Pointers in Commercial Law

2016 Bar Examinations

by Professor Victoria V. Loanzon

With assistance of Atty. Gerald Co, and Atty. C. Loanzon Reyes IV

I. Banking Laws and Related Laws

Q. The authorized signatories of X company pre-signed checks so as not to disturb busi-

ness operations while they went abroad. Marti got hold of the checks wrote amounts on
them and subsequently encashed them. The Bank allowed encashment without a verifica-
tion call despite the large amount and irregularities on the face of the check. Is the bank
solely liable for allowing Marti to encash the checks?
A. No. The SC held that the depositors are guilty of contributory negligence, hence, they
should bear a part of the loss.

Q. What is a material alteration? In the absence of said alteration, is a bank still duty
bound to verify a check with some irregularities on its face not strictly alterations under
the law1?
A. A material alteration is defined in Section 125 of the NIL to be one which changes the
date, the sum payable, the time or place of payment, the number or relations of the parties,
the currency in which payment is to be made or one which adds a place of payment where no
place of payment is specified, or any other change or addition which alters the effect of the
instrument in any respect. With respect to the checks at issue, petitioner points out that they
do not contain any material alteration. A bank still has to exercise extraordinary diligence
despite the lack of a material alteration.

Q. How should the liability be apportioned? Why?

A. The Bank is liable for 60% and the depositor should be liable for 40%. The Supreme
Court used the Doctrine of Last Clear Chance in relation to the public interest involved in
banking and the extraordinary diligence required of banks to justify the liability of the bank
as it had the final opportunity to stop the fraudulent transaction. (Bank of America v. Philip-
pine Racing Club, 2009)

Q. What are the requirements for registration of a bank?

A. Articles of Inc., By-Laws, Treasurers Affidavit, Bank Certificate of Deposit on paid-up
capital, SEC Verification Slip on availability of corporate name, Letter of Undertaking to
change name if proposed name is already adopted by another entity, Certificate of Authority

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on the blank space of each check reserved for the payee, the following typewritten words appear: "ONE
HUNDRED TEN THOUSAND PESOS ONLY." Above the same is the typewritten word, "CASH." On the blank re-
served for the amount, the same amount of One Hundred Ten Thousand Pesos was indicated with the use of a
check writer. The presence of these irregularities in each check should have alerted the petitioner to be cau-
tious before proceeding to encash them which it did not do. The SC said this is not a material alteration.

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from the Monetary Board or the BSP; and Letter authorizing the SEC and the Monetary
Board or its duly authorized representative to examine bank records regarding the paid-up
capital.

Q. What is the degree of diligence required of a bank?

A. A bank is expected to exercise the highest degree of diligence, as well as to observe the
high standards of integrity and performance in all its transactions because its business is im-
bued with public interest. The high standards were also necessary to ensure public confidence
in the banking system. (Development Bank of the Philippines (DBP) v. Guaria Agricultural
and Realty Development Corporation, G.R. No. 160758. January 15, 2014)

Q. What is the nature of banks as a business undertaking?

A. Banks, their business being impressed with public interest, are expected to exercise more
care and prudence than private individuals in their dealings, even those involving registered
lands. The rule that persons dealings with registered lands can rely solely on the certificate of
title does not apply to banks. (Philtrust Bank v. CA, G.R. No. 150318, November 22, 2010)

Q. Can a bank outsource its functions?

A. It depends. From the very definition of banks as provided under the General Banking
Law, it can easily be discerned that banks perform only two (2) main or basic functions de-
posit and loan functions. Thus, cashiering, distribution and bookkeeping are but ancillary
functions whose outsourcing is sanctioned under CBP Circular No. 1388 as well as D.O. No.
10. Banks cannot legally contract out its deposit and loan functions as they are directly relat-
ed or integral to the main business or operation of banks. The CBPs Manual of Regulations
has even categorically stated and emphasized on the prohibition against outsourcing inherent
banking functions, which refer to any contract between the bank and a service provider for
the latter to supply, or any act whereby the latter supplies, the manpower to service the de-
posit transactions of the former. BPI Employees Union-Davao City-Fubu (BPIEU-Davao
City-Fubu) v. Bank of the Philippine Islands (BPI), et al., G.R. No. 174912, July 24, 2013).

Q. May any officer of the bank bind the corporation?

A. Generally, no. As the Court ruled in AF Realty & Development, Inc. v. Dieselman Freight
Services, Co.: Section 23 of the Corporation Code expressly provides that the corporate pow-
ers of all corporations shall be exercised by the board of directors. Just as a natural person
may authorize another to do certain acts in his behalf, so may the board of directors of a cor-
poration validly delegate some of its functions to individual officers or agents appointed by
it. Thus, contracts or acts of a corporation must be made either by the board of directors or by
a corporate agent duly authorized by the board. Absent such valid delegation/authorization,
the rule is that the declarations of an individual director relating to the affairs of the corpora-
tion, but not in the course of, or connected with, the performance of authorized duties of such
director, are held not binding on the corporation. (Heirs of Fausto C. Ignacio vs. Home
Bankers Savings and Trust Co., et al., G.R. No. 177783. January 23, 2013)

Q. Does a branch office of a bank have a personality separate and distinct from its parent
company?
A. Yes. The Philippine branch of a foreign bank is without a separate legal personality from
its parent company because as its name implies, it is merely a branch, subject to the supervi-
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sion and control of the parent bank. Thus, being one and the same entity, the funds placed by
the parent bank in its branch in the Philippines should not be treated as deposits made by a
third party subject to deposit insurance under the PDIC Charter. (Philippine Deposit Insur-
ance Corporation (PDIC) v. Citibank, G.R. 170290, April 11, 2012)

Q. What is the nature of the relationship of the Credit Card Issuer and Holder?
A. The relationship between the credit card issuer and the credit card holder is a contractual
one that is governed by the terms and conditions found in the card membership agreement.
Such terms and conditions constitute the law between the parties. In case of their breach,
moral damages may be recovered where the defendant is shown to have acted fraudulently or
in bad faith. Malice or bad faith implies a conscious and intentional design to do a wrongful
act for a dishonest purpose or moral obliquity. However, a conscious or intentional design
need not always be present because negligence may occasionally be so gross as to amount to
malice or bad faith. Hence, bad faith in the context of Article 2220 of the Civil Code includes
gross negligence. (BPI Express Card Corporation v. Ma. Antonia Armovit, G.R. No. 163654,
October 8, 2014.)

Q. What are the Modes of Assistance to Banks in Distress?

A. Receivership (suspends authority to operate and prohibits officers to act on any transac-
tion as soon as proceedings are initiated), Conservatorship (restores viability of a bank), and
Liquidation (reviews assets of the bank and prioritizes payment to creditors preferred
claims, Closure (permanent stoppage of operations)
Reliefs available to Owners, Depositors and Creditors: Owners may file action in court to
question the action of the BSP; Depositors may file claim with PDIC and Creditors may file
respective claims in appropriate proceedings.

Q. What is the extent of the Monetary Boards power to put a bank under receivership?
A. The Court, in several cases, upheld the power of the MB to take over banks without need
for prior hearing under R.A. 7653. It is not necessary inasmuch as the law entrusts to the MB
the appreciation and determination of whether any or all of the statutory grounds for the clo-
sure and receivership of the erring bank are present. The MB can immediately implement its
resolution prohibiting a banking institution to do business in the Philippines and, thereafter,
appoint the PDIC as receiver. It may be later subjected to a judicial scrutiny via a petition for
certiorari to be filed by the stockholders of