covered
All peso-denominated deposits of
whatever nature with banks or
banking institutions in the
Philippines are hereby considered
as of an absolutely confidential
nature and may not be examined.
[N.B. The confidentiality of
foreigncurrency deposits is
governed by the Foreign Currency
Deposit Act.]
Includes investments in bonds
issued by the Philippine
Government, its political
subdivisions and its
instrumentalities, regardless of the
currency of denomination. (Sec. 2)
Under the RA 1405, bank deposits
are statutorily protected or
recognized zones of privacy.
(People v. Estrada, G.R. No.
164368, April 2, 2009; Marquez v.
Desierto, G.R. No. 135882, June 27,
2001, 359 SCRA 772; Ople v.
Torres, G.R. No. 107737. October 1,
1999, 316 SCRA 43)
The term deposits as used in RA
1405 is to be understood broadly
and not limited only to accounts
which give rise to a creditor-debtor
relationship between the depositor
and the bank.
If the money deposited under an
account may be used by banks for
authorized loans to third persons,
then such account, regardless of
whether it creates a creditordebtor relationship between the
depositor and the bank, falls under
the category of accounts which the
law precisely seeks to protect for
the purpose of boosting the
economic development of the
country.
Considering the use of the phrase
of whatever nature RA 1405
applies not only to money which is
deposited but also to those which
are invested. Thus, the protection

aforded by RA 1405 extends to

trust accounts. (Ejercito v.
Sandiganbayan (Special Division),
2006)
4. Exceptions
(1) Upon written permission of the
depositor;
(2) In cases of impeachment;
(3) Upon order of a competent
court in cases of:
(a) Bribery;
(b) Dereliction of duty of public
officials; or
(4) Where the money deposited or
invested is the subject matter of
the litigation. (Sec. 2)
By the phrase "subject matter of
the action" is meant "the physical
facts, the things real or personal,
the money, lands, chattels, and the
like, in relation to which the suit is
prosecuted, and not the delict or
wrong committed by the
defendant. (Mathay v. Consolidated
Bank and Trust Company, 1974).
We note with approval the
diference between the "subject of
the action" from the "cause of
action." We also find petitioner's
definition of the phrase "subject
matter of the action" is consistent
with the term "subject matter of
the litigation," as the latter is used
in the Bank Deposits Secrecy Act.
Where the plaintif is fishing for
information so it can determine the
culpability of private respondent
and the amount of damages it can
recover from the latter. It does not
seek recovery of the very money
contained in the deposit. The
subject matter of the dispute may
be the amount of P999,000.00 that
petitioner seeks from private
respondent as a result of the
latter's alleged failure to inform the
former of the discrepancy; but it is
not the P999,000.00 deposited in
the drawer's account. By the terms
of R.A. No. 1405, the "money
deposited" itself should be the
subject matter of the litigation.
(Union Bank v. Court of Appeals,
1999)
The exception applies to cases of
concealment of illegally acquired

property in anti-graft cases. The

inquiry into illegally acquired
property or property NOT
"legitimately acquired" extends
to cases where such property is
concealed by being held by or
recorded in the name of other
persons. (Banco Filipino v.
Purisima, 1988)
The exception even extends to
cases of concealment of illegally
acquired property not involving
anti-graft cases as long as money
deposited was the subject matter
of litigation. (Mellon Bank, N.A. v.
Magsino, 1990)
Other Exceptions
(1) Upon order of a competent
court in cases of unexplained
wealth under Sec. 8 of RA 3019 or
the Anti- Graft and Corrupt
Practices Act (PNB v. Gancayco,
1965; Banco Filipino v. Purisima,
1988; Marquez v. Desierto, 2001)
(2) When inquiry is conducted
under the authority of the
Commissioner of Internal Revenue
into the bank accounts of the
following:
(a) A decedent in order to
determine his gross estate
(b) Any taxpayer who has filed an
application for compromise of his
tax liability, which application shall
include a written waiver of his
privilege under RA 1405 or under
other general or special laws Note:
Information obtained from banks
and financial institutions may be
furnished to a foreign tax authority
pursuant to an existing convention
or agreement. (Sec. 6(F), NIRC, as
amended by RA 10021)
(3) Upon order of a competent
court in cases under the AntiMoney Laundering Act of 2001 (RA
9160, hereinafter AMLA), when
there is probable cause that the
deposits or investments involved
are in any way related to an
unlawful activity or a money
laundering ofense, except that no
court order required if:
(a) Funds or property involved
consists of investments; or
(b) Said investments are related to:

(i) Kidnapping for ransom

(ii) Unlawful activities under
Comprehensive Drugs Act of 2002
(RA 9165);
(iii) Hijacking and other violations
under RA 6235; and
(iv) Destructive arson and murder,
including those perpetrated by
terrorists against non-combatants
and similar targets.
(4) BSP inquiry or examination in
the course of its periodic or special
examination of the bank (Sec. 11,
AMLA).
(5) Disclosure of certain
information about bank deposits
which have been dormant for at
least 10 years, to the Treasurer of
the Philippine in a sworn
statement, a copy of which is
posted in the bank premises. (Sec.
2, Unclaimed Balances Law [Act
No. 3926, as amended])
(6) The PDIC and/or the BSP can
inquire into or examine deposit
accounts and all information
related thereto in case there is a
finding of unsafe and unsound
banking practice (Sec. 8,
paragraph 8, R.A. 3591, as
amended by R.A. 9576).
5. Garnishment of Deposits, including
Foreign Deposits
General rule: The prohibition
against examination of or inquiry
into a bank deposit under Republic
Act 1405 does not preclude its
being garnished to insure
satisfaction of a judgment (China
Banking Corporation v. Ortega,
1973; Philippine Commercial and
Industrial Bank v. Court of Appeals,
1991)
the prohibition against
examination of or inquiry into a
bank deposit under Republic Act
1405 does not preclude its being
garnished to insure satisfaction of
a judgment. Indeed there is no real
inquiry in such a case, and if the
existence of the deposit is
disclosed the disclosure is purely
incidental to the execution
process. It is hard to conceive that
it was ever within the intention of
Congress to enable debtors to

evade payment of their just debts,

even if ordered by the Court,
through the expedient of
converting their assets into cash
and depositing the same in a
bank. (China Banking Corporation
v. Ortega, 1973)
Exception: Foreign Currency
Deposits The foreign currency
deposits shall be exempt from
attachment, garnishment, or any
other order or process of any court,
legislative body, government
agency or any administrative body
whatsoever. (Sec. 8, Foreign
Currency Deposit Act)
General rule: Foreign currency
deposits are confidential.
Exceptions:
(1) Upon written permission of the
depositor (Sec. 8, Foreign Currency
Deposit Act ; Intengan vs CA ;
2002)
(2) Upon order of a competent
court in cases of violation of the
Anti-Money Laundering Act of 2001
[as in the case of peso deposits,
supra]
(3) During Bangko Sentrals
periodic or special examinations
[as in the case of peso deposits,
supra], and
(4) Disclosure of the Treasurer of
the Philippines when the unclaimed
balances law applies (Act 3936, as
amended by PD 679)
(5) BSP/PDIC inquiry if there is a
finding of unsafe and unsound
banking practice (as in the case of
peso deposits, supra)
(6) In Salvacion vs. CB (1997),
where a Filipino child was raped by
a foreigner, the SC allowed, pro
hac vice, garnishment of foreign
currency deposits stating: If we
rule that the questioned Section
113 of CB Circular No. 960 which
exempts from attachment,
garnishment, or any other order or
process of any court, legislative
body, government agency or any
administrative body whatsoever, is
applicable to a foreign transient,
injustice would result especially to
a citizen aggrieved by a foreign
guest.

C. General Banking Law of 2000 (R.A.

No. 8791)
1. Definition and Classification of Banks
Banks shall refer to entities
engaged in the lending of funds
obtained in the form of deposits.
(Sec. 3.1, GBL)
Core banking Functions:
(1) Taking of deposits from the
public
(2) Lending out these funds
(Morales, The Philippine GBL
Annotation).
Classification of Banks:
(1) Universal Banks (UB) These
used to be called expanded
commercial banks and their
operations are primarily governed
by the GBL. They can exercise the
powers of an investment house
and invest in non-allied
enterprises. They have the highest
capitalization requirement.
(2) Commercial Banks (KB) These
are ordinary or regular commercial
banks, as distinguished from a
universal bank. They have a lower
capitalization requirement than a
UB and cannot exercise the powers
of an investment house and invest
in non-allied enterprises.
(3) Thrift Banks These are:
(a) Savings and mortgage
banks;
(b) Stock savings and loan
associations; and
(c) Private development banks
(Sec. 3.2)
Note: The term thrift banks also
refers to any banking corporation
organized for the following
purposes:
(i) Accumulating the savings of
depositors and investing them,
together with capital loans secured
by bonds, mortgages in real estate
and insured improvements
thereon, chattel mortgage, bonds
and other forms of security or in
loans for personal or household
finance, whether secured or
unsecured, or in financing for
homebuilding and home
development; in readily
marketable and debt securities; in
commercial papers and accounts

receivables, drafts, bills of

exchange, acceptances or notes
arising out of commercial
transactions; and in such other
investments and loans which the
Monetary Board may determine as
necessary in the furtherance of
national economic objectives;
(ii) Providing short-term working
capital, medium- and long-term
financing, to businesses engaged
in agriculture, services, industry
and housing; and
(iii) Providing diversified financial
and allied services for its chosen
market and constituencies
especially for small and medium
enterprises and individuals.
(Sec.3(a), R.A. 7906)
(4) Cooperative Banks These are
banks organized primarily to make
financial and credit services
available to cooperatives and their
members. It may perform any or all
of the services ofered by a rural
bank, including the operation of an
FCDU subject to certain conditions.
(Morales, The Philippine GBL
Annotation)
Note: A cooperative bank is one
organized for the primary purpose
of providing a wide range of
financial services to cooperatives
and their members. (Art. 23(i), R.A.
9520)
(5) Islamic Banks These are
banks the business dealings and
activities of which are subject to
the basic principles and rulings of
Islamic Sharia. The Al Amanah
Islamic Investment Bank of the
Philippines, which was created by
RA 6848, is the only Islamic bank
in the country at this time.
Note: Islamic Bank refers to the AlAmanah Islamic Investment Bank
of the Philippines, created under
R.A. 6848. (See Sec. 44(1) and Sec.
2, R.A. 6848)
(6) Rural Banks Mandated to
make needed credit available and
readily accessible in the rural areas
on reasonable terms and which are
primarily governed by the Rural
Banks Act of 1992 (RA 7353)

(7) Other Classifications of Banks

As determined by the Monetary
Board, i.e., Philippine Veterans
Bank (RA 3518), Landbank of the
Philippines (RA 3844),
Development Bank of the
Philippines (RA 85)
2. Distinction of Banks from Quasi-Banks
and Trust Entities
As Opposed to Quasi-banks
Quasi-banks (QB) refer to entities
engaged in the borrowing of funds
through the issuance, endorsement
or assignment with recourse or
acceptance of deposit-substitute
instruments, for purposes of
relending the funds so borrowed or
using them to purchase
receivables and other obligations.
(last paragraph of Sec. 4)
The term deposit substitutes is
defined as funds obtained from the
public, other than deposits,
through the issuance,
endorsement, or acceptance of
deposit-substitute instruments for
the borrower's own account, for
the purposeof relending or
purchasing of receivables and
other obligations. It includes
bankers acceptances, promissory
notes, participations, certificates of
assignment and similar
instruments with recourse, and
repurchase agreements. (Sec. 95,
New Central Bank Act, hereinafter
NCBA)
As Opposed to Trust Entities
A Trust Entity is a stock corporation
or a person duly authorized by the
Monetary Board to engage in trust
business. (Sec. 79, GBL)
A Trust Business is any activity
resulting from trusteeship involving
the appointment of a trustee by a
trustor for the administration,
holding, management of funds
and/or properties of the trustor by
the trustee for the use, benefit or
advantage of the trustor or of
beneficiaries.
3. Bank Powers and Liabilities
a. Corporate Powers
General powers incident to
corporations

(1) To sue and be sued in its

corporate name;
(2) Succession by its corporate
name for the period stated in the
AOI and the certificate of
incorporation
(3) To adopt and use a corporate
seal
(4) To amend its AOI
(5) To adopt by-laws, not contrary
to law, morals, or public policy, and
to amend or repeal them
(6) To issue or sell stocks to
subscribers and to sell treasury
stocks.
(7) To purchase, receive, take or
grant, hold, convey, sell, lease,
pledge, mortgage and otherwise
deal with such real and personal
property, including securities and
bonds of other corporations, as the
transaction of the lawful business
of the corporation may reasonably
and necessarily require, subject to
the limitations prescribed by law
and the Constitution
(8) To enter into merger or
consolidation
(9) To make reasonable donations,
including those for the public
welfare or for hospital, charitable,
cultural, scientific, civic, or similar
purposes: provided that no
corporation, domestic or foreign,
shall give donations in aid of any
political party or candidate or for
purposes of partisan political
activity
(10) To establish pension,
retirement, and other plans for the
benefit of its directors, trustees,
officers and employees
(11) To exercise such other powers
as may be essential or necessary
to carry out its purposes as stated
in the AOI. (Sec. 36, Corporation
Code)
b. Banking and Incidental Powers
All such powers as may be
necessary to carry on the business
of commercial banking (Sec. 29)
(1) Accepting drafts By accepting
a draft, a bank creates a bankers
acceptance, which is a negotiable
time draft or bill of exchange
drawn on and accepted by a

commercial bank. This is diferent

from trade acceptance, which is
accepted by the buyer. (Morales,
The Philippine GBL Annotation)
(2) Issuing letters of credit (3)
Discounting and negotiating
promissory notes, drafts, bills of
exchange, and other evidence of
debt
(4) Accepting or creating demand
deposits Deposit function
General rule: Only a Universal Bank
(UB) Commercial Bank (KB) can
accept or create demand deposits.
Exception: Banks other than a UB
or KB with prior approval of, and
subject to such conditions and
rules as may be prescribed by the
Monetary Board (Sec. 33, GBL)
4. Diligence Required of Banks
Relevant Jurisprudence
Banks should observe diligence
that is higher than that expected
from a good father of a family.
Notwithstanding the degree of
diligence required, a bank is not
expected to be infallible (Prudential
Bank vs. CA, 2000).
Fiduciary Nature of Banks
(1) Failure on the part of the bank
to satisfy the degree of diligence
required of banks may warrant the
award of damages.
(2) Under Sec. 2, the degree of
diligence is high standards of
integrity and performance and no
longer highest degree of
diligence as was decided prior to
the efectivity of the General
Banking Law of 2000 but also
(mistakenly) even thereafter. In
numerous cases, the Supreme
Court has held that the highest
degree of diligence and care is
expected from banks (Simex
International v. CA [1990];
Philippine Bank of Commerce
v. CA [1997]; Westmont Bank v.
Ong [2002]; Solidbank v. Spouses
Tan [2003]; Samsung Construction
v. FEBTC [2004]; Citibank, N.A. v.
Spouses Cabamongan [2006];
Philippine Savings Bank v.
Chowking Food Corporation [2008];
Bank of America NT &SA v.
Philippine Racing Club [2009].

5. Nature of Bank Funds and Bank

Deposits
As a business afected with public
interest and because of the nature
of its functions, the bank is under
obligation to treat the accounts of
its depositors with meticulous care,
always having in mind the fiduciary
nature of their relationship.
In every case, the depositor
expects the bank to treat his
account with the utmost fidelity,
whether such account consists only
of a few hundred pesos or of
millions. The bank must record
every single transaction accurately,
down to the last centavo, and as
promptly as possible. This has to
be done if the account is to reflect
at any given time the amount of
money the depositor can dispose
as he sees fit, confident that the
bank will deliver it as and to
whomever he directs. A blunder on
the part of the bank, such as the
failure to duly credit him his
deposits as soon as they are made,
can cause the depositor not a little
embarrassment if not financial loss
and perhaps even civil and criminal
litigation (Simex International v.
CA, 1990).
Banks are expected to exercise the
highest degree of diligence in the
selection and supervision of their
employees (PCI Bank v. CA, 2001).
It cannot be over emphasized that
the banking business is impressed
with public interest. Of paramount
importance is the trust and
confidence of the public in general
in the banking industry.
Consequently, the diligence
required of banks is more than that
of a Roman pater familias or a
good father of a family. The highest
degree of diligence is expected
(Phil. Savings Bank v. Chowking
Food Corporation,
2008).
The banking business is so
impressed with public interest
where the trust and confidence of
the public in general is of
paramount importance such that
the appropriate standard of

diligence must be a high degree of

diligence, if not the utmost
diligence (Bank of America NT&SA
v. Phil. Racing Club, 2009).
Under the doctrine of last clear
chance, a bank may be held liable
for loss despite the negligence of a
depositor.
Examples of these cases are the
following:
(1) For disbursing funds to a
dishonest employee despite the
employees failure to strictly abide
with the banks internal procedure.
(PBC v. CA, 1997)
(2) Allowing the execution of a
mortgage on parcels of land as
security for a loan not owned by
the prospective borrower. (Canlas
v. Court of Appeals, 2000)
(3) Crediting the deposit in favor of
another depositor, a check where
the signature of the drawer was
forged. (Westmont Bank v. Ong,
2002)
(4) Encashing pre-signed checks of
the depositor which were stolen by
its employee. (Bank of America NT
& SA v. Philippine Racing Club,
2009)
A bank is liable to a depositor when
it honored and paid on a forged
check against the depositors
account even if the bank followed
its internal procedure in preventing
a faulty discharge. (Samsung
Construction v. FEBTC, 2004)
In Gempesaw v. Court of Appeals
(1993), a bank was held liable for
damages for failing to follow its
internal procedures in paying on a
forged check despite the gross
negligence on the part of the
depositor.
6. Stipulation on Interests
The Monetary Board may prescribe
the maturities, as well as related
terms and conditions for various
types of bank loans and other
credit accommodations.
Any change by the Board in the
maximum maturities shall apply
only to loans and other credit
accommodations made after the
date of such action.

The Monetary Board shall regulate

the interest imposed on micro
finance borrowers by lending
investors and similar lenders such
as, but not limited to, the
unconscionable rates of interest
collected on salary loans and
similar credit accommodations
(Sec. 43, GBL)
7. Grant of Loans and Security Requirements
a. Ratio of Net Worth to Total Risk Assets
The minimum ratio which the net
worth of a bank must bear to its
total risk assets which may include
contingent accounts [i.e. net
worth: total risk assets] (Sec. 34,
GBL)
General rule: A bank must conform
to the risk-based capital ratio
prescribed by the MB
Exceptions: The MB may alter or
suspend compliance with such
ratio whenever necessary for a
maximum period of 1 year.
(1) In case of a bank merger or
consolidation; OR
(2) When a bank is under
rehabilitation under a program
approved by the BSP; (Sec. 34,
GBL)
Purpose
A bank must not be allowed to
expand the volume of its loans and
investments in a manner that is
disproportionate to its net worth.
(MORALES, Phil. Gen. Banking Law)
Efect of non-compliance
(1) The MB may limit or prohibit
the distribution of net profits by
such bank and may require that
part or all of the net profits be
used to increase the capital
accounts of the bank until the
minimum requirement has been
met.
(2) The MB may restrict or prohibit
the acquisition of major assets and
the making of new investments by
the bank, with the exception of
purchases of readily marketable
evidences of indebtedness of the
RP and the BSP and any other
evidences of indebtedness or
obligations the servicing and
repayment of which are fully
guaranteed by the RP, until the

minimum required capital ratio has

been restored. (Sec. 34, GBL)
b. Single Borrowers Limit
General rule: The total loans, credit
accommodations and guarantees
that may be extended by a bank to
any person, partnership,
association, or corporation or other
entity shall at no time exceed 20%
of the net worth of such bank.
(Sec. 35.1,GBL)
Exceptions:
(1) The Monetary Board otherwise
prescribes for reasons of national
interest. (Sec. 35.1, GBL) Now, the
single borrowers limit is 25% of
the net worth of the lending bank.
(2) Wholesale lending activities of
government banks to participating
institutions for relending to enduserborrowers: separate limit of
35% net worth. (BSP Circular No.
425 dated March 25, 2004)
c. Restrictions on Bank Exposure to DOSRI
(Directors, Officers, Stockholders and their
Related Interests)
General rule: No director or officer
of any bank:
(1) Shall, directly or indirectly, for
himself or as the representative or
agent of others, borrow from such
bank, nor
(2) Shall he become a guarantor,
endorser or surety for loans from
such bank to others, or in any
manner be an obligor or incur any
contractual liability to the bank
Exceptions:
(1) Valid insider lending (Sec. 36,
GBL)
(2) Loans, credit accommodations
and guarantees extended by a
cooperative bank to its cooperative
shareholders (Sec. 36, GBL)
Requirements for valid insider
lending
(1) In the regular course of
business;
(2) Upon terms not less favorable
to the bank than those ofered to
others;
(3) There is a written approval of
the majority of all the directors of
the bank, excluding the director
concerned;

(Except: granted to officers under

a fringe benefit plan approved by
the BSP;
(4) The required approval shall be
entered upon the record of the
bank and a copy of such entry shall
be transmitted forthwith to the
appropriate supervising and
examining department of the BSP;
(5) Limited to an amount
equivalent to the DOSRI borrowers
unencumbered deposits and book
value of his paid-in capital
contribution in the bank (Sec. 36,
GBL)
Exceptions:
(1) Non-risk items; and
(2) Loans in the form of fringe
benefits.
A DOSRI borrower is required to
waive the secrecy of his deposits
of whatever nature in all banks in
the Philippines. (Sec. 26, NCBA)
Purpose
The general policy behind DOSRI
rules is to level the lending field
between the insiders and the
outsiders.
The objective is to prevent the
bank from becoming a captive
source of finance for DOSRI.
(Morales, The Philippine General
Banking Law, Opinion)
Loan-Loss Provisioning
The following are subject to
regulation by the Monetary Board:
(1) The amount of reserves for bad
debts or doubtful accounts or other
contingencies; and
(2) The writing of of loans, other
credit accommodations, advances
and other assets. (Sec. 49, GBL)
Purpose
For efective banking supervision.
There is a problem of mismatch
when a loan becomes nonperforming. The bank is paying
interest on the money it borrowed
from the depositors or other
placers of funds, but is not
recouping that interest from the
loan it made. Eventually, the bank
may have to write of loan losses
against profits. To cushion this
eventuality, the bank is required to
set aside reserved for bad debts

and other doubtful accounts or

contingencies. (Morales, The
Philippine General Banking Law,
Opinion)
To address the non-performing
asset problem, RA 9182 Special
Purpose Vehicle Act was passed.
The Monetary Board approved
certain accounting guidelines on
the sale by banks and other
financial institutions for housing
under the said Act. (MORALES, The
Philippine GBL Annotation) [N.B. RA
9182 is no longer in efect.]

IX. Intellectual Property Code

(Exclude Implementing Rules
& Regulations)
A. Intellectual
General

Property

Rights

in

1. Intellectual Property Rights

Those property rights which result
from the physical manifestation of
original thought.
Refers to the totality of all rights which
the law recognizes in favor of the
author, composer, painter, artist,
scientist, or any other person with
respect to the creations or product of
his
intellect,
and
consists
of
principally, in his right to authorize or
refuse the publication or production of
such creations or products.
Coverage: (Sec. 4, IPC)
1. Copyright
2. Related rights or neighboring rights
of copyright
3. Patents
4. Mark
5. Geographical indications
6. Industrial designs
7. Layout designs (topographies) of
integrated circuits
8. Protection
of
undisclosed
information
2. Differences between Copyrights,
Trademarks and Patent
COPYRIGHT confined to literary or
artistic works which are original
creations in the literary or artistic
domain protected from the moment of
their creation.

PATENT INVENTIONS any technical

solution of a problem in any field of
human activity which is new, involves
an inventive step and is industrially
applicable (Sec. 21, IPC)
TRADEMARK any visible sign
capable of distinguishing the goods or
services of an enterprise and shall
include
a
stamped
or
marked
container of goods (Sec. 121.1, IPC)
3. Technology Transfer Arrangements
Technology Transfer Arrangements are
contracts or agreements involving the
transfer of systematic knowledge for the
manufacture of a product, the application of
a process, or rendering of a service including
management contracts; and the transfer,
assignment or licensing of all forms of
intellectual
property
rights,
including
licensing of computer software except
computer software developed for mass
market. (Sec. 4.2, IPC)
B. Patents
A patent is a statutory monopoly
which protects against unlicensed use
of the patented device or process
even by one who discovers it properly
through independent research.
Purposes:
1. The Patent Law seeks to foster and
reward invention;
2. It prompts disclosures of inventions
to stimulate further innovation and
to permit the public to practice the
invention once the patent expires;
3. The stringent requirements for
patent protection seek to ensure
that ideas in the public domain
remain there for the free use of the
public.
Principles:
1. Test of Non-Obviousness If any
person possessing ordinary skill in
the art was able to draw the
inferences and the constructs that
the supposed inventor drew from
prior art, then the latter did not
really invent.
2. Unity
of
invention

The
application shall relate to one
invention only or to a group of

inventions forming a single general

inventive step. (Sec. 38.1, IPC)
REQUISITES OF PATENTABILITY:
1. Any technical solution of a problem
in any field of human activity.
2. Novelty an invention shall be
considered new if it does not form
part of a prior art.
3. Inventiveness

an
invention
involves inventive step if, having
regard to prior art, it is not obvious
to a person skilled in the art at the
time of the filing date or priority
date of the application claiming the
invention. (Sec. 26, IPC)
4. Industrial
applicability

an
invention that can be produced and
used in any industry (Sec. 27, IPC)

PRIOR ART shall consist of:

1. Everything which has been made
available to the public anywhere in the
world, before the filing date or the priority
date of the application claiming the
invention; and
2. The whole contents of an application for a
patent, utility model, or industrial design
registration, published in accordance with
this Act, filed or effective in the Philippines,
with a filing or priority date that is earlier
than the filing or priority date of the
application: Provided, That the application
which has validly claimed the filing date of
an earlier application under Section 31 of
this Act, shall be prior art with effect as of
the filing date of such earlier application:
Provided further, That the applicant or the
inventor identified in both applications are
not one and the same.
1. Patentable Inventions
1. Useful machine
2. Product
3. Process
4. Improvement of any of items 1, 2
and 3
5. Micro-organism
6. Non-biological and microbiological
process
2. Non-Patentable Inventions (Sec. 22,
IPC)

1. Discoveries,
scientific
theories
and
mathematical methods;
2. Schemes, rules and methods of performing
mental acts, playing games or doing
business, and programs for computers;
3. Methods for treatment of the human or
animal body by surgery or therapy and
diagnostic methods practiced on the human
or animal body. This provision shall not
apply to products and composition for use
in any of these methods;
4. Plant varieties or animal breeds or
essentially biological process for the
production of plants or animals. This
provision shall not apply to microorganisms
and
non-biological
and
microbiological processes.
Provisions under this subsection shall not
preclude Congress to consider the enactment
of a law providing sui generis protection of
plant varieties and animal breeds and a
system of community intellectual rights
protection.
5. Aesthetic creations; and
6. Anything which is contrary to public order or
morality.
3. Ownership of a Patent
a. Right to a Patent
The right granted to an inventor by
the State, or by the regional office
acting for several States, which allows
the inventor to exclude anyone else
from commercially exploiting his
invention for a limited period.
The right to a patent belongs to the
inventor, his heirs, or assigns. When
two (2) or more persons have jointly
made an invention, the right to a
patent shall belong to them jointly.
(Sec. 28, IPC)
b. First-to-File Rule
If two (2) or more persons have made
the
invention
separately
and
independently of each other, the right
to the patent shall belong to the
person who filed an application for
such invention, or where two or more
applications are filed for the same
invention, to the applicant who has
the earliest filing date or, the earliest
priority date. (Sec. 29, IPC)

c. Inventions Created Pursuant to a

Commission (Sec. 30, IPC)
1. The person who commissions the
work for inventions created pursuant
to a commission, unless otherwise
provided in the contract.
2. If the employee made the invention in
the course of his employment
contract:
The
employee,
if
the
inventive activity is not part
of his regular duties even if
the employee uses the time,
facilities and materials of the
employer.
The
employer,
if
the
invention is the result of the
performance of his regularly
assigned duties, unless there
is an agreement, express or
implied, to the contrary.
d. Right of Priority (Sec. 31, IPC)
An application for patent filed by any
person who has previously applied for
the same invention in another country
which by treaty, convention, or law
affords similar privileges to Filipino
citizens, shall be considered as filed as
of the date of filing the foreign
application: Provided, That:
(a) the local application expressly
claims priority;
(b) it is filed within twelve (12)
months from the date the earliest
foreign application was filed; and
(c) a certified copy of the foreign
application together with an
English translation is filed within
six (6) months from the date of
filing in the Philippines.
4. Grounds for Cancellation of a Patents
Cancellation of Patents - Any
interested
person
may,
upon
payment of the required fee,
petition to cancel the patent or any
claim thereof, or parts of the claim,
on any of the following grounds:
(a) That what is claimed as the
invention
is
not
new
or
Patentable;
(b) That the patent does not
disclose the invention in a
manner sufficiently clear and

complete for it to be carried out

by any person skilled in the art;
or
(c) That the patent is contrary to
public order or morality.
Where the grounds for cancellation
relate to some of the claims or parts
of the claim, cancellation may be
effected to such extent only.
5. Remedy of the True and Actual Inventor
If a person, who was deprived of the
patent without his consent or
through fraud is declared by final
court order or decision to be the
true and actual inventor, the court
shall order for his substitution as
patentee, or at the option of the
true inventor, cancel the patent,
and award actual and other
damages in his favor if warranted
by the circumstances. (Sec. 68, IPC)
6. Rights Conferred by a Patent
A patent shall confer on its owner
the following exclusive rights:
(a) Where the subject matter of a
patent is a product, to restrain,
prohibit
and
prevent
any
unauthorized person or entity
from making, using, offering for
sale, selling or importing that
product;
(b) Where the subject matter of a
patent is a process, to restrain,
prevent
or
prohibit
any
unauthorized person or entity
from using the process, and from
manufacturing, dealing in, using,
selling or offering for sale, or
importing any product obtained
directly or indirectly from such
process.
Patent owners shall also have the
right to assign, or transfer by
succession the patent, and to
conclude licensing contracts for the
same. (Sec. 71, IPC)
7. Limitations of Patent Rights (Sec. 72, IPC)

The owner of a patent has no right to

prevent third parties from performing,
without his authorization, the acts
referred to in Section 71 in the following
circumstances:

1. Using a patented product which has

been put on the market in the
Philippines by the owner of the product,
or with his express consent, insofar as
such use is performed after that product
has been so put on the said market;
2. Where the act is done privately and on a
non-commercial scale or for a noncommercial purpose: Provided, That it
does not significantly prejudice the
economic interests of the owner of the
patent;
3. Where the act consists of making or
using exclusively for the purpose of
experiments that relate to the subject
matter of the patented invention;
4. Where the act consists of the
preparation for individual cases, in a
pharmacy or by a medical professional,
of a medicine in accordance with a
medical prescription or acts concerning
the medicine so prepared;
5. Where the invention is used in any ship,
vessel, aircraft, or land vehicle of any
other country entering the territory of
the
Philippines
temporarily
or
accidentally: Provided, That such
invention is used exclusively for the
needs of the ship, vessel, aircraft, or
land vehicle and not used for the
manufacturing of anything to be sold
within the Philippines.

a. Prior User (Sec. 73, IPC)

Any prior user, who, in good faith
was using the invention or has
undertaken serious preparations to
use the invention in his enterprise
or business, before the filing date or
priority date of the application on
which a patent is granted, shall
have the right to continue the use
thereof as envisaged in such
preparations within the territory
where the patent produces its
effect.

The right of the prior user may only be

transferred or assigned together with his
enterprise or business, or with that part of
his enterprise or business in which the use
or preparations for use have been made.

b. Use by the Government (Sec. 74, IPC)

A Government agency or third
person
authorized
by
the
Government
may
exploit
the
invention even without agreement
of the patent owner where:
(a) The public interest, in particular,
national
security,
nutrition,
health or the development of
other sectors, as determined by
the appropriate agency of the
government, so requires; or
(b) A judicial or administrative body
has determined that the manner
of exploitation, by the owner of
the patent or his licensee is anticompetitive.
8. Patent Infringement
It constitutes:
1. The making, using, offering for
sale, selling, or importing a
patented product or a product
obtained directly or indirectly
from a patented process, or
2. the use of a patented process
without the authorization of the
patentee.

Remedies:
1. Civil action - Any patentee, or anyone
possessing any right, title or interest
in and to the patented invention,
whose rights have been infringed,
may bring a civil action before a court
of competent jurisdiction, to recover
from the infringer such damages
sustained thereby, plus attorney's fees
and other expenses of litigation, and
to secure an injunction for the
protection of his rights.
If the damages are inadequate
or
cannot
be
readily
ascertained with reasonable
certainty, the court may award
by way of damages a sum
equivalent
to
reasonable
royalty.
The court may, according to
the circumstances of the case,
award damages in a sum
above the amount found as
actual damages sustained:

Provided, That the award does

not exceed three (3) times the
amount of such actual
damages.
The court may, in its
discretion, order that the
infringing goods, materials
and
implements
predominantly used in the
infringement be disposed of
outside the channels of
commerce
or
destroyed,
without compensation.
Anyone who actively induces
the infringement of a patent or
provides the infringer with a
component of a patented
product or of a product
produced because of a
patented process knowing it to
be especially adopted for
infringing
the
patented
invention and not suitable for
substantial non-infringing use
shall
be
liable
as
a
contributory infringer and
shall be jointly and severally
liable with the infringer. (Sec.
76, IPC)
2. Criminal action - If infringement is
repeated by the infringer or by anyone
in connivance with him after finality
of the judgment of the court against
the infringer, the offenders shall,
without prejudice to the institution of
a civil action for damages, be
criminally liable therefor and, upon
conviction, shall suffer imprisonment
for the period of not less than six (6)
months but not more than three (3)
years and/or a fine of not less than
One
hundred
thousand
pesos
(P100,000) but not more than Three
hundred thousand pesos (P300,000),
at the discretion of the court. The
criminal action herein provided shall
prescribe in three (3) years from date
of the commission of the crime. (Sec.
84, IPC)
a. Tests in Patent Infringement
i. Literal Infringement

Resort must be had, in the first

instance, to words of the claim.
If the accused matter clearly
falls
within
the
claim,
infringement is committed.
Minor
modifications
are
sufficient to put the item
beyond literal infringement.
ii. Doctrine of Equivalents
There is infringement where a
device appropriates a prior
invention by incorporating its
innovative
concept
and,
although
with
some
modification
and
change,
performs substantially the same
function in substantially the
same
way
to
achieve
substantially the same result.
b. Defenses in Action for Infringement

In an action for infringement, the

defendant, in addition to other
defenses available to him, may show
the invalidity of the patent, or any
claim thereof, on any of the grounds
on which a petition of cancellation
can be brought.
9. Licensing
Modes:
a. Voluntary the grant by the
patent owner to a third person of
the right to exploit a patented
invention.
Rights of a licensor - In the
absence of any provision to the
contrary in the technology
transfer arrangement, the grant
of a license shall not prevent
the licensor from granting
further licenses to third person
nor from exploiting the subject
matter
of
the
technology
transfer arrangement himself.

b. Compulsory - The Director of Legal

Affairs may grant a license to exploit a
patented invention, even without the
agreement of the patent owner, in
favor of any person who has shown his
capability to exploit the invention,

under
any
of
the
following
circumstances:
1. National emergency or other
circumstances of extreme urgency;
2. Where the public interest, in
particular,
national
security,
nutrition,
health
or
the
development of other vital sectors
of the national economy as
determined by the appropriate
agency of the Government, so
requires; or
3. Where a judicial or administrative
body has determined that the
manner of exploitation by the
owner of the patent or his licensee
is anti-competitive; or
4. In case of public non-commercial
use of the patent by the patentee,
without satisfactory reason;
5. If the patented invention is not
being worked in the Philippines on
a commercial scale, although
capable of being worked, without
satisfactory reason: Provided, That
the importation of the patented
article shall constitute working or
using the patent.
10.Assignment and Transmission of Rights
Transmission of Rights - Patents or
applications
for
patents
and
invention to which they relate, shall
be protected in the same way as
the rights of other property under
the Civil Code. Inventions and any
right, title or interest in and to
patents and inventions covered
thereby, may be assigned or
transmitted:
1. by inheritance or bequest, or
2. may be the subject of a license
contract.
Assignment of Inventions - An
assignment may be:
1. of the entire right, title or
interest in and to the patent and
the invention covered thereby,
or
2. of an undivided share of the
entire patent and invention, in

which event the parties become

joint owners thereof.
An assignment may be
limited
to
a
specified
territory.
Form of Assignment - The
assignment must be:
1. in writing,
2. acknowledged before a
notary public or other
officer
authorized
to
administer
oath
or
perform notarial acts, and
3. certified under the hand
and official seal of the
notary or such other
officer.
4. Recorded in the IPO Such instruments shall be
void as against any
subsequent purchaser or
mortgagee for valuable
consideration and without
notice, unless, it is so
recorded in the Office,
within three (3) months
from the date of said
instrument, or prior to
the subsequent purchase
or mortgage
C. Trademarks
1. Definition of Marks, Collective Marks,
Trade Names

"Mark" - means any visible sign capable of

distinguishing the goods (trademark) or
services (service mark) of an enterprise and
shall include a stamped or marked container
of goods.
"Collective mark"- means any visible sign
designated as such in the application for
registration and capable of distinguishing
the origin or any other common
characteristic, including the quality of goods
or services of different enterprises which use
the sign under the control of the registered
owner of the collective mark.
"Trade name" - means the name or
designation identifying or distinguishing an
enterprise.

2. Acquisition of Ownership of Mark

The rights in a mark shall be acquired
through valid registration. (Sec. 122,
IPC)
1. Acquisition of Ownership of Trade
Name
Trade names and business names are
acquired through adoption and use.
Registration is not required.
4. Non- Registrable Marks:

A mark cannot be registered if it:

(a) Consists of immoral, deceptive or
scandalous matter, or matter which may
disparage or falsely suggest a connection
with persons, living or dead, institutions,
beliefs, or national symbols, or bring
them into contempt or disrepute;
(b) Consists of the flag or coat of arms or
other insignia of the Philippines or any
of its political subdivisions, or of any
foreign nation, or any simulation thereof;
(c) Consists of a name, portrait or signature
identifying a particular living individual
except by his written consent, or the
name, signature, or portrait of a deceased
President of the Philippines, during the
life of his widow, if any, except by
written consent of the widow;
(d) Is identical with a registered mark
belonging to a different proprietor or a
mark with an earlier filing or priority
date, in respect of:
(i) The same goods or services, or
(ii) Closely related goods or services,
or
(iii) If it nearly resembles such a
mark as to be likely to deceive or
cause confusion;
(e) Is identical with, or confusingly similar
to, or constitutes a translation of a mark
which is considered by the competent
authority of the Philippines to be wellknown internationally and in the
Philippines, whether or not it is
registered here, as being already the
mark of a person other than the applicant
for registration, and used for identical or
similar goods or services: Provided, That
in determining whether a mark is wellknown, account shall be taken of the

knowledge of the relevant sector of the

public, rather than of the public at large,
including knowledge in the Philippines
which has been obtained as a result of
the promotion of the mark;
(f) Is identical with, or confusingly similar
to, or constitutes a translation of a mark
considered well-known in accordance
with the preceding paragraph, which is
registered in the Philippines with respect
to goods or services which are not
similar to those with respect to which
registration is applied for: Provided,
That use of the mark in relation to those
goods or services would indicate a
connection between those goods or
services, and the owner of the registered
mark: Provided further, That the interests
of the owner of the registered mark are
likely to be damaged by such use;
(g) Is likely to mislead the public,
particularly as to the nature, quality,
characteristics or geographical origin of
the goods or services;
(h) Consists exclusively of signs that are
generic for the goods or services that
they seek to identify;
(i) Consists exclusively of signs or of
indications that have become customary
or usual to designate the goods or
services in everyday language or in bona
fide and established trade practice;
(j) Consists exclusively of signs or of
indications that may serve in trade to
designate the kind, quality, quantity,
intended purpose, value, geographical
origin, time or production of the goods
or rendering of the services, or other
characteristics of the goods or services;
(k) Consists of shapes that may be
necessitated by technical factors or by
the nature of the goods themselves or
factors that affect their intrinsic value;
(l) Consists of color alone, unless defined
by a given form; or
(m)Is contrary to public order or morality.
As regards signs or devices mentioned in
paragraphs (j), (k), and (l), nothing shall
prevent the registration of any such sign or
device which has become distinctive in
relation to the goods for which registration
is requested as a result of the use that have

been made of it in commerce in the

Philippines. The Office may accept as prima
facie evidence that the mark has become
distinctive, as used in connection with the
applicant's goods or services in commerce,
proof of substantially exclusive and
continuous use thereof by the applicant in
commerce in the Philippines for five (5)
years before the date on which the claim of
distinctiveness is made.
The nature of the goods to which the mark is
applied will not constitute an obstacle to
registration

5. Prior Use of Mark as a Requirement

Actual prior use in Commerce in the
Philippines has been abolished as a
condition for the registration of a
trademark. (RA 8293)

Non-use of a Mark When Excused - Non-use

of a mark may be excused:
1.
if caused by circumstances arising
independently of the will of the
trademark owner. Lack of funds shall not
excuse non-use of a mark.
2. The use of the mark in a form different
from the form in which it is registered,
which does not alter its distinctive
character, shall not be ground for
cancellation or removal of the mark and
shall not diminish the protection granted
to the mark.
3. The use of a mark in connection with one
or more of the goods or services
belonging to the class in respect of which
the mark is registered shall prevent its
cancellation or removal in respect of all
other goods or services of the same class.
4. The use of a mark by a company related
with the registrant or applicant shall inure
to the latter's benefit, and such use shall
not affect the validity of such mark or of
its registration: Provided, That such mark
is not used in such manner as to deceive
the public. If use of a mark by a person is
controlled by the registrant or applicant
with respect to the nature and quality of
the goods or services, such use shall inure
to the benefit of the registrant or
applicant.
6.
Tests
to
Determine
Similarity between Marks

Confusing

a. Dominancy Test
Focuses on the similarity of the
prevalent features of the competing
marks. If the competing trademark
contains the main or essential
dominant features of another, and
confusion
is
likely
to
result,
infringement takes place.
b. Holistic Test
Confusing
similarity
is
to
be
determined on the basis of visual,
aural, connotative comparisons and
overall impressions engendered by the
marks in controversy as they are
encountered in the marketplace.
7. Well-Known Marks
A mark which a competent authority
of the Philippines has designated to be
well-known internationally and in the
Philippines.
8. Rights Conferred by Registration

1. The owner of a registered mark shall

have the exclusive right to prevent all
third parties not having the owner's
consent from using in the course of trade
identical or similar signs or containers
for goods or services which are identical
or similar to those in respect of which
the trademark is registered where such
use would result in a likelihood of
confusion. In case of the use of an
identical sign for identical goods or
services, a likelihood of confusion shall
be presumed.
2. The exclusive right of the owner of a
well-known mark which is registered in
the Philippines, shall extend to goods
and services which are not similar to
those in respect of which the mark is
registered: Provided, That use of that
mark in relation to those goods or
services would indicate a connection
between those goods or services and the
owner of the registered mark: Provided
further, That the interests of the owner of
the registered mark are likely to be
damaged by such use. (Sec. 147, IPC)
9. Use by Third Parties of Names, etc.
Similar to Registered Mark

 Registration of the mark shall not

confer on the registered owner the
right to preclude third parties from
using
bona
fide
their
names,
addresses,
pseudonyms,
a
geographical
name,
or
exact
indications
concerning
the
kind,
quality, origin, or time of production or
of supply, of their goods or services.
10. Infringement and Remedies
a. Trademark Infringement
Any person who shall, without the
consent of the owner of the registered
mark:
1. Use in commerce any reproduction,
counterfeit, copy, or colorable
imitation of a registered mark or
the same container or a dominant
feature thereof in connection with
the
sale,
offering
for
sale,
distribution, advertising of any
goods or services including other
preparatory steps necessary to
carry out the sale of any goods or
services on or in connection with
which such use is likely to cause
confusion, or to cause mistake, or
to deceive; or
2. Reproduce, counterfeit, copy or
colorably imitate a registered mark
or a dominant feature thereof and
apply
such
reproduction,
counterfeit, copy or colorable
imitation to labels, signs, prints,
packages, wrappers, receptacles or
advertisements intended to be
used in commerce upon or in
connection with the sale, offering
for sale, distribution, or advertising
of goods or services on or in
connection with which such use is
likely to cause confusion, or to
cause mistake, or to deceive, shall
be liable in a civil action for
infringement by the registrant for
the remedies hereinafter set forth:
Provided, That the infringement
takes place at the moment any of
the acts stated in Subsection 155.1
or this subsection are committed
regardless of whether there is
actual sale of goods or services
using the infringing material.
b. Damages

In any suit for infringement, the owner

of the registered mark shall not be
entitled to recover profits or damages
unless the acts have been committed
with knowledge that such imitation is
likely to cause confusion, or to cause
mistake, or to deceive.
c. Requirement of Notice
Such knowledge is presumed if the
registrant gives notice that his mark is
registered by displaying with the mark
the words '"Registered Mark" or the
letter R within a circle or if the
defendant had otherwise actual notice
of the registration.
11. Unfair Competition - Unfair Competition,

Rights, Regulation and Remedies. Rights: A person who has identified in the
mind of the public the goods he
manufactures or deals in, his business or
services from those of others, whether or not
a registered mark is employed, has a
property right in the goodwill of the said
goods, business or services so identified,
which will be protected in the same manner
as other property rights.
Unfair competition: Any person who shall
employ deception or any other means
contrary to good faith by which he shall pass
off the goods manufactured by him or in
which he deals, or his business, or services
for those of the one having established such
goodwill, or who shall commit any acts
calculated to produce said result, shall be
guilty of unfair competition, and shall be
subject to an action therefor.
In particular, and without in any way
limiting the scope of protection against
unfair competition, the following shall be
deemed guilty of unfair competition:
(a) Any person, who is selling his goods and
gives them the general appearance of
goods of another manufacturer or dealer,
either as to the goods themselves or in
the wrapping of the packages in which
they are contained, or the devices or
words thereon, or in any other feature of
their appearance, which would be likely
to influence purchasers to believe that
the goods offered are those of a
manufacturer or dealer, other than the

actual manufacturer or dealer, or who

otherwise clothes the goods with such
appearance as shall deceive the public
and defraud another of his legitimate
trade, or any subsequent vendor of such
goods or any agent of any vendor
engaged in selling such goods with a like
purpose;
(b) Any person who by any artifice, or
device, or who employs any other means
calculated to induce the false belief that
such person is offering the services of
another who has identified such services
in the mind of the public; or
(c) Any person who shall make any false
statement in the course of trade or who
shall commit any other act contrary to
good faith of a nature calculated to
discredit the goods, business or services
of another.
Remedies: Civil, criminal and administrative
remedies as provided by Sections 156, 157
and 161 of the IPC.
12. Trade Names or Business Names
A name or designation may not be
used as a trade name if by its nature
or the use to which such name or
designation may be put, it is contrary
to public order or morals and if, in
particular, it is liable to deceive trade
circles or the public as to the nature of
the enterprise identified by that name.

(a) Notwithstanding any laws or regulations

providing for any obligation to register
trade names, such names shall be protected,
even prior to or without registration, against
any unlawful act committed by third parties.
(b) In particular, any subsequent use of the
trade name by a third party, whether as a
trade name or a mark or collective mark, or
any such use of a similar trade name or
mark, likely to mislead the public, shall be
deemed unlawful.
13. Collective Marks

Collective Marks is a mark used by the

members of a cooperative, an association or
other collective group or an organization.
Application for registration of a collective
mark - shall designate the mark as a
collective mark and shall be accompanied by

a copy of the agreement, if any, governing

the use of the collective mark.
Grounds for cancellation of the registration
of a collective mark
1. if the person requesting the cancellation
proves that only the registered owner
uses the mark, or
2.
if he uses or permits its use in
contravention of the agreements
3. or that he uses or permits its use in a
manner liable to deceive trade circles or
the public as to the origin or any other
common characteristics of the goods or
The registration of a collective mark, or an
application therefor shall not be the subject
of a license contract. (Sec. 167, IPC)
D. Copyrights
1. Basic Principles, Sections 172.2, 175 and 181
What is a copyright?
Copyright is the legal protection extended to the
owner of the rights in an original work.
Original work refers to every production in the
literary, scientific and artistic domain. Among the
literary and artistic works enumerated in the IP
Code includes books and other writings, musical
works, films, paintings and other works, and
computer programs.
Works are protected by the sole fact of their
creation, irrespective of their mode or form of
expression, as well as their content, quality and
purpose. Thus, it does not matter if, in the eyes of
some critics, a certain work has little artistic value.
So long as it has been independently created and
has a minimum of creativity, the same enjoys
copyright
protection.
(http://www.ipophil.gov.ph/index.php/services/copy
right/ownership-and-rights)
Who is entitled to a copyright?
A person to be entitled to a copyright must
be the original creator of the work. He must
have created it by his own skill, labor and
judgment without directly copying or
evasively imitating the work of another.
(Chuan vs CA, G.R. No. 130360. August 15,
2001)
What is the scope of a copyright?
the scope of a copyright is confined to literary
and artistic works which are original
intellectual creations in the literary and

artistic domain protected from the moment

of their creation. (Kho vs CA, G.R. No.
115758. March 19, 2002)

The copyright does not extend to an idea,

procedure, process, system, method of operation,
concept, principle, or discovery, regardless of the
form in which it is described, explained, illustrated,
or embodied in such work. (Joaquin Jr vs Drilon,
G.R. No. 108946. January 28, 1999)
When is copyright vested?
Literary and artistic works "works", are
original intellectual creations in the literary
and artistic domain protected from the
moment of their creation (Sec. 172.1). These
works are protected by the sole fact of their
creation, irrespective of their mode or form
of expression, as well as their content,
quality and purpose. (Sec. 172.2)
Is copyright the same as the covered
material object?
Section 181. Copyright and Material Object.
- The copyright is distinct from the property
in the material object subject to it.
Consequently, the transfer or assignment of
the copyright shall not itself constitute a
transfer of the material object. Nor shall a
transfer or assignment of the sole copy or of
one or several copies of the work imply
transfer or assignment of the copyright.

2. Copyrightable Works
Copyright, in the strict sense of the term, is
purely a statutory right. It is a new or
independent right granted by the statute,
and not simply a pre-existing right
regulated by the statute. Being a statutory
grant, the rights are only such as the statute
confers, and may be obtained and enjoyed
only with respect to the subjects and by the
persons, and on terms and conditions
specified in the statute.
Since . . . copyright in published works is
purely a statutory creation, a copyright may
be obtained only for a work falling within the
statutory
enumeration
or
description.
(Joaquin
Jr
vs
Drilon,
G.R.
No.
108946. January 28, 1999)

a. Original Works
What are original works?
SECTION 172. Literary and Artistic Works.
172.1. Literary and artistic works,
hereinafter referred to as "works", are
original intellectual creations in the
literary and artistic domain protected
from the moment of their creation and
shall include in particular:

1.

Books, pamphlets, articles and

other writings;
2. Periodicals and newspapers;
3. Lectures,
sermons,
addresses,
dissertations prepared for oral
delivery, whether or not reduced in
writing or other material form;
4. Letters;
5. Dramatic
or
dramatico-musical
compositions; choreographic works
or entertainment in dumb shows;
6. Musical compositions, with or
without words;
7. Works
of
drawing,
painting,
architecture, sculpture, engraving,
lithography or other works of art;
models or designs for works of art;
8. Original ornamental designs or
models for articles of manufacture,
whether or not registrable as an
industrial design, and other works
of applied art;
9. Illustrations, maps, plans, sketches,
charts and three-dimensional works
relative to geography, topography,
architecture or science;
10. Drawings or plastic works of a
scientific or technical character;
11. Photographic
works
including
works produced by a process
analogous to photography; lantern
slides;
12. Audiovisual
works
and
cinematographic works and works
produced by a process analogous
to cinematography or any process
for making audio-visual recordings;
13. Pictorial
illustrations
and
advertisements;
14. Computer programs; and
15. Other literary, scholarly, scientific
and artistic works.
172.2. Works are protected by the sole
fact of their creation, irrespective of their
mode or form of expression, as well as of
their content, quality and purpose.

b. Derivative Works
What are derivative works?
Derivative works are creations that are based on
an existing work. Thus, the series of film Harry
Potter is a derivative work based on the novel
of the same title. (Essentials of Intellectual
Property Law, E. Salao, 2nd edition, 2012)
SECTION 173. Derivative Works.

173.1. The following derivative works

shall also be protected by copyright:
a.
Dramatizations,
translations,
adaptations,
abridgments,
arrangements, and other alterations of
literary or artistic works; and
b. Collections of literary, scholarly or
artistic works, and compilations of
data and other materials which are
original by reason of the selection or
coordination or arrangement of their
contents.
173.2. The works referred to in
paragraphs (a) and (b) of Subsection
173.1 shall be protected as new works:
Provided however, That such new work
shall not affect the force of any subsisting
copyright upon the original works
employed or any part thereof, or be
construed to imply any right to such use
of the original works, or to secure or
extend copyright in such original works.
Who is a publisher?
A publisher is someone who makes public
something. This word has evolved to
mean as someone who is engaged in the
business of publishing reading materials
such
as
books,
newspapers
and
magazines.
Publishers of songs are
usually called record producer. In the film
industry, it is usually called movie
producer. (Essentials of Intellectual Property

character of mere items of press

information; and
c. or any official text of a legislative,
administrative or legal nature, as well
as any official translation thereof.
In addition Sec. 176.1 states:
No copyright shall subsist in any work of the
Government of the Philippines.
When is it considered a work of the
Government of the Philippines?
a. The work was created by an officer or
employee
of
the
Philippine
Government or any of its subdivisions
and
instrumentalities,
including
GOCCs; and
b. The work was done as part of his
regularly prescribed official duties.
General rule:
Prior approval of the
government agency or office wherein
the work is created shall be necessary
for exploitation of such work for profit.
Such agency or office may, among
other things, impose as a condition the
payment of royalties. (Sec. 176.1)
Exception: The author of speeches,
lectures, sermons, addresses, and
dissertations
mentioned
in
the
preceding paragraphs shall have the
exclusive right of making a collection of
his works.

Law, E. Salao, 2nd edition, 2012)

not precluded from receiving and holding

copyrights transferred to it by assignment,
bequest or otherwise; nor shall publication or
republication by the Government in a public
document of any work in which copyright is
subsisting be taken to cause any abridgment
or annulment of the copyright or to authorize
any use or appropriation of such work
without the consent of the copyright owner.

What does rights does a publisher

have?
Sec. 174 provides;
a. the right to publish granted by the
author, his heirs, or assigns
b. the publisher shall have a copyright
consisting merely of the right of
reproduction of the typographical
arrangement of the published edition
of the work. (n)

3. Non-Copyrightable Works
What are non-copyrightable works?
. The following are unprotected subject
matter (Sec. 175):
a. any idea, procedure, system, method
or
operation,
concept,
principle,
discovery or mere data as such, even
if they are expressed, explained,
illustrated or embodied in a work;
b. to news of the day and other
miscellaneous
facts
having
the

Can the government be a copyright owner?

Yes. Sec. 176.3 provides that the Government is

4. Rights of Copyright Owner

WHAT ARE THE TWO TYPES OF RIGHTS
UNDER COPYRIGHT?
There are two types of rights under
copyright:
(1) economic rights, so-called because
they enable the creator to obtain
remuneration from the exploitation of
his works by third parties, and
(2) moral rights, which makes it possible
for the creator to undertake measures
to maintain and protect the personal
connection between himself and the
work.

Economic rights include (Sec. 177):

1) Reproduction
2) Transformation
3) First public distribution
4) Rental
5) Public display
6) Public performance
7) Other communication to the
public of the work.

Moral rights include:

1) Right of Attribution
2) Right of Alteration
3) Right of Integrity (object to any
4)

prejudicial distortion)
Right to restrain use of his name.

Exception to the moral rights

When an author contributes to a
collective work, his right to have
his contribution attributed to him
is deemed waived unless he
expressly reserves it. A collective
work is a work which has been
created by two (2) or more natural
persons at the initiative and under
the direction of another with the
understanding that it will be
disclosed by the latter under his
own name and that contributing
natural persons will not be
identified.
In the absence of a contrary
stipulation at the time an author
licenses or permits another to use
his work, the necessary editing,
arranging or adaptation of such
work, for publication, broadcast,
use
in
a
motion
picture,
dramatization, or mechanical or
electrical
reproduction
in
accordance with the reasonable
and customary standards or
requirements of the medium in
which the work is to be used, shall
not be deemed to contravene the
author's rights secured by this
chapter.
Nor
shall
complete
destruction
of
a
work
unconditionally transferred by the
author be deemed to violate such
rights.

Resale right: In every sale or lease of an

original work of painting or sculpture or of
the original manuscript of a writer or

composer, subsequent to the first

disposition thereof by the author, the
author or his heirs shall have an
inalienable right to participate in the gross
proceeds of the sale or lease to the extent
of five percent (5%). This right shall exist
during the lifetime of the author and for
fifty (50) years after his death.
Related rights
Authors create works to disseminate
them to as large an audience as
possible. Obviously, they cannot do the
dissemination by themselves. They
need the help of persons or entities who
contribute
substantial
creative,
technical or organizational skill in the
process of making the works available
to the public and whose interests ought
to be protected to encourage them to
continue with their work. Hence, their
rights are referred to as related rights
or neighboring rights since they are
related to or are neighboring on the
authors copyright.

Thus, we have the related rights of: (a)

performers; (b) producers of sound
recordings;
and
(c)
broadcasting
organizations.

(Source:http://www.ipophil.gov.ph/index.ph
p/services/copyright/ownership-and-rights)
5. Rules on Ownership of Copyright (Sec. 178)
Creator
To Whom It Belongs
Author of the work, his
Single Creator
heirs or assigns
If work consists of
UNIDENTIFIABLE
parts, co-authors jointly
as co-owners, unless
there is an agreement to
Joint Creator
the contrary.
If work consists of
IDENTIFIABLE parts,
author of each part own
the that he has created.
If the creation is PART
of his regular duties:
employer, unless there is
Employees Creation
agreement
to
the
contrary.
If it is NOT: employee
Commissioned Work Work itself: person
commissioning

Copyright:
creator,
unless there is a written
stipulation
to
the
contrary.
For exhibition purposes:
producer
For all other purposes:
Cinematographic
producer, author of the
Works
scenario, composer, film
director, author of the
work.
Publishers are deemed
representative of the
author, unless:
1. The
contrary
appears;
Anonymous
and
2. Pseudonyms
or
Pseudonymous
adopted
name
Works
leaves no doubt as
to the authors
identity; or author
discloses
his
identity.(Sec. 179)
Contributor is deemed to
have waived his right
Collective Works
unless he expressly
reserves it. (Sec. 195)
Writer.
However, the court may
authorize
their
publication
or
Letters
dissemination if the
public good or the
interest of justice so
requires. (Art. 223, New
Civil Code)
(Table from San Beda 2009 Commercial Law
Reviewer)
What is the duration of the protection granted
various categories of works?
Category
of
Work
Books,
writings,
articles, musical
compositions,
dramaticomusical works,
etc.

Duration
of
Protection
Liefe-time of
author PLUS
fifty
years
thereafter

Provision
of Law
Section
213.1,
et
seq

Works
applied art

of Twenty-five
Section
years from the 213.4
time of making
Photographic
Fifty year from Section
works
publication, if 213.5
published
or
from making, if
unpublished
Audio-visual
Fifty
years Section
works,
from date of 213.6
including
making
if
recordings on unpublished
optical
or and
from
magnetic media publication if
published.
(Table from a paper entitled INTELLECTUAL
PROPERTY RIGHTS: Protecting Economic
Interests by Fr. Ranhilio Callangan Aquino)
What other protection is afforded under Part IV of
the Intellectual Property Code?
Category
Performances
of
actos,
singers,
musicians,
dancers and
other
in
similar
positions.

Scope
of
Protection
1. Broadcasting
or telecasting
of
their
performance;
2. Fixation
of
their unfixed
performance;
3. Authorizing
the direct or
indirect
reproductions
of
their
performance in
any form;
4. Authorizing
the first public
distribution of
the
original
and copies of
the fixed forms
of
their
performance;
5. Authorizing
commercial
rental of the
original
and
copies of the

Provision
of Law
Section
203.1
et
seq.

Section
205

Section
206

fixed forms of
their
performance;
6. Authorizing
communicatio
n to the public
of
their
performance
by such means
as television.

Broadcasting
organizations
(Broadcast =
Telecast)

Important:
These rights cease
the moment the
performer
authorizes
broadcast/telecast
or fixation of her
performance
She is entitled
though
to
additional
remuneration per
broadcast
or
communication to
the public to at
least
5%
of
original
compensation.
Procedures of 1. Right
to
sound
reproduce
recording
2. Right
to
distribute:
either through
sale or rental
3. Right
to
authorized
commercial
rental
4. Right to single
equitable
remuneration
when
recording
directly used
for
broadcasting
or
communicatio
n
to
the
public.

1. Right
to
prevent
rebroadcasting
of broadcasts;
2. Recording of
their
broadcasts for
the purpose n
to
the
of
communicatio
n
to
the
public;
3. The use of
such recording
for
fresh
transmission
or recording.

Section
211

1961
Rome
Conventio
Note though:
n
There
is
no Article
prohibition of the 13.b
private recording
of any broadcast
or telecast, as long
as this is for
private education,
etc. use.

Section
208

Section
209

It is however a
legal
possibility
for
a
foreign
broadcasting
organization
to
which we have
access
in
the
Philippines
to
prohibit altogether
the fixation of
their broadcasts.
(Table from a paper entitled INTELLECTUAL
PROPERTY RIGHTS: Protecting Economic
Interests by Fr. Ranhilio Callangan Aquino)
6. Limitations on Copyright
What are the limitations on copyright? (GF-PARRI)
1) General limitations (Sec. 184);
2) Fair use (Sec. 185);
3) In case of a work of architecture, the right to
control the reconstruction or rehabilitation in
the same style as the original of the building
(Sec. 186);

4) Private reproduction of a published work in a

single copy by a natural person for research
and private study (Sec. 187);
5) Repographic reproduction in a single copy by
non-profit
libraries,
under
certain
circumstances (Sec 188);
6) Reproduction, under certain circumstances, of
a computer program in one back-up copy by
the lawful owner of this program (Sec. 189);
7) Importation for personal purposes under certain
conditions (Sec. 190).
(from San Beda 2009 Commercial Law
Reviewer)
What are the general limitations on
copyright?
The following acts shall not constitute
infringement of copyright:
1) Performance of a work, once it has

been lawfully made accessible to

the public, if done privately and
free of charge or for a charitable
or religious institution or society.
2) The making of quotations from a

published work if they are

compatible with fair use and only
to the extent justified for the
purpose.
3) Communication to the public by

mass media of articles on current

political,
social,
economic,
scientific
or
religious
topic,
lectures, addresses and other
works of the same nature
4) As

part of reports of current

events (e.g. music played or tunes
on the occasion of a sporting
event and such tunes were picked
up during a new coverage of the
event).

5) For teaching purposes, provided

that the source and of the name of

the author, if appearing in the
work, are mentioned.
6) Recording

made in educational
institutions of a work included in a
broadcast for the use of such
educational institutions, provided
that such recording must be

deleted within a reasonable period

after they were first broadcast.
7) The

making
of
ephemeral
recordings by a broadcasting
organization by means of its own
facilities and for use in its own
broadcast.

8) The use made of a work by or

under the direction or control of

the government, by the National
Library
or
by
educational,
scientific
or
professional
institutions where such use is in
the
public
interest
and
is
compatible with fair use.
9) The public performance of a work,

in a place where no admission fee

is charged.
10) Public display of the original or a

copy of the work not made by

means of a film, slide, television
image or otherwise on screen or
by means of any other device or
process (e.g. Public display using
posters mounted on walls and
display boards).
11) Any use made of a work for the

purpose
of
any
judicial
proceedings or for the giving of
professional advice by a legal
practitioner.
(from UST Golden Notes 2011)

a. Doctrine of Fair Use

What Is Fair Use?
In its most general sense, a fair use is any
copying of copyrighted material done for a
limited and transformative purpose, such
as to comment upon, criticize, or parody a
copyrighted work. Such uses can be done
without permission from the copyright owner.
In other words, fair use is a defense against a
claim
of
copyright
infringement.
(http://fairuse.stanford.edu/overview/fairuse/what-is-fair-use/)
Fair use is a legal doctrine that permits
limited use of copyrighted material without
acquiring permission from the rights holders.
It is one type of limitation and exception to
the exclusive rights copyright law grants to
the
author
of
a
creative
work.
(https://en.wikipedia.org/wiki/Fair_use)

Section 185. Fair Use of a Copyrighted

Work. - 185.1. The fair use of a copyrighted
work for criticism, comment, news reporting,
teaching including multiple copies for
classroom use, scholarship, research, and
similar purposes is not an infringement of
copyright.
Decompilation,
which
is
understood here to be the reproduction of
the code and translation of the forms of the
computer program to achieve the interoperability of an independently created
computer program with other programs may
also constitute fair use.
Sec. 185 also includes the criteria to
determine fair use as follows:
(a) The purpose and character of the use,
including whether such use is of a
commercial nature or is for non-profit
educational purposes;
(b) The nature of the copyrighted work;
(c) The amount and substantiality of the
portion used in relation to the
copyrighted work as a whole; and
(d) The effect of the use upon the potential
market for or value of the copyrighted
work.
185.2. The fact that a work is unpublished
shall not by itself bar a finding of fair use if
such finding is made upon consideration of
all the above factors.

b. Copyright Infringement
What is copyright infringement?
Infringement of a copyright is a trespass on a
private domain owned and occupied by the owner
of the copyright, and, therefore, protected by law,
and infringement of copyright, or piracy, which is a
synonymous term in this connection, consists in the
doing by any person, without the consent of the
owner of the copyright, of anything the sole right to
do which is conferred by statute on the owner of the
copyright. (Columbia Pictures, Inc. v. CA)
What ris the difference between copyright
infringement and plagiarism?
Copyright
Plagiarism
Infringement
The unauthorized use The use of anothers
of
copyrighted information, language,
material in a manner or writing, when done
that violates one of without
proper
the copyright owners acknowledgment of the
exclusive rights, such original source.
as the right to
reproduce or perform

the copyrighted work,

or to make derivative
works that build upon
it.
Copyright
infringement is a very
broad
term
that
describes a variety of
acts.
It may be
duplication of work,
rewriting a piece,
performing a written
work
or
doing
anything
that
is
normally considered
to be the exclusive
right of the copyright
holder.
There is no copyright
infringement
on
public documents.

Plagiarism is specific as
it refers only to using
someone elses work
without
proper
acknowledgment.

Public documents can

be plagiarized so long
as
it
is
not
acknowledged.

(from UST Golden Notes 2011)

Statutorily
protected
material

Examples
of works:

Acts
of
Infringement

1.

Books
and
other
writings;

Published
or
unpublished
articles;

Reproduci
ng
Adapting;
all forms
of
2.
Periodica
transforma
ls
and
tion
newspap
Selling or
ers;
transferrin
Music
or
g
movie files
ownership
on
the
of
the
Internet.
object
unless one
is already
Electronic or
the lawful
e-Books
owner
are
thereof
books.
Importatio
Web-site
publicati
n of the
ons are
work
covered
(Applies to all
as
are
material
webobjects
pages,
protected by
including
copyright)
sound
(Section 177)
and
Unauthoriz
movie
ed
recording
copying,
s
available
reproducti
on
the
on,
Internet
disseminati
(Electron
on,
ic
distributio
Commer
n,
use,
ce
Act,
removal,
R.A.
alteration,
8792,
substitutio
Section
n,
33,b)
modificati
on,
storage,
uploading,
downloadi
ng,
communic
ation,
making
available
to
the

public,
broadcasti
ng.
(Electroni
c
Commerc
e
Act,
R.A.
8792,
Section
33,b)

3.

Lectures
and oral
presenta
tions,
whether
or
reduced
to
writing
or not;

4.

Letters;

Lectures
Unauthoriz
delivered by
ed
a reviewer
compilatio
for the Bar
n
(by
Exams
recording
whether in
or
writing or
tranascripti
not;
on) of the
homilies
orally
delivered by
delivered
a
priest,
pieces
whether he
Section
has notes or
176.2
not.
Besides the I.P.
Code
provisions, see
Art. 723, Civil
Code

5.

6.
7.

8.

9.

10.

Dramatic
or
dramatic
omusical
composit
ions;
choreogr
aphy
Musical
composit
ions
Drawings
,
paintings
,
architect
ure,
sculpture
,
other
works of
art and
models
thereof

Operas,
Public
operettas,
performan
musicals;
ce or other
Note:
forms of
Popular
communic
dance steps
ation to the
ballroom
public.
dancing Section 177.6
not
included.
-dittoArchitectura
l plans
Painting of
Joya;
Clay
models of
sculptural
works

Works of Decorative
applied
prints
of
art;
shirts
or

blouses or
skirts;
Creatively
devised
Illustratio
formats of
ns,
blank forms
maps,
or
even
plans,
receipts;
sketches,
charts
Drawing
s
or
plastic
works of
a
scientific
or
technical
characte
r

Acetate
transparenci
es found in
medical
books
illustrating
body parts;
Plastic
models of
molecular
structures
11. Photogra Photographs
phic and whether on
similar
traditional
products film
or

Constructi
ng
the
building
that
reproduces
the whole
or
a
substantial
part of the
architectur
al work
Section 186

digital
format.
12. Audiovis
ual
works
and
cinemato
graphic
works
13. Pictorial
illustratio
ns
and
advertise Software,
ments;
including
14. Compute
r
program
s;

Piracy of
optical &
magnetic
media

R.A.9293,
Section 19

databases
(excluding
mere data)

15. Other
literary,
scholarly
,
scientific
and
artistic
works.
Section
172

(Table from a paper entitled INTELLECTUAL

PROPERTY RIGHTS: Protecting Economic
Interests by Fr. Ranhilio Callangan Aquino)
What are the available remedies in case of copyright
infringement?
1.

Injunction

2.

Damages, including legal costs and

other expenses, as he may have
incurred due to
the infringement as
well as the profits the infringer may
have made due to such infringement
Impounding during the pendency of the
action
sales
invoices
and
other
documents evidencing sales
Destruction without any compensation
all infringing copies
Moral and exemplary damages (Sec.
216.1); or
Seizure and impounding of any article,
which may serve as evidence in the
court proceedings. (Sec. 216.2)

3.
4.
5.
6.

What are the criminal penalties in case of copyright

infringement?
1. Imprisonment of one (1) year to three (3)
years plus a fine ranging from Fifty
thousand pesos (P50,000) to One hundred
fifty thousand pesos (P150,000) for the
first offense.
2. Imprisonment of three (3) years and one
(1) day to six (6) years plus a fine ranging
from One hundred fifty thousand pesos to
Five hundred thousand (P500,000) for the
second offense.
3. Imprisonment of six (6) years and one day
to nine (9) years plus a fine ranging from
Five hundred thousand pesos (P500,000)
to P1,500,000 for the third offense.
4. In all cases, subsidiary imprisonment in
cases of insolvency.
What is affidavit evidence?
An affidavit made before the notary public in
actions for infringement, reciting the facts
required to be stated under the IPC. (Sec.
216.1)

Note: As a prima facie proof, the affidavit shifts the

burden of proof to the defendant, to prove the
ownership of the copyrighted work.
(All three Q & A above from UST Golden Notes
2011)
E. Rules of Procedure for Intellectual Property
Rights Cases (A.M. No. 10-3-10-SC)
`
What courts shall observe the Rules of
Procedure for Intellectual Property
Rights Cases?
SEC. 2. In what courts applicable. These
Rules shall be observed by the Regional Trial
Courts designated by the Supreme Court as
Special Commercial Courts.
Will the regular rules apply?
SEC. 3. Applicability of the regular rules.
When the court determines that the civil or
criminal action involves complex issues, it
shall issue a special order that the regular
procedure prescribed in the Rules of Court
shall apply, stating the reason therefor.
Where applicable, the Rules of Court shall

apply suppletorily
these Rules.
Are orders
executor?

to

issued

proceedings
by

the

under
court

SEC. 4. Executory nature of orders. Any

order issued by the court under these Rules
is immediately executory unless restrained
by a superior court.
Is there a need for verification
documents filed with the court?

of

SEC.
5.
Verification
and
supporting
documents. Any pleading, motion,
opposition, defense or claim filed by any
interested party shall be supported by
verified statements that the affiant has read
the same and that the factual allegations
therein are true and correct of his personal
knowledge or based on authentic records,
and shall contain as annexes such
documents as may be deemed by the party
submitting the same as supportive of the
allegations in the affidavits.
What is the duty of the clerk of court?
SEC. 6. Duty of the clerk of court. It shall
be the duty of the branch clerk of court to
notify in writing the Director-General of the
intellectual Property Office (IPO) of any
action, suit or roceeding involving a
copyright, trademark, service mark, patent,
industrial design, utility model, undisclosed
information
and
technology
transfer
agreement. Such notice shall set forth: the
names and addresses of the litigants and the
copyright, trademark, service mark, patent
or design registrations involved and, where
applicable, the numbers of their certificates
of registration. The notice shall be submitted
within one (1) month after the filing thereof.
What rules of procedure must be
observed for violation of intellectual
property rights in civil actions and
criminal actions?
Civil Actions

Criminal
Actions
RULE 2. NATURE OF Rule 10 NATURE
PROCEEDINGS
OF PROCEEDINGS
SEC

1.

Scope.

SEC 1. Scope.

Rules 2 to 9 shall
apply to all civil
actions for violations
of
intellectual
property
rights
provided
for
in
Republic Act 8293 or
the
Intellectual
Property Code, as
amended,
including
civil
actions
for
infringement
of
Patent (Section 76),
Utility Model (Section
108) and Industrial
Design (Section 119),
Trademark
Infringement (Section
155 in relation to
Section 163), Unfair
Competition (Section
168 in relation to
Section 163), actions
concerning trademark
license
contracts
(Section
150
in
relation to Section
163),
actions
concerning imported
merchandise or goods
bearing
infringing
marks or trade names
(Section
166
in
relation to Section
163),
actions
for
cancellation of the
registration
of
a
collective
mark
(Section
167
in
relation to Section
163),
False
Designations
of
Origin;
False
Description
or
Representation
(Section
169
in
relation to Section
163),
Breach
of
Contract
(Section
194), civil actions for
infringement
of
copyright,
moral
rights,
performers'
rights,
producers'
rights,
and
broadcasting
rights

Rules 10 to 15
shall apply to all
criminal
actions
for violations of
intellectual
property
rights
provided for in
Republic Act 8293
or the Intellectual
Property Code, as
amended,
including
Repetition
of
Infringement
of
Patent
(Section
84), Utility Model
(Section 108) and
Industrial Design
(Section
119),
Trademark
Infringement
(Section 155 in
relation to Section
170),
Unfair
Competition
(Section 168 in
relation to Section
170),
False
Designations
of
Origin;
False
Description
or
Representation
(Section 169.1 in
relation to Section
170),
infringement
of
copyright, moral
rights,
performers'
rights, producers'
rights,
and
broadcasting
rights
(Section
177, 193, 203,
208 and 211 in
relation to Section
217), and other
violations
of
intellectual
property rights as
may be defined
by law.
SEC. 2. Special
Commercial
Courts
in
the

(Sections 177, 193,

203, 208, 211, and
216),
and
other
violations
of
intellectual property
rights as may be
defined by law.
SEC.
2.
Special
Commercial Courts in
the National Capital
Judicial Region with
authority
to
issue
writs of search and
seizure
enforceable
nationwide. Special
Commercial Courts in
Quezon City, Manila,
Makati,
and
Pasig
shall have authority
to act on applications
for the issuance of
writs of search and
seizure in civil actions
for violations of the
Intellectual Property
Code, which writs
shall be enforceable
nationwide.
The
issuance
of
these
writs
shall
be
governed by the rules
prescribed
in
Re:
Proposed
Rule
on
Search and Seizure in
Civil
Actions
for
Infringement
of
Intellectual Property
Rights (A.M. No. 02-106-SC, which took
effect on February 15,
2002). Within their
respective territorial
jurisdictions,
the
Special
Commercial
Courts in the judicial
regions where the
violation
of
intellectual property
rights occurred shall
have
concurrent
jurisdiction to issue
writs of search and
seizure.

National
Capital
Judicial
Region
with authority to
issue
search
warrants
enforceable
nationwide.
Special
Commercial
Courts in Quezon
City,
Manila,
Makati, and Pasig
shall
have
authority to act
on
applications
for the issuance
of
search
warrants
involving
violations of the
Intellectual
Property
Code,
which
search
warrants shall be
enforceable
nationwide.
Within
their
respective
territorial
jurisdictions, the
Special
Commercial
Courts
in
the
judicial
regions
where
the
violation
of
intellectual
property
rights
occurred
shall
have concurrent
jurisdiction
to
issue
search
warrants.
Accordingly, the
Executive Judges
are
hereby
relieved of the
duty
to
issue
search warrants
involving
violations of the
Intellectual
Property Code in
criminal cases as
stated in Sec. 12,

Rule
COMMENCEMENT
ACTION

Chapter V of A.M.
No.
03-8-02-SC
(Guidelines
on
the Selection and
Appointment
of
Executive Judges
and Defining their
Powers,
Prerogatives and
Duties).
3 Rule
11
OF COMMENCEMENT
OF ACTION

SECTION 1. Pleadings.
The only pleadings
allowed to be filed are
the
complaints,
compulsory
counterclaims
and
cross-claims pleaded
in the answer, and
the answers thereto.
All pleadings shall he
verified.
SEC. 2. Who may file
an action under these
Rules.

Any
intellectual property
right
owner,
or
anyone
possessing
any right, title or
interest under claim
of ownership in any
intellectual property
right, whose right
may
have
been
violated, may file an
action under these
Rules.
Any person who is a
national or who is
domiciled or has a
real
and
effective
industrial
establishment in a
country which is a
party
to
any
convention, treaty or
agreement relating to
intellectual property
rights
or
the
repression of unfair
competition, to which

SECTION 1. How
commenced.

The
filing
of
criminal
cases
falling within the
scope of this Rule
shall
be
by
information after
a prior verified
complaint is filed
under Rule 12 on
Preliminary
Investigation.
When
the
information
is
filed, the verified
complaint and the
affidavits
of
witnesses
together
with
other evidence, in
such number of
copies as there
are accused plus
two (2) copies for
the court's files,
shall be attached
thereto.
In case of failure
to
attach
the
complaint,
affidavit
and
evidence,
the
court shall order
the investigating
prosecutor,
through
the
court's
designated
prosecutor,
to

the Philippines is also

a party, or extends
reciprocal rights to
nationals
of
the
Philippines by law,
shall be entitled to
file an action under
these Rules.
Any foreign national
or juridical person
who
meets
the
requirements of the
immediately
preceding paragraph,
and does not engage
in business in the
Philippines, may also
file an action under
these Rules.
SEC. 3. Form and
contents
of
the
complaint.

The
complaint shall be
verified
and
shall
state the full names
of the parties to the
case. Facts showing
the capacity of a
party to sue or be
sued, or the authority
of a party to sue or
be
sued
in
a
representative
capacity, or the legal
existence
of
an
organized association
of persons that is
made a party, must
be averred. In case of
juridical
persons,
proof of capacity to
sue must be attached
to the complaint.
The complaint shall
contain
a
concise
statement
of
the
ultimate
facts
constituting
the
complainant's cause
or causes of action. It
shall
specify
the
relief(s) sought, but it
may add a general

submit the said

requirements
before the pretrial.
SEC. 2. Where to
file.

The
information,
together
with
attachments,
shall be filed with
the court referred
to in Section 2 of
Rule 1, which has
jurisdiction over
the
territory
where any of the
elements of the
offense occurred.
SEC.
3.
When
warrant of arrest
may
issue.

Within ten (10)

days from the
filing
of
the
information, the
judge
shall
personally
evaluate
the
information
together with the
resolution of the
prosecutor and its
supporting
documents. The
judge
may
immediately
dismiss the case
if the evidence on
record
clearly
fails to establish
probable cause, if
he finds probable
cause, he shall
issue a warrant of
arrest,
or
a
commitment
order
if
the
accused
has
already
been
arrested. In case
of doubt on the
existence
of
probable
cause,
the judge may

prayer
for
such
further
or
other
relief(s) as may be
deemed
just
or
equitable.
The
affidavits
in
question-and-answer
format referred to in
Sec. 5 hereof and the
relevant
evidence
shall be made part of
the complaint.
The complaint shall
include a certification
that
the
party
commencing
the
action has not filed
any other action or
proceeding involving
the same issue or
issues
before
any
tribunal or agency nor
is such action or
proceeding
pending
in other quasi-judicial
bodies;
Provided,
however, that if any
such
action
is
pending, the status of
the same must be
stated, and should
knowledge thereof be
acquired after the
filing
of
the
complaint, the party
concerned
shall
undertake to notify
the court within five
(5) days from such
knowledge.

order
the
prosecutor
to
present additional
evidence
within
five (5) days from
notice and the
issue must be
resolved by the
court
within
fifteen (15) days
from
the
presentation
of
the
additional
evidence.
SEC.
4.
Disposition
of
goods
seized
pursuant
to
search warrant.
If
a
criminal
action has been
instituted,
only
the trial court
shall rule on a
motion to quash a
search warrant or
to
suppress
evidence
obtained thereby
or
to
release
seized goods.

It shall be the
duty
of
the
applicant
or
private
complainant
to
file a motion for
the
immediate
transfer of the
seized goods to
the trial court,
When
the
party- which
motion
litigant
is
a shall
be
corporation,
the immediately
verification/certificati
acted upon by the
on
of
non-forum issuing court.
shopping
required
should be executed If
no
criminal
by a natural person action has been
duly authorized by instituted,
the
the
corporation, motion to quash a
through
a
special search warrant or
power of attorney or to
suppress
a board resolution for evidence

the purpose, attached obtained thereby

to the complaint.
or
to
release
seized goods may
The complaint shall be filed in and
further
be resolved by the
accompanied
by issuing court. If
proof of payment of pending
docket
and
other resolution of the
lawful fees. Failure to motion, a criminal
comply
with
the case
is
foregoing
meanwhile filed in
requirements
shall another court, the
not be remedied by incident shall be
mere amendment of transferred to and
the complaint. The resolved by the
court, motu proprio, latter court.
shall dismiss the case
without prejudice.
Upon motion of
the party whose
The submission of a goods have been
false certification or seized,
with
non-compliance with notice
to
the
any
of
the applicant,
the
undertakings therein issuing court may
shall
constitute quash the search
indirect
contempt, warrant and order
without prejudice to the return of the
the
corresponding seized goods if no
administrative,
civil criminal
and
criminal complaint is filed
liabilities. If the acts within sixty (60)
of a party or his days from the
counsel
clearly issuance of the
constitute willful and search warrant.
deliberate
forum
shopping, the same If
no
criminal
shall be a ground for action
is
filed
summary
dismissal before the office
with prejudice and of the prosecutor
shall constitute direct and no motion for
contempt
the return of the
seized goods is
SEC. 4. Prohibited filed within sixty
pleadings.

The (60) days from

following
pleadings the issuance of
are prohibited:
the
search
a)
Motion
to warrant,
the
dismiss;
issuing court shall
b) Motion for a bill require
the
of particulars;
parties, including
c)
Motion
for the
private
reconsideration of complainant,
if
a final order or any,
to
show
judgment, except cause why the
with regard to an search
warrant
order
of should not be

destruction issued
under
Rule
20
hereof;
d) Reply;
e)
Petition
for
relief
from
judgment;
f)
Motion
for
extension of time
to file pleadings or
other
written
submissions,
except
for
the
answer
for
meritorious
reasons;
g)
Motion
for
postponement
intended for delay;
h)
Third-party
complaint;
i) Intervention;
j) Motion to hear
affirmative
defenses; and k)
Any pleading or
motion which is
similar to or of like
effect as any of
the foregoing.
SEC. 5. Affidavits.
The
affidavits
required
to
be
submitted with the
complaint shall be in
questionand-answer
format
numbered
consecutively,
and
shall state only facts
of
direct
personal
knowledge
of
the
affiants which are
admissible
in
evidence.
The
affidavits shall also
show the competence
of the affiants to
testify to the matters
stated therein.
A violation of this
requirement
may
subject the party or
the
counsel
who
submits the same to

quashed.
SEC. 5. Prohibited
motions. The
following motions
shall
not
be
allowed:
a) Motion to
quash
the
information,
except on the
ground of lack
of jurisdiction;
b) Motion for
extension
of
time
to
file
affidavits
or
any
other
papers; and
c) Motion for
postponement
intended
for
delay.

disciplinary
action,
and shall be a ground
for the court to order
that the inadmissible
affidavit or portion
thereof be expunged
from the records.
SEC. 6. Failure to file
complaint where a
writ of search and
seizure is issued.
Upon motion of the
party whose goods
have been seized,
with notice to the
applicant, the issuing
court may lift its writ
and order the return
of the seized goods if
no case is filed with
the appropriate court
and/or
appropriate
quasi-judicial agency,
including
the
Intellectual Property
Office
of
the
Philippines,
within
thirty-one
(31)
calendar days from
the date of issuance
of the writ.
If no motion for the
return of the seized
goods is filed within
sixty (60) days from
the issuance of the
writ
under
the
preceding paragraph,
the court shall order
the disposal of the
goods, as may be
warranted,
after
hearing with notice to
the parties.
Rule 4 ANSWER
Rule
12
PRELIMINARY
SEC 1. Summons. INVESTIGATION
The summons and
the
complaint, SEC 1. Complaint.
including
its The complaint
attachments, shall be shall be filed with
served not later than the Department
five (5) days from of Justice or the
receipt
of
the office
of
the

complaint
by
the prosecutor
that
court to which it is has
jurisdiction
assigned or raffled.
over the offense
charged:
SEC. 2. Service of
a)
The
summons, orders and
complaint shall
other
court
state the full
processes.

name of the
Summons, orders and
complainant
other court processes
and the facts
may be served by the
showing
the
sheriff, his deputy or
capacity
or
other proper court
authority of the
officer
or
for
complaining
justifiable reasons, by
witness
to
the
counsel
or
institute
a
representative of the
criminal action
plaintiff
or
any
in
a
suitable
person
representative
authorized by the
capacity,
and
court
issuing
the
the
legal
summons.
existence of an
organized
Any private person
association of
who is authorized by
persons that is
the court to serve
instituting the
summons, orders and
criminal action.
other court processes
In
case
of
shall,
for
that
juridical
purpose,
be
persons, proof
considered an officer
of capacity to
of the court.
sue must be
attached to the
When the defendant
complaint.
is a foreign private
Where
the
juridical
entity,
complainant is
service may be made
a
juridical
on its resident agent
person
not
designated
in
registered
in
accordance with law
the Philippines,
for that purpose, or, if
documents
there be no such
proving its legal
agent,
on
the
existence
government
official
and/or
its
designated by law to
capacity to sue,
that effect, or on any
such
as
a
of its officers or
certificate
of
agents
within
the
registration or
Philippines.
extracts
from
relevant
If the foreign private
commercial
juridical entity is not
registries
or
registered
in
the
offices having
Philippines or has no
jurisdiction
resident
agent,
over
said
service may, with
entities,
shall

leave of court, be
effected out of the
Philippines
through
any of the following
means:
a)
By
personal
service
coursed
through
the
appropriate
court
in
the
foreign
country with the
assistance of the
Department
of
Foreign Affairs;
b) By publication
once
in
a
newspaper
of
general circulation
in
the
country
where
the
defendant may be
found
and
by
serving a copy of
the summons and
the court order by
registered mail at
the
last
known
address
of
the
defendant;
c) By facsimile or
any
recognized
electronic
means
that could generate
proof of service; or
d) By such other
means as the court
may,
in
its
discretion,
direct.
Should
either
personal
or
substituted service
fail, summons by
publication shall be
allowed.
In
the
case of juridical
entities, summons
by publication shall
be
done
by
indicating
the
names
of
the
officers or their
duly
authorized
representative.
SEC. 3. Answer.
Within fifteen (15)

be accepted if
these
are
originals or in
case of public
documents,
certified
true
copies thereof
executed
by
the
proper
officer of such
registries
or
offices. Where
the
complainant is
a
foreign
national or is
domiciled
or
has a real and
effective
industrial
establishment
in a country
which is a party
to
any
convention,
treaty
or
agreement
relating
to
intellectual
property rights
or
the
repression
of
unfair
competition to
which
the
Philippines
is
also a party, or
extends
reciprocal
rights
to
national of the
Philippines by
law,
the
verified
complaint must
contain
such
facts showing
entitlement to
file the action.
b)
The
complaint shall
state
the
address of the
respondent and
shall be in such

days from service of

summons,
the
defendant shall file
his answer to the
complaint and serve
a copy thereof on the
plaintiff.
Affirmative
and
negative
defenses not pleaded
in the answer shall be
deemed
waived,
except
when
the
court
has
no
jurisdiction over the
subject matter, when
there
is
another
action
pending
between the same
parties for the same
cause, or when the
action is barred by a
prior judgment or by
the
statute
of
limitations.
Crossclaims
and
compulsory
counterclaims
not
asserted
in
the
answer
shall
be
considered
barred.
The
answer
to
counterclaims
or
cross-claims shall be
filed
and
served
within ten (10) days
from service of the
answer in which they
are pleaded.
SEC. 4. Effect of
failure to answer.
Should the defendant
fail to answer the
complaint within the
period stated above,
the
court,
motu
proprio or on motion
of the plaintiff, shall
render judgment as
may be warranted by
the allegations of the
complaint, as well as
the
affidavits
and
other evidence on
record, unless the
court in its discretion

number
of
copies as there
are
respondents,
plus two (2)
copies for the
investigating
prosecutor. The
complaint shall
be subscribed
and sworn to
before
any
prosecutor
or
government
official
authorized
to
administer
oath,
or,
in
their
absence
or
unavailability,
before a notary
public.
The
administering
officer
must
certify that he
personally
examined the
complainant
and that he is
satisfied
that
the
complainant
voluntarily
executed
and
understood the
complaint.
c)
The
complaint shall
be
accompanied
by
the
affidavits of the
complainant
and
his
witnesses,
as
well as other
supporting
documents to
establish
probable cause.
Notarized
affidavits
of
witnesses shall
be allowed and

requires the plaintiff

to submit additional
evidence.
Such
reception
of
additional
evidence
may be delegated to
the clerk of court. In
no case shall the
court award a relief
beyond or different
from that prayed for;
Provided, that the
court may, in its
discretion, reduce the
amount of damages
and attorney's fees
claimed
for
being
excessive
or
otherwise
unconscionable.
SEC. 5. Affidavits.
The
affidavits
required
to
be
submitted with the
answer shall be in
questionand-answer
format
numbered
consecutively,
and
shall state only facts
of
direct
personal
knowledge
of
the
affiants which are
admissible
in
evidence.
The
affidavits shall also
show the competence
of the affiants to
testify to the matters
stated therein.
A violation of this
requirement
may
subject the party or
the
counsel
who
submits the same to
disciplinary
action,
and shall be ground
for the court to order
that the inadmissible
affidavit or portion
thereof be expunged
from the records.

admitted
as
part
of
the
complaint,
provided
that
affidavits
executed
by
non-residents
of
the
Philippines
shall be duly
authenticated
by
the
concerned
Philippine
consular
or
diplomatic
office.
d) In instances
where multiple
complaints are
filed
by the
same
complainant,
copies of the
supporting
documents
shall
be
admitted after
they
are
compared with
and shown to
be
faithful
reproductions
of the originals
or
certified
documents
referred to in
subparagraphs
(a)
and
(c)
above.
SEC.
2.
Procedure. The
preliminary
investigation shall
be conducted as
follows:
a) Within ten
(10) days after
the filing of the
complaint, the
investigating
prosecutor, on
the basis of the
complaint and

the
affidavits
and
other
evidence
accompanying
the same, may
dismiss
the
case
outright
for
being
patently
without basis or
merit and order
the release of
the accused if
in
custody,
and/or
seized
articles
in
custody, if any.
b) When the
complaint
is
not dismissed
pursuant to the
immediately
proceeding
paragraph, the
investigating
prosecutor,
within ten (10)
days from the
filing of the
complaint, shall
issue an order
to
the
respondent
attaching
thereto a copy
of
the
complaint and
its supporting
affidavits
and
documents,
and require the
respondent to
submit
his
counteraffidavit
and
the affidavits of
his
witnesses
and
other
documentary
evidence in the
format required
under Section 1
hereof,
wherever
applicable,

serving copies
thereof on the
complainant
not later than
ten (10) days
from receipt of
said order. The
counteraffidavits shall
be subscribed
and sworn to
and certified as
provided
in
paragraphs (b)
and
(c)
of
Section
1
hereof.
The
respondent
shall not be
allowed to file a
motion
to
dismiss in lieu
of a counteraffidavit.
c)
If
the
respondent
cannot
be
served with the
order of the
investigating
prosecutor, or if
served,
does
not
submit
counteraffidavits within
the ten (10)
day period, the
investigating
prosecutor shall
resolve
the
complaint
based on the
evidence
presented
by
the
complainant.
d)
The
investigating
prosecutor may
set a hearing if
there are facts
and issues to
be
clarified
from a party or

a witness. The
parties can be
present at the
hearing
but
without
the
right
to
examine
or
cross-examine.
They
may,
however,
submit to the
investigating
prosecutor
questions
which may be
asked to the
party
or
witness
concerned.
Within ten (10)
days from the
last
written
submission by
the parties or
the expiration
of the period
for
such
submission, the
investigating
prosecutor shall
determine
whether or not
there
is
sufficient
ground to hold
the respondent
for trial.
SEC.
3.
When
accused lawfully
arrested without
warrant. When
a
person
is
lawfully arrested
without
a
warrant,
the
information may
be filed by a
prosecutor
without need of
such investigation
provided
an
inquest had been
conducted
in
accordance with
existing Rules.

Before
the
information
is
filed, the person
arrested may ask
for a preliminary
investigation
in
accordance with
this Rule, but he
must
sign
a
waiver
of
the
provisions
of
Article 125 of the
Revised
Penal
Code,
as
amended, in the
presence of his
counsel.
Notwithstanding
the waiver, he
may apply for bail
and
the
investigation
must
be
terminated within
fifteen (15) days
from its inception.
After the filing of
the information in
court
without
preliminary
investigation, the
accused
may,
within five (5)
days from the
time he learns of
its filing, ask for a
preliminary
investigation with
the same right to
adduce evidence
in his defense as
provided in this
Rule.
Rule 5 MODES
DISCOVERY

OF

SEC 1. In general.
A party can avail of
any of the modes of
discovery not later
than thirty (30) days
from the joinder of
issues.

SEC. 2. Objections.
Any
mode
of
discovery, such as
interrogatories,
request
for
admission, production
or
inspection
of
documents or things,
may be objected to
within ten (10) days
from receipt of the
request for discovery
and only on the
ground
that
the
matter requested is
manifestly
incompetent,
immaterial,
or
irrelevant
or
is
undisclosed
information
or
privileged in nature,
or the request is for
harassment.
The
requesting party may
comment in writing
within three (3) days
from receipt of the
objection. Thereafter,
the court shall rule on
the objection not later
than ten (10) days
from receipt of the
comment
or
the
expiration
of
the
three-day period.
SEC. 3. Compliance.
Compliance with
any
mode
of
discovery shall be
made within ten (10)
days from receipt of
the
request
for
discovery, or if there
are objections, from
notice of the ruling of
the court.
SEC. 4. Sanctions.
The
sanctions
prescribed
by the
Rules of Court in
relation to the modes
of
discovery
shall
apply.

Rule 6 PRE-TRIAL

Rule
13
ARRAIGNMENT
SEC
1.
Pre-trial; AND PRE-TRIAL
mandatory nature.
Within five (5) days SEC
1.
after the period for Arraignment.

availing
of,
or The arraignment
compliance with, any shall
be
of the modes of conducted
in
discovery prescribed accordance with
in Rule 5 hereof, Rule 116 of the
whichever
comes Rules of Court. If
later, the handling the accused is in
court
shall custody for the
immediately set the crime charged, he
case for pre-trial and shall
be
direct the parties to immediately
submit
their arraigned. If the
respective
pre-trial accused enters a
briefs.
plea of guilty, he
shall forthwith be
The parties shall file sentenced. After
with the court and arraignment, the
furnish each other court
shall
copies
of
their immediately
respective
pre-trial schedule the case
briefs in such manner for pre-trial.
as to ensure receipt
by the court, and the SEC. 2. Referral to
other party at least mediation.

five (5) days before Before conducting

the date set for the the trial, the court
pre-trial. The parties shall
call
the
shall set forth in their parties
to
a
pre-trial
briefs, pretrial.
Upon
among other matters, appearance
of
the following:
the parties during
a) Brief statement pre-trial,
the
of the nature of the judge shall order
case, which shall the
parties
to
summarize
the appear before the
theory or theories of Philippine
the party in clear Mediation Center
and
concise for court-annexed
language;
mediation on the
b)
Allegations civil aspect of the
expressly admitted criminal
action.
by either or both The
pre-trial
parties;
judge
shall
c)
Allegations suspend the court
deemed
admitted proceedings while
by either or both the
case
is
parties;
undergoing
d) Documents not mediation. Upon
specifically denied termination of the
under oath by either mediation

or both parties;
e) Amendments to
the pleadings;
f) Statement of the
issues, which shall
separately
summarize
the
factual and legal
issues involved in
the case;
g)
Names,
addresses
and
contact numbers of
affiants and their
judicial
affidavits
supporting
the
parties' respective
positions on each of
the issues; h) All
other
pieces
of
evidence, whether
documentary
or
otherwise, and their
respective
purposes;
i) Specific proposals
for
an
amicable
settlement;
j)
Possibility
of
referral to mediation
or other alternative
modes of dispute
resolution;
k)
Requests
for
closed
door
hearings in cases
involving
trade
secrets, undisclosed
information
and
patents; and
l)
Such
other
matters as may aid
in the just and
speedy disposition
of the case.
SEC. 2. Nature and
purpose of pre-trial.
Upon appearance
of the parties during
the pre-trial, the court
shall order the parties
to appear before the
Philippine Mediation
Center in accordance
with mediation rules

proceedings, the
court
shall
continue with the
pre-trial.
SEC. 3. Pre-trial.
During the pretrial, a stipulation
of facts may be
entered into, or
the propriety of
allowing
the
accused to enter
a plea of guilty to
a lesser offense
may
be
considered,
or
such
other
matters as may
be taken up to
clarify the issues
and to ensure a
speedy
disposition of the
case.
However,
no admission by
the accused shall
be used against
him
unless
reduced to writing
and signed by the
accused and his
counsel. A refusal
or
failure
to
stipulate shall not
prejudice
the
accused.
The pre-trial shall
be terminated not
later than thirty
(30) days from
the date of its
commencement,
excluding
the
period
for
mediation
and
JDR.
Should
a
party desire to
present additional
affidavits
or
counter affidavits
as part of his
direct evidence,
he
shall
so
manifest
during

of the Supreme Court.

Should the parties fail
to settle the case
after mediation, the
pairing court shall
conduct
judicial
dispute
resolution
(JDR)
conferences
upon request of the
court handling the
case in accordance
with the guidelines of
the Supreme Court.
Pending
mediation
before the Philippine
Mediation Center and
JDR with the pairing
court,
the
court
handling the case
shall
suspend
the
proceedings. If either
mediation or JDR fails,
the case shall be
returned to the court
with dispatch for the
pre-trial.
Before the pre-trial,
the court may require
the
marking
of
documentary
or
object evidence by
the branch clerk of
court
or
any
authorized
court
personnel.
During the pre-trial,
the court shall, with
its
active
participation, ensure
that
the
parties
consider in detail all
of the following:
a) The possibility of
an
amicable
settlement;
b) Facts that need
not
be
proven,
either
because
they are matters of
judicial notice, or
expressly
or
deemed admitted;

the
pre-trial,
stating
the
purpose thereof.
If allowed by the
court,
the
additional
affidavits of the
prosecution
or
the
counteraffidavits of the
defense shall be
submitted to the
court and served
on the adverse
party not later
than three (3)
days after the
termination of the
pre-trial. If the
additional
affidavits
are
presented by the
prosecution, the
accused may file
his
counteraffidavits
and
serve the same
on
the
prosecution
within three (3)
days from such
service.
Before the pretrial, the court
may require the
marking
of
documentary or
object
evidence
by the branch
clerk of court or
any
authorized
court personnel.
SEC.
4.
Nonappearance
at
the pre-trial. If
the counsel for
the accused or
the
prosecutor
does not appear
at the pre-trial
and
does
not
offer
an
acceptable
excuse for his

c)
Permissible
amendments to the
pleadings;
d) The possibility of
obtaining
stipulations
and
admissions of facts
and documents;
e) Objections to the
admissibility
of
testimonial,
documentary and
other evidence;
f) Submission of
judicial affidavits of
witnesses
and
objections to the
form or substance
of any affidavit, or
part thereof;
g) Simplification of
the issues; and
h)
Such
other
matters as may aid
in the speedy and
summary
disposition of the
case.
SEC. 3. Effect of
failure to appear.
The failure of the
plaintiff to submit a
pre-trial brief within
the specified period
or to appear in the
pre-trial shall be a
cause
for
the
dismissal
of
the
complaint
with
prejudice,
unless
otherwise ordered by
the
court.
The
defendant
who
submits a pre-trial
brief
and
who
appears during the
pre-trial
shall
be
entitled
to
a
judgment
on
the
counterclaim unless
the court requires
evidence ex parte for
a
judgment.
Any
cross-claim shall be
dismissed.

lack
of
cooperation, the
court may impose
proper sanctions
or penalties.
SEC. 5. Record of
pre-trial Within
five (5) days after
the termination of
the pre-trial, the
court shall issue
an order stating
the matters taken
up
therein,
including but not
limited to:
a)
Plea
bargaining;
b)
The
stipulations or
admissions
entered into by
the parties;
c) Whether, on
the basis of the
stipulations and
admissions
made by the
parties,
judgment may
be
rendered
without
the
need of further
proceedings, in
which
event
judgment shall
be
rendered
within
thirty
(30) days from
issuance of the
order;
d)
A
clear
specification of
material facts
which
remain
controverted;
e) Trial dates of
each party;
f) Such other
matters
intended
to
expedite
the
disposition
of
the case.

The failure of the

defendant to submit a
pre-trial brief within
the specified period
or to appear in the
pre-trial shall be a
cause
for
the
dismissal
of
the
counterclaim.
The
plaintiff who submits
a pre-trial brief and
who appears during
the pre-trial shall be
entitled
to
a
judgment
on
the
complaint unless the
court
requires
evidence ex parte for
a judgment.
SEC. 4. Termination.
The pre-trial shall
be terminated not
later than thirty (30)
working days after its
commencement,
excluding the period
for mediation and
judicial
dispute
resolution (JDR).
SEC. 5. Record of pretrial.

The
proceedings in the
pre-trial
shall
be
recorded,
excluding
mediation and JDR.
Within ten (10) days
after the termination
of the pre-trial, the
court shall issue an
order
which
shall
recite in detail the
matters taken up in
the
pre-trial,
the
actions taken on such
matters,
the
amendments allowed
in the pleadings, and
the agreements or
admissions made by
the parties as to any
of
the
matters
considered. The court
shall
rule
on all

objections
to
or
comments
on
the
admissibility of any
documentary or other
evidence,
including
any affidavit or any
part
thereof.
The
court shall indicate
whether
the
case
shall be submitted for
decision immediately
after pre-trial, or on
the basis of position
papers,
or
after
clarificatory hearing,
or after trial.
SEC. 6. Submission of
position papers. If
the case is to be
submitted
for
decision on the basis
of position papers,
the court, in the PreTrial
Order,
shall
direct the parties to
file
simultaneously
their
respective
position
papers,
setting forth the law
and the facts relied
upon by them and
attaching
thereto
affidavits
of
their
witnesses in questionand-answer
format
numbered
consecutively,
and
other evidence on the
factual issues defined
in the order, together
with their respective
draft decisions, if so
desired, within a nonextendible period of
thirty (30) days from
receipt of the order.
No reply or rejoinder
shall be allowed.
SEC. 7. Clarificatory
hearing or hearings
following pre-trial.
If there are matters to
be clarified, the court
shall include in the

Pre-Trial Order the

schedule
of
clarificatory hearing
or hearings, which
must
commence
within thirty (30) days
from the termination
of the pre-trial, and
be completed not
later than fifteen (15)
days thereafter. At
least three (3) days
before the scheduled
clarificatory hearing,
the
parties
may
submit
clarificatory
questions which the
court,
in
its
discretion,
may
propound.
SEC. 8. Schedule of
trial. If the court
deems it necessary to
hold trial, the court
shall include in the
Pre-Trial Order the
schedule of hearings
to
be
conducted
expeditiously
and
completed not later
than sixty (60) days
from the date of the
initial trial which must
commence
within
thirty (30) days from
the termination of the
pre-trial.
Rule7 CLARIFICATORY Rule 14 TRIAL
HEARING AND TRIAL
SEC 1. Affidavits
SEC. 1. Clarificatory and
other
hearings. During evidence at the
clarificatory hearing trial. The Court
or
hearings,
the shall hear the
parties must have evidence of the
representatives and parties on the
their counsels ready trial dates agreed
for questioning by the upon by them
court.
during the pretrial.
The
Immediately
after affidavits of the
termination of such witnesses of the
clarificatory hearing parties
which
or hearings, the court form part of the
shall order the parties record
of
the

to simultaneously file,
within ten (10) days
from such date, their
respective
position
papers as required
under Section 6, Rule
6, above.
SEC. 2. Clarificatory
hearing or hearings
following submission
of position papers.
Upon submission of
the parties' position
papers immediately
after the pre-trial as
required under Sec. 6
of the preceding Rule,
and the court deems
it necessary to hold
clarificatory hearing
or hearings on any
matter
before
rendering judgment,
it shall set the case
for such purpose.

case,
such
as
those submitted:
(a) during the
preliminary
investigation;
and/or
(b) during the
pre-trial,
shall
constitute
the
direct testimonies
of the witnesses
who
executed
them.
Such
witnesses may be
subjected to cross
examination
by
the adverse party.

SEC. 2. Conduct
of trial. The
court
shall
conduct hearings
expeditiously so
as
to
ensure
speedy trial. Each
party shall have a
maximum period
The order setting the of sixty (60) days
case for clarificatory to present his
hearing
must
be evidence-in-chief
issued not later than on the trial dates
fifteen (15) days after agreed
upon
receipt of the last during the preposition papers or the trial.
expiration
of
the
period for filing the
SEC.
3.
same
and
the Submission
of
clarificatory hearing memoranda.

must be scheduled Upon termination

within fifteen (15) of trial, the court
days
from
the may order the
issuance
of
such parties to submit
order and completed within
a
nonnot later than fifteen extendible period
(15) days.
of thirty (30) days
their memoranda
During
said setting forth the
clarificatory hearing law and the facts
or
hearings,
the relied upon by
parties must have them.
representatives and
their counsels ready SEC. 4. Judgment.
for questioning by the The court shall
court.
promulgate
the
judgment
not
SEC.
3.
Judicial later than sixty

affidavits.

The
judicial affidavits shall
serve as the direct
testimonies of the
witnesses during trial,
subject
to
crossexamination by the
adverse party.
SEC. 4. Period of trial.
A
period
not
exceeding thirty (30)
days shall be allotted
to the plaintiff and a
similar period to the
defendant
in
the
manner prescribed in
the Pre-Trial Order.
The failure of a party
to present a witness
on a scheduled trial
date shall be deemed
a waiver of such trial
date.
However,
a
party may present
such
witness
or
witnesses within the
party's
remaining
allotted trial dates.
No extension shall be
allowed by the judge
except for justifiable
reasons.
SEC. 5. Offer of and
ruling on exhibits.
Evidence
presented
during the trial and
not
otherwise
admitted
by
the
parties or ruled upon
by the court during
the pre-trial shall be
offered
orally
immediately after the
completion of the
presentation
of
evidence of the party
concerned.
The
opposing party shall
immediately raise the
objections
on
the
offer of exhibits and
thereafter, the court
shall at once rule on
the
offer
and

(60) days from

the time the case
is submitted for
decision, with or
without
the
memoranda.
A
copy
of
the
judgment shall be
furnished the IPO.

objections
court.

in

open

In case the court

requires
the
submission of written
formal
offer
of
exhibits, the same
shall be submitted to
the court within five
(5)
days
from
completion of the
presentation of the
evidence of the party,
furnishing
copies
thereof on the other
party,
who
may
submit comments or
objections
to
the
formal offer within
five (5) days from
receipt. The court
shall make its ruling
on the offer within
five (5) days from the
expiration
of
the
period
to
file
comments
or
objections.
SEC. 6. Mandatory
submission of draft
decisions.

Immediately after an
oral ruling on the last
offer of evidence, the
court shall order the
parties
to
simultaneously
submit
their
respective
draft
decisions, within a
non-extendible period
of thirty (30) days. In
case the ruling is in
writing,
the
court
shall order the parties
to
simultaneously
submit
their
respective
draft
decisions within a
nonextendible period
of thirty (30) days
from receipt of the
order.
Rule 8 JUDGMENT

SEC
1.
Judgment
immediately
after
pre-trial. Where the
case is submitted for
decision immediately
after
pre-trial
in
accordance with Sec.
5, Rule 6, the court
shall render judgment
within forty-five (45)
days after pre-trial.
SEC.
2.
Judgment
after submission of
position papers.
Within forty-five (45)
days after receipt of
the
last
position
paper,
affidavits,
documentary and real
evidence,
or
the
expiration
of
the
period for filing the
same under Sec. 6 of
Rule 6 and Sec. 1 of
Rule 7, the court shall
render judgment on
the basis of the
parties'
position
papers,
affidavits,
documentary and real
evidence.
SEC.
3.
Judgment
after
clarificatory
hearing. Within
forty-five (45) days
after termination of
clarificatory hearing
or hearings under
Sec. 7 of Rule 6 and
Sec. 2 of Rule 7, the
court shall render
judgment.
SEC.
4.
Judgment
after trial. Within
sixty (60) days after
receipt of the draft
decision of the parties
under Sec. 6 of Rule
7, the court shall
render judgment.
SEC.

5.

Judgments

executory
pending
appeal.

Unless
restrained by a higher
court, the judgment
of the court shall be
executory
even
pending appeal under
such
terms
and
conditions
as
the
court may prescribe.
Rule 9 APPEAL
Rule 15 APPEAL
SEC 1. Who may
appeal. Any party
may appeal from a
judgment
or
final
order.

SEC 1. Who may

appeal. Any
party may appeal
from a judgment
or
final
order,
unless
the
SEC. 2. How appeal accused will be
taken. All decisions placed in double
and final orders shall jeopardy.
be appealable to the
Court
of
Appeals SEC.
2.
How
through a petition for appeal taken.
review under Rule 43 The appeal shall
of the Rules of Court.
be taken in the
manner provided
The
petition
for under Rule 122 of
review shall be taken the
Rules
of
within fifteen (15) Court.
days from notice of
the decision or final
order of the Regional
Trial Court designated
by the Supreme Court
as
Special
Commercial
Courts.
Upon proper motion
and the payment of
the full amount of the
legal fee prescribed in
Rule
141,
as
amended, and before
the expiration of the
reglementary period,
the Court of Appeals
may
grant
an
additional period of
fifteen
(15)
days
within which to file
the
petition
for
review. No further
extension shall be
granted except for
the most compelling
reasons and in no

case to exceed fifteen

(15) days.

What are the common rules on

admissibility and weight of evidence?
Under Rule 16, these are:
SECTION 1. Evidence of good faith. In
cases of patent infringement, trademark
infringement, and copyright infringement,
fraudulent intent on the part of the
defendant or the accused need not be
established. Good faith is not a defense
unless the defendant or the accused claims
to be a prior user under Sections 73 and 159
of the Intellectual Property Code or when
damages may be recovered under Sections
76, 156, and 216 of the Code.
SEC. 2. Foreign official documents. All
official records kept in a foreign country,
including certificates of registration, shall be
admissible if authenticated by the proper
consular office of the Philippines having
jurisdiction over the country where such
records
and/or
certificates
are
kept.
However, such authentication of foreign
official documents may be the subject of the
agreement of the parties.
SEC. 3. Deposition of foreign witness. The
deposition of any witness abroad shall be
taken within six (6) months from the date of
the order allowing the deposition, unless the
failure to take the deposition within the
period is caused by a fortuitous event, fraud,
accident, mistake or excusable negligence.
SEC. 4. Presumptions in the Intellectual
Property Code. The presumptions in the
Intellectual Property Code on patents,
trademarks and copyright shall apply to
these Rules.
SEC. 5. Suppletory application of the rules on
discovery
and
evidence.

Unless
inconsistent with these Rules, the rules on
discovery and evidence under the Rules of
Court shall apply.
What evidence would be needed in
patents cases?
Rule 17

EVIDENCE IN PATENT CASES

SECTION 1. Burden of proof in patent
infringement; presumption regarding process
patents.
a) The burden of proof to substantiate a
charge for patent infringement rests on
the
party
alleging
the
same,
subject,
however, to sub-Section b) below, and
other
applicable laws.
b) If the subject matter of a patent is a
process for obtaining a product, any
identical
product is presumed to have been
obtained through the use of the patented
process
if; (i) the product is new; or (ii) there is
substantial likelihood that the identical
product
was made by the process and the owner
of the patent has been unable, despite
reasonable efforts, to determine the
process actually used. In such cases, the
court
shall then order the defendant or alleged
infringer to prove that the process to
obtain
the identical product is different from the
patented process, subject to the court's
adoption of measures to protect, as far as
practicable, said defendant or alleged
infringer's manufacturing and business
secrets.
SEC. 2. Patents issued presumed valid.
a) In all cases, a letters patent issued by
the Intellectual Property Office - Bureau of
Patents, or its predecessor or successoragencies, is prima facie evidence of its
existence and validity during the term
specified therein against all persons,
unless
the same has already been cancelled or
voided by a final and executory judgment
or
order.
b) Moreover, letters patents issued by the
Intellectual Property Office Bureau of
Patents, or its predecessor or successoragencies, are presumed to have been
validly issued by said government agency
in accordance with applicable laws, unless
otherwise contradicted or overcome by
other admissible evidence showing that
the

same was irregularly issued.

SEC. 3. Presumption regarding knowledge of
existing patent rights. For purposes of
awarding damages in patent infringement
cases, it is presumed that the defendant or
alleged infringer knew of the existence of a
patent over a protected invention or process,
if: (a) on the patented invention or product
manufactured using the patented process;
(b) on the container or package in which said
article is supplied to the public; or (c) on the
advertising material relating to the patented
product or
process, are placed the words "Philippine
Patent" with the number of the patent.
SEC. 4. Request for technical advice. In
patent infringement cases, the court, motu
proprio or upon motion by a party, may order
the creation of a committee of three (3)
experts to provide advice on the technical
aspects of the patent in dispute. Within thirty
(30) days from receipt of the order creating
the committee, each side shall nominate an
expert, who shall then both be appointed by
the court. The court shall appoint the third
expert from a list submitted by the experts of
each side. All fees and expenses relating to
the appointment of a committee shall be
initially equally shouldered by
the parties but may later on be adjudicated
by the court in favor of the prevailing party.
To assist in the trial involving highly-technical
evidence or matters, the court may also
request the IPO to provide equipment,
technical facilities, and personnel.
SEC. 5. Application to utility models and
industrial designs. The above rules shall
likewise be applicable to infringement cases
involving utility models and industrial
designs.
What
evtidence
is
required
in
trademark infringement and unfair
competition cases?
Rule 18 provides:
SECTION 1. Certificate of registration. A
certificate of registration of a mark shall be
prima facie evidence of:
a) the validity of the registration;
b) the registrant's ownership of the mark;
and

c) the registrant's exclusive right to use

the same in connection with the goods or
services and those that are related thereto
specified in the certificate.
SEC. 2. Well-known mark. In determining
whether a mark is well-known, account shall
be taken of the knowledge of the relevant
sector of the public, rather than of the public
at large, including knowledge in the
Philippines which has been obtained as a
result of the promotion of the mark. The
following criteria or any combination thereof
may be taken into account in determining
whether a mark is well-known:
a) the duration, extent and geographical
area of any use of the mark; in
particular, the
duration, extent and geographical area
of any promotion of the mark, including
advertising or publicity and the
presentation, at fairs or exhibitions, of
the goods
and/or services to which the mark
applies;
b) the market share, in the Philippines and
in other countries, of the goods and/or
services to which the mark applies;
c) the degree of the inherent or acquired
distinction of the mark;
d) the quality-image or reputation
acquired by the mark;
e) the extent to which the mark has been
registered in the world;
f) the exclusivity of registration attained
by the mark in the world;
g) the extent to which the mark has been
used in the world;
h) the exclusivity of use attained by the
mark in the world;
i) the commercial value attributed to the
mark in the world;
j) the record of successful protection of the
rights in the mark;
k) the outcome of litigations dealing with
the issue of whether the mark is a wellknown mark; and
l) the presence or absence of identical or
similar marks validly registered for or
used on identical or similar goods or
services and owned by persons other
than the person claiming that his mark
is a well-known mark.
Provided, further, that the mark is wellknown both internationally and in the
Philippines.

SEC. 3. Presumption of likelihood of

confusion. Likelihood of confusion shall be
presumed in case an identical sign or mark is
used for identical goods or services.
SEC. 4. Likelihood of confusion in other
cases. In determining whether one
trademark is confusingly similar to or is a
colorable imitation of another, the court
must consider the general impression of the
ordinary purchaser, buying under the
normally prevalent conditions in trade and
giving the attention such purchasers usually
give in buying that class of goods. Visual,
aural, connotative comparisons and overall
impressions engendered by the marks in
controversy as they are encountered in the
realities of the marketplace must be taken
into account. Where there are both
similarities and differences in the marks,
these must be weighed against one another
to see which predominates.
In determining likelihood of confusion
between marks used on non-identical goods
or services, several factors may be taken
into account, such as, but not limited to:
a) the strength of plaintiffs mark;
b) the degree of similarity between the
plaintiffs and the defendant's marks;
c) the proximity of the products or
services;
d) the likelihood that the plaintiff will
bridge the gap;
e) evidence of actual confusion;
f) the defendant's good faith in adopting
the mark;
g) the quality of defendant's product or
service; and/or
h) the sophistication of the buyers.
"Colorable imitation" denotes such a close or
ingenious imitation as to be calculated to
deceive
ordinary persons, or such a resemblance to
the original as to deceive an ordinary
purchaser giving such attention as a
purchaser usually gives, as to cause him to
purchase the one supposing it to be the
other.
SEC. 5. Determination of similar and
dissimilar goods or services. Goods or
services may not be considered as being
similar or dissimilar to each other on the

ground that, in any registration or publication

by the Office, they appear in different classes
of the Nice Classification.
SEC. 6. Intent to defraud or deceive. In an
action for unfair competition, the intent to
defraud ordeceive the public shall be
presumed:
a) when the defendant passes off a
product as his by using imitative devices,
signs or
marks on the general appearance of the
goods, which misleads prospective
purchasers into buying his merchandise
under the impression that they are buying
that of his competitors;
b) when the defendant makes any false
statement in the course of trade to
discredit the goods and business of
another; or
c) where the similarity in the appearance
of the goods as packed and offered for
sale is so striking.
SEC. 7. Generic marks. A registered mark
shall not be deemed to be the generic name
of goods or services solely because such
mark is also used as a name of or to identify
a unique product or service.
The test for determining whether the mark is
or has become the generic name of goods or
services on or in connection with which it has
been used shall be the primary significance
of the mark to the relevant public rather than
purchaser motivation.
What evidence is required in copyright
cases?
Rule 19 states:
SEC 1. When copyright presumed to subsist.
In copyright infringement cases, copyright
shall be presumed to subsist in the work or
other subject matter to which the action
relates, and ownership thereof shall be
presumed to belong to complainant if he so
claims through affidavit evidence under
Section 218 of the Intellectual Property Code,
as amended, unless defendant disputes it
and shows or attaches proof to the contrary
in his answer to the complaint. A mere denial
of the subsistence of copyright and/or
ownership of copyright based on lack of
knowledge shall not be sufficient to rebut the
presumption.

SEC. 2. Effect of registration and deposit.

Registration and deposit of a work with the
National Library or the Intellectual Property
Office shall not carry with it the presumption
of ownership of the copyright by the
registrant or depositor, nor shall it be
considered a condition sine qua non to a
claim of copyright infringement.
SEC. 3. Presumption of authorship. The
natural person whose name is indicated on a
work in the usual manner as the author shall,
in the absence of proof to the contrary, be
presumed to be the author of the work. This
presumption applies even if the name is a
pseudonym, provided the pseudonym leaves
no doubt as to the identity of the author.
The person or body corporate whose name
appears on an audiovisual work in the usual
manner
shall, in the absence of proof to the contrary,
be presumed to be the maker of said work.
SEC. 4. International registration of works.
A statement concerning a work, recorded in
an international register in accordance with
an international treaty to which the
Philippines is or may become a party, shall
be construed as true until the contrary is
proved, except:
a) Where the statement cannot be valid
under Republic Act No. 8293, as
amended, or any other law concerning
intellectual property; or
b) Where the statement is contradicted by
another statement recorded in the
international register.
What is the order of destruction?
Rule 20, Sec. 1 provides:
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.Such hearing shall be summary
in nature with notice of hearing to the
defendant or accused to his last known

address to afford the defendant or accused

the opportunity to oppose the motion.
What are the conditions for a valid
Order of Destruction?
Under Rule 20, Sec. 2, the conditions are:
a) An inventory and photographs of the
seized infringing goods have been taken
before
destruction at the place where the seized
infringing goods are stored;
b) The taking of the inventory and
photographs must be witnessed and
attested to by:
(1) the accused or counsel or agent, or in
their absence, an officer of the barangay
where the seized infringing goods are
stored;
(2) the complainant, his representative or
counsel;
(3) the public officer who seized the items
or a representative of his office; and
(4) a court officer authorized by the court
to supervise the destruction of the seized
infringing goods;
c) Representative samples of the seized
infringing goods have been retained in a
number and nature as to suffice for
evidentiary purposes;
d) An inventory of the representative
samples has been made by the persons
enumerated under (b) above;
e) The court officer authorized to supervise
the destruction has submitted a report
thereon, within five (5) days from the
date of destruction, to which is attached
(i) the
inventory and photographs of the seized
infringing goods and (ii) the inventory of
the
representative samples; and
f) The applicant has posted a bond in an
amount fixed by the court
Are representative samples admissible?
Rule
20,
SEC.
3.
Admissibility
of
representative samples. Representative
samples of the goods, objects and devices
referred to in this Rule, together with the
inventory and photographs of the same, shall
be admissible in lieu of the actual items.
What are the reportorial requirements?

In Rule 21, Sec. 1: Within thirty (30) days

from the issuance of the decision or final
order, the court shall furnish the IPO a copy
of the decision or final order.

X. SPECIAL LAWS

ANTI-MONEY LAUNDERING ACT (R.A. No.

9160, as amended by R.A. No. 9194)
Policy of the Law
1.
To protect and preserve the
integrity and confidentiality of bank
accounts and to ensure that the
Philippines shall not be used as a
money laundering site for the
proceeds of any unlawful activity.
2. To pursue the States foreign policy
to
extend
cooperation
in
transnational
investigation
and
prosecutions of persons involved in
money
laundering
activities
wherever committed.
Covered Institutions/Covered Persons
- Natural or juridical refer to
(a) Banks, non-banks, quasi-banks, trust,
entities, foreign exchange dealers,
pawnshops,
money
changers.
Remittance, and transfer companies
and other similar entities and all other
persons and their subsidiaries and
affiliates supervised or regulated by
the Bangko Sentral ng Pilipinas (BSP)
(b) Insurance
companies,
pre-need
companies and all other persons
supervised or regulated by the
Insurance Commission (IC)
(c) Securities dealers, brokers, salesmen,
investment houses and other similar
persons
managing
securities
or
rendering services as investment,
agent, advisor, or consultant
(c.1) mutual funds, close,-end
investment
companies,
common trust funds, and other
similar persons
(c.1.2)
other
entities
administering
or
otherwise
dealing
in
currency,
commodities
or
financial
derivatives
based
thereon,
valuable
objects,
cash
substitutes and other similar
monetary
instruments
or
property
supervised
or
regulated by the Securities and
Exchange Commission (SEC)

(d) Jewelry dealers in precious metals,

who as a business, trade in precious
metals, for transactions in excess of
One million pesos (PhP1,000,000.00)
(e) Jewelry dealers in precious stones,
who as a business, trade in precious
stones, for transactions in excess of
One million pesos (PhP 1,000,000.00)
(f) Company service providers which, as
a business, provide any of the
following services to third parties.
(1) acting as a formation agent of
juridical persons
(2) acting as (or arranging for another
person to act as) a director or
corporate secretary of a company, a
partner of a partnership or a similar
position in relation to other juridical
persons
(3) providing a registered office,
business address or accommodation,
correspondence,
or
administrative
address for a company, a partnership
or a similar position in relation to other
juridical persons
(4) acting as (or arranging for another
person to act as) a nominee
shareholder for another person.
(g) persons who provide any of the
following services:
(1) managing of client money,
securities or other assets
(2) management of bank, savings or
securities accounts
(3) organization of contributions for
the
creation,
operation
or
management of companies; and
(4) creation, operation or management
of juridical persons or arrangements
and buying and selling business
entities.
Exclusions: The term covered persons
shall exclude lawyers and accountants
Requisites for Exclusion:
(a) Acting
as
independent
legal
professionals
(b) In
relation
to
information
concerning their clients or
(c) Where disclosure of information
would
compromise
client
confidences or the attorney-client
relationship
Obligations of Covered Institutions
Customer Identification
Covered institutions shall establish
and record the true identity of its clients

based on official documents. They shall

maintain a system of verifying the rue
identity of their clients and in case of
corporate clients, require a system of
verifying
their
legal
existence
and
organizational structure, as well as the
authority and identification of all persons
purporting to act on their behalf.
The provisions of existing laws to the
contrary
notwithstanding,
anonymous
accounts, accounts under fictitious names,
and all other similar accounts shall be
absolutely prohibited. Peso and foreign
currency non-checking numbered accounts
shall be allowed. The BSP may conduct
annual testing solely limited to the
determination of the existence and true
identity of the owners of such accounts.
Record Keeping
All records of all transactions of covered
institutions shall be maintained and safely
stored for five (5) years from the date of
translations. With respect to closed accounts,
the records on customer identification,
account files and business correspondence
shall be preserved and safely stored for at
least five (5) years from the dates when they
were closed.
Reporting of Covered and Suspicious
Transactions
Covered persons shall report to the AMLC
all covered transactions and suspicious
transactions within five (5) working days
from occurrence thereof, unless the AMLC
prescribes a different period not exceeding
fifteen (15) working days.
Lawyers and accountants acting as
independent legal professionals are not
required to report covered and suspicious
transactions if the relevant information was
obtained in circumstances where they are
subject to professional secrecy or legal
professional privilege.
Should a transaction be determined to be
both a covered transaction and a suspicious
transaction, the covered institution shall be
required to report the same as a suspicious
transaction.
When reporting covered or suspicious
transactions and a suspicious transactions to
the AMLC, covered persons and their officers
and
employees
are
prohibited
from
communicating, directly, or indirectly in any
manner or by any means, to any person or
entity, the media, the fact that a covered or

suspicious transaction has been reported or

is about to be reported, the contents of the
report or any other information in relation
thereto. Neither may such reporting be
published or aired in any manner of form by
the mass media, electronic mail or other
similar devices. In case of violation thereof,
the concerned officer and employee of the
covered person and media shall be held
criminally liable.
Covered Transactions
Is a transaction in cash or other
equivalent monetary instrument involving a
total amount in excess of five hundred
thousand pesos (PhP 500,000.00) within one
(1) banking day.
Suspicious Transactions
Are
transactions
with
covered
institutions, regardless of the amounts
involved, where any of the following
circumstances exist:
1. There is no underlying legal or
trade
obligation,
purpose
or
economic justification
2. The client is not properly identified
3. The amount involved is not
commensurate with the business or
financial capacity of the client
4. Taking into account all known
circumstances
,
it
may
be
perceived
that
the
cleints
transaction is structured in order to
avoid being the subject of reporting
requirements under the Act
5. Any circumstances relating to the
transaction which is observed to
deviate from the profile of the
client and/or the clients past
transactions with the covered
institution
6. The transactions is in a way related
to an unlawful activity or offense
under this Act that is about to be, is
being or has been committed
7. Any transactions that is similar or
analogous to any of the foregoing.
When is Money Laundering Committed
Money laundering is committed by any
person who, knowing that any monetary
instrument or property represents, involves
or related to the proceeds of any unlawful
activity:
(a) Transacts said monetary instrument or
property

(b) Converts, transfers, disposes of,

moves, acquires, possesses or uses
said monetary instrument or property
(c) Conceals or disguises the true nature,
source,
location,
disposition,
movement, or ownership of or rights
with respect to said monetary
instrument or property
(d) Attempts or conspires to commit
money laundering offenses referred to
in paragraphs (a), (b), or (c)
(e) Aids, abets assists in or counsels the
commission of the money laundering
offenses referred to in paragraphs (a),
(b) or (c) above and
(f) Performs or fails to perform any act as
a result of which he facilities the
offense of money laundering referred
to in paragraphs (a), (b) or (c) above
Money laundering is also committed
by any covered person who, knowing that a
covered or suspicious transactions is
required under this Act to ve reported to the
Anti-Money Laundering Council (AMLC) fails
to do so.
Unlawful Activities or Predicate Crimes
Refers to any act or omission or series or
combination thereof involving or having
direct relation to the following:
(a) Kidnapping for ransom under
Article 267 of Act No. 3815
otherwise known as the Revised
Penal Code as amended
(b) Sections 4, 5, 6, 8, 9, 10, 11, 12,
13, 14, 15 and 16 of Republic Act
No. 9165 otherwise known as the
Comprehensive Dangerous Drugs
Act of 2002;
(c) Section 3 paragraphs B, C, E, G, H
and I of Republic Act. No. 3019, as
amended otherwise known as the
Anti-Graft and Corrupt Practices
Act;
(d) Plunder under Republic Act No.
7080 as amended
(e) Robbery
and
extortion
under
Articles 294, 295, 296, 299, 300,
301 and 302 of the Revised Penal
Code, as amended
(f) Jueteng and Masiao punished as
illegal gambling under Presidential
Decree No. 1602
(g) Piracy on the high seas under the
Revised Penal Code, as amended
and Presidential Decree No. 532

(h) Qualified theft under Article 310 of

the Revised Penal Code, as
amended
(i) Swindling under Article 315 and
other forms of Swindling under
Article 316 of the Revised Penal
Code as amended
(j) Smuggling under Republic Act Nos.
455 and 1937
(k) Violations of Republic Act No. 8792,
otherwise known as the Electronic
Commerce Act of 2000
(l) Hijacking and other violations
under Republic Act No. 6235,
destructive arson and murder as
defined under the Revised Penal
Code, as amended
(m) Terrorism and conspiracy to
commit terrorism as defined and
penalized under Sections 3 and 4
or Republic Act No. 9372
(n) Financing
of
Terrorism
under
Section 4 and offenses punishable
under Sections 5, 6 and 7 and 8 of
Republic Act No. 10168, otherwise
known as Terrorism Financing
Prevention and Suppression Act No.
2012
(o) Bribery under Articles 210, 211 and
211-A of the Revised Penal Code as
amended and Corruption of Public
Officers unbder Article 212 of the
Revised Penal Code, as amended
(p) Frauds and Illegal Exactions and
Transactions under Articles 213,
214, 215 and 216 of the Revised
Penal Code, as amended
(q) Malversation of Public Funds an
Property under Articles 217 and
222 of the Revised Penal Code, as
amended
(r) Forgeries and Counterfeiting under
Articles 163, 166, 167, 168, 169,
and 176 of the Revised Penal Code,
as amended
(s) Violations of Sections 4 to 6 of
Republic Act No. 9208, otherwise
known as the Anti-Trafficking in
Persons Act of 2003
(t) Violations of Sections 101 to 107
and 110 of Republic Act No. 7942
otherwise known as the Philippine
Fisheries Code of 1998
(u) Violations of Sections 78 to 79 of
Chapter IV, of Presidential Decree
No. 705, otherwise known as the

Revised Forestry Code of the

Philippines, as amended
(v) Violations of Section 27 (c), (e), (f),
(g) and (i) of Republic Act No. 9147
otherwise known as the Wildlife
Resources
Conservation
ande
Protection Act
(w)Violation of Section 7(b) of the
Republic Act No. 9072 otherwise
known as the National Caves and
Cave
Resources
Management
Protection Act
(x) Violation of Republic Act No. 6539
otherwise known as the AntiCarnapping Act of 2002, as
amended
(y) Violations of Sections 1, 3 and 5 of
Presidential Decree No. 1866, as
amended otherwise known as the
decree Codifying the Laws on
Illegal/Unlawful
Possession,
Manufacture,
Dealing
In,
acquisition
or
Disposition
of
Firearms, Ammunition or Explosives
(z) Violation of Presidential Decree No.
1612 otherwise known as the AntiFencing Law;
Anti-Money Laundering Council (AMLC)
The Anti-Money Laundering Council is
hereby created and shall be composed of:
1. The Governor of the Bangko Sentral ng
Pilipinas as Chairman
2. The Commissioner of the Insurance
Commission and the
3. Chairman
of
the
Securities
of
Exchange Commission as members
Functions
The AMLC shall act unanimously in the
discharge of its functions as defined
hereunder:
(1) To require and receive covered or
suspicious tyransaction reports from
covered institutions
(2) To issue orders addressed to the
appropriate Supervising, Authority or
the covered institutions to determine
the true identity of the owner of any
monetary instrument or property
subject of a covered transaction or
suspicious transaction or suspicious
transaction report or request for
assistance from a foreign State, or
believed by the Council, on the basis
for substantial evidence to be in whole
or
in
part,
wherever
located,
representing, involving or related to

directly or indirectly, in any manner or

by any means, the proceeds of an
unlawful activity
(3) To institute civil forfeiture proceedings
and all other remedial proceedings
through the Office of the Solicitor
General
(4) To cause the filing of complaints with
the Department of Justice or the
Ombudsman for the prosecution of
money laundering offenses
(5) To investigate suspicious transactions
and covered transactions deemed
suspicious after an investigation by
the AMLC, money laundering activities
and other violations of this Act
(6) To apply before the Court of Appeals
ex parte for the freezing of any
monetary instrument or property
alleged to be laundered, proceeds
from or instrumentalities used in or
intended for use in any unlawful
activity as defined in Section 3(1)
hereof
(7) To implement such measures as may
be necessary and justified under this
Act
to
the
counteract
money
laundering
(8) To receive and take action in respect
of, any request from foreign states for
assistance in their own anti-money
laundering operations provided in this
Act
(9) To develop education programs on the
pernicious
effects
of
money
laundering,
the
methods
and
techniques used in the money
laundering, the viable means of
preventing money laundering, the
viable means of preventing money
laundering and the effective ways of
prosecuting and punishing offenders.
(10) To enlist the assistance of any
branch, department, bureau,office,
agency, or instrumentality of the
government including governmentowned and controlled corporations, in
undertaking any and all anti-money
laundering operations, which may
include the use of its personnel,
facilities and resources for the more
resolute prevention, detection, and
investigation of money laundering
offenses and prosecution of offenders
and

(11) To impose administrative sanctions

for the violation of laws,rules and
regulations and orders and resolutions
issued pursuant thereto.
(12) To require the Land Registration
Authority and all its Registries of
Deeds to submit to the AMLC, reports
on
all
real
estate
transactions
involving an amount in excess of Five
Hundred
Thousand
Pesos
(PhP500,000.00). within fifteen (15)
days from the date of registration of
the transaction, in a form to be
prescribed by the AMLC. The AMLC
may also require the Land Registration
Authority and all its Registries of
Deeds to submit copies of relevant
documents
of
all
real
estate
transactions.
FREEZING OF MONEY INSTRUMENT
OR PROPERTY
Upon a verified ex parte petition by the
AMLC and after determination that
probable cause exists that any monetary
instrument or property is in any way
related to an unlawful activity as defined
in Section 3(i) hereof, the Court of
Appeals may issue a freeze order which
shall not exceed six (6) months
depending upon the circumstances of the
case. Provided that if there is no case
filed against a person whose account has
been frozen within the period determined
by the court, the freeze order shall be
deemed ipso facto lifted; provided further
that this new rule shall not apply to
pending cases in the courts. In any case,
the court should act on the petition to
freeze within 24 hours from filing of the
petition. If the application is filed a day
before
a
non-working
day,
the
computation of the twenty-four(24) hour
period shall exclude the non-working
days.
A person whose account has been frozen
may file a motion to lift the freeze order
and the court must resolve this motion
before the expiration of the freeze order.
No court shall issue a temporary
restraining order or a writ of injunction
against any freeze order except the
Supreme Court.
AUTHORITY TO INQUIRE INTO BANK
DEPOSITS

Notwithstanding
the
provisions
of
Republic Act No.1405 as amended,
Republic Act No. 8791 and other laws, the
AMLC may inquire into or examine any
particular
deposit
or
investment,
including related accounts, with any
banking institution or non0bank financial
institution upon order of any competent
court based on ex parte application in
cases of violations of this Act, when it has
been established that there is probable
cause that the deposits or investments,
including related accounts involved, are
related to an unlawful activity as defined
in Section 3(1) hereof or a money
laundering offense under Section 4
hereof; except that no court order shall be
required in cases involving activities
defined in Section 3(i)(1),(2), and
(12)hereof and felonies or offenses of a
nature similar to those mentioned in
Section 3(i)(1),(2) and (12) which are
punishable under the penal laws of other
countries, and terrorism and conspiracy
to commit terrorism as defined and
penalized under Republic Act No. 9372.
The Court of Appeals shall act on the
application to inquire into or examine any
deposit or investment with any banking
institution
or
non-bank
financial
institution within twenty-four (24) hours
from filing of the application.
Nothing contained in this Act nor in
related antecedent laws or existing
agreements shall be construed to allow
the AMLC to participate in any manner in
the operations of the BIR. (Section 20,
RA10365, amending RA 9160)
The authority to inquire into or examine
the main account and the related
accounts
shall
comply
with
the
requirements of Article III, Sections 2 and
3 of the 1987 Constitution, which are
hereby
incorporated
by
reference.
Likewise, the constitutional injunction
against ex post facto laws and bills of
attainder shall be respected in the
implementation of this Act.
To ensure the compliance with this Act,
the Bangko Sentral nang Pilipinas may in
the course of a periodic or special
examination, check the compliance of a
covered institution with the requirements
of the AMLA and its implementing rules
and regulations.

For purposes of this section, related

accounts, the funds and resources of
which
originated
from
and/or
are
materially linked to the monetary
instrument(s) or property(ies) subject of
the freeze order.
Acourt order exparte must first be
obtained before the AMLC can inquire into
these related accounts. Provided that the
procedure for the ex parte application of
the ex parte court order for the principal
account shall be the same with that of the
related accounts.
The authority to inquire into or
examine the main account and the
related accounts shall comply with the
requirements of Article III, Sections 2 and
3 of the 1987 Constitution, which are
hereby incorporated by reference (RA
9160,as amended by RA 10167)
FOREIGN INVESTMENT ACT (R.A.No.
7042)
Policy of the Law
It is the policy of the State to attract,
promote
and
welcome
productive
investments in activities which significantly
contribute to National industrialization and
socio-economic development to the extent
that foreign investment is allowed in such
activity by the Constitution and relevant laws
from
(a) Foreign individuals
(b) Partnerships
(c) Corporations
(d) Governments,
including
their
political subdivisions
Foreign
investments
shall
be
encouraged
in
the
enterprises
that
significantly
expand
livelihood
and
employment opportunities for Filipinos by:
(a) Enhancing economic value of farm
products
(b) Promoting the welfare of Filipino
consumers
(c) Expanding the scope, quality, and
volume of exports and their access
to foreign markets
(d) And/or
transferring
relevant
technologies
in
agriculture,
industry and support services
Foreign investment shall be welcome
as a supplement to Filipino capital and
technology in those enterprises serving
mainly the domestic market
General Rule:

There are no restrictions on extent of

foreign ownership or Export Enterprises. In
domestic market enterprises, foreigners can
invests as much as 100% equity
Exception:
In the areas included in the negative list.
Foreign-owned firms catering mainly to
the domestic market shall be encouraged to
undertake measures that will gradually
increase Filipino participation in their
businesses by
(a) Taking in Filipino partners
(b) Electing Filipinos to the board of
director
(c) Implementing
transfer
of
technology to Filipinos
(d) Generating more employment for
the economy; and
(e) Enhancing skills of Filipino workers
DEFINITION OF TERMS
Foreign Investment
It is an equity investment made by nonPhilippine national in the form of foreign
exchange and/or other assets actually
transferred to the Philippines and duly
registered with the Central Bank which shall
assess and appraise the value of such assets
other than foreign exchange.
Doing Business in the Philippines
Foreign corporations are considered
doing or transacting business in the
Philippines if they are:
1. Soliciting orders, service contracts and
opening offices whether called liason
offices of branches
2. Appointing
representatives,
distributors,
domiciled
in
the
Philippines or who stay for a period or
periods totaling 180 days or more
3. Participating in the management,
supervision or control of any domestic
business, firm, entity or corporation in
the Philippines
4. Doing any act or acts that imply a
continuity of commercial dealings or
arrangements and contemplate to
some extent the performance of acts
or works or the exercise of some
functions normally incident to and in
progressive
prosecution
of,
the
purpose and object of its organization.
Instances that are considered as not
doing or transacting business in the
Philippines for foreign corporations:

1. Mere investment as shareholder and

exercise of rights as investor
2. Having a nominee director or officer to
represent
its
interest
in
the
corporation
3. Appointing
a
representative
or
distributor which transacts business in
its own name and for its own account
4. Publication of a general advertisement
through any print or broadcast media;
5. Maintaining a stock of goods in the
Philippines solely for the purpose of
having the same processed by another
entity in the Philippines
6. Consignment
by
the
foreign
corporation of equipment with a local
company to be used in the processing
of products of export
7. Collecting
information
in
the
Philippines;
8. Performing services auxiliary to an
existing isolated contract of sale which
are not on a continuing basis (R.A.
7042, Sec. 3(d) ).
Export Enterprise
It is a enterprise wherein a manufacturer,
processor or service (including tourism)
enterprise exports sixty percent (60%) or
more of its output or wherein a trader
purchases products domestically and exports
sixty percent (60%) or more of such
purchases. (Section 3(e) RA 7042)
Domestic Market Enterprise
It is an enterprise which produces goods
for sale or renders services to the domestic
market entirely or if exporting a portion of its
output fails to consistency export at least
60% thereof (R.A. 7042,Section 3 (f))
REGISTRATION OF INVESTMENTS OF
NON-PHILIPPINE NATIONALS
Philippine Nationals
1. A citizen of the Philippines
2. A domestic partnership or association
wholly owned by citizens of the
Philippines
3. Corporations
organized
under
Philippine laws of which 60% of the
capital stock outstanding and entitled
to vote owned and held by Filipino
citizens
4. Corporations organized abroad and
registered as doing business in the
Philippines under the Corporation
Code of which 100% of the capital

stock entitled to vote belong to

Filipinos; and
5. Trustee of funds for pension or other
employee retirement or separation
benefits, where the trustee is a
Philippine national and at least sixty
(60%) percent of the fund will accrue
to the benefit of the Philippine
nationals.
Non-Philippine Nationals
1. Those who do not belong to the
definition of the Philippine National
2. A non-Philippine national may own
fully a domestic market enterprise.
3. A non-Philippine national may own up
to 100% of a domestic market
enterprise. (RA 7042 Sec.7)
Requirements
for
a
non-Philippine
national to own up to 100% of a
domestic market enterprise
1. A non-Philippine national must register
with the SEC or with the Bureau of
Trade
Regulation
and
Consumer
Protection (BTRCP) of DTI in the case
of single proprietorship for it to do
business or invest in a domestic
enterprise up to 100% of its capital
2. The participation of non-Philippine
national in the enterprise must not be
prohibited orlimited to a smaller
percentage by existing law and/or
under Foreign Investment Negative
List (RA 7042,Sec.5)
Imposition of additional limitation on
the extent of foreign ownership in an
enterprise other than those provided
for under RA 7042 by the SEC or BTRCP
General Rule:
The SEC or BTRCP, as the case may be,
shall not impose any limitations on the
extent of foreign ownership in an enterprise
additional to those provided in RA 7042.
Exceptions:
1. That any enterprise seeking to avail of
incentive
under
the
Omnibus
Investment Code of 1987 must apply
for registration with the Board of
Investment Code of 1987 must apply
for registration with the Board of
Investments (BOI),which shall process
such application for registration in
accordance with the criteria for
evaluation prescribed in said Code
2. That
anon-Philippine
national
intending to engage in the same line

of business as an existing joint

venture, in which he or his majority
shareholder is a substantial partner,
must disclose the fact and the names
and addresses of the partners in the
existing joint venture in his application
for registration with the SEC
FOREIGN
INVESTMENT
IN
EXPORT
ENTERPRISES
Rules:
1. Foreign
investment
in
export
enterprises
whose
products
and
services do not fall within lists A and B
of the Foreign Investment Negative
List is allowed up to 100% ownership
2. Export enterprises which are nonPhilippine nationals shall register with
BOI and submit the reports that may
be required to ensure continuing
compliance of the export enterprise
with its export requirement
3. BOI shall advise SEC or BTRCP as the
case may be of any export enterprise
that fails to meet the export ratio
requirement
4. The SEC or BTRCP shall thereupon
order
the
non-complying
export
enterprise to reduce its sales to the
domestic market to not more than
40% of its total production, failure to
comply with such SEC or BTRCP order,
without justifiable reason shall subject
the enterprise to cancellation of SEC
or BTRCP registration, and/or the
penalties provided in this law. (RA
7042 Sec.6)
FOREIGN
INVESTMENT
DOMESTIC
MARKET ENTERPRISE
A domestic enterprise may change its
status to export enterprise the Domestic
market enterprise consistently exports in
each year thereof sixty percent (60%) or
more of its output over a three (3) year
period (RA 7042, Sec.7)
FOREIGN
INVESTMENT
NEGATIVE
LIST
It is a list of areas of economic activity
whose foreign ownership is limited to a
maximum of 40% of the equity capital of
the enterprises engaged therein.
List A of the Foreign Investment
Negative List

Filipino Ownership must be (100%

Filipino Owned, Zero Percent (0%)
foreign equity
1. Cooperatives
2. Manufacture of Firecrackers and other
pyrotechnic devices
3. Manufacture, repair, stockpiling and/or
distribution of biological, chemical,
and radiological weapons and antipersonnel mines(Various treaties to
which the Philippines is a signatory
and conventions supported by the
Philippines)
4. Mass media except recording
5. Utilization of marine resources
6. Manufacture, repair, stockpiling and/or
distribution of nuclear weapons
7. Cockpits
8. Small-scale mining
9. Private security agencies
10.Retail trade enterprises with paid-up
capital of less than US$ 2.5M
80% Filipino Owned (up to 25%
foreign equity)
1. Contracts for the construction and
repair of locally funded public works
except:
a. Infrastructure/development
projects covered in RA 7718
b. Projects which are foreign
funded or assisted and
required
to
undergo
international
competitive
bidding
2. Private recruitment whether for local
or overseas employment
3. Contracts for the construction of
defense-related structures
4. Under the flag law, in the purchase of
articles for the government preference
shall be given to materials and
supplies
produced,
made
or
manufactured in the Philippines and to
domestic entities. Domestic entities
mean any citizen of the Philippines or
commercial company at least 75% of
the capital of which is owned by
citizens of the Philippines.
70% Filipino Owned (Up to thirty
percent (30%) foreign equity)
1. Advertising
2. Corporations engaged in pawnshop
business
60% Filipino Owned (up to forty
percent (40%) foreign equity

1. Contracts for the supply of materials,

goods, and commodities to GOCC,
agency or municipal corporation
2. Ownership of private lands
3. Ownership/establishment
and
administration
of
educational
institutions
4. Adjustment Companies
5. Culture,
production,
milling,
processing,
trading,
excepting,
retailing of rice and corn and acquiring
by barter, purchase or otherwise rice
and corns and the by-products thereof
6. Exploration,
development,
and
utilization of natural resources
7. Ownership of condominium units
where the common areas in the
condominium project are co-owned by
the owners of the separate units or
owned by a corporation
8. Operation and management of public
utilities
9. Project
proponent
and
Facility
Operator of a BOT project requiring a
public utilities franchise
10.Manufacture, repair, storage, and/or
distribution of products/ingredients
requiring PNP clearance
11.Operation of deep sea commercial
fishing vessel
12.Corporations engaged in Coastwise
shipping
40% Filipino Owned (up to sixty
percent (60%) foreign equity
1. Financing companies regulated by the
SEC
2. Investment houses regulated by the
SEC
LIST B OF THE FOREIGN INVESTMENT
NEGATIVE LIST
General Rule:
Defense-related activities, requiring prior
clearance and authorization from the
Department of National Defense to
engage in such activity such as the:
a. Manufacture
b. Repair
c. Storage
d. Distribution of firearms, ammunition,
lethal weapons, military ordinance,
explosives,
pyrotechnics,
similar
materials
Exception:
a. Such manufacturing or repair activity
is specifically authorized with a

substantial export component to a

non-Philippine
national
by
the
Secretary of National Defense, or
b. Those that have implications on
public health and morals, such as the
manufacture and distribution of all
dangerous drugs, all forms of
gambling, nightclubs, bars beer
houses, dance halls, sauna and steam
bathhouses, massage clinics
LIST C OF THE FOREIGN INVESTMENT
NEGATIVE LIST
List C shall contain the areas of investment
in which existing enterprises already serve
adequately the needs of the economy and
the consumer and do not require further
foreign investments as determined by NEDA
and approved by the President and
promulgated in a Presidential Proclamation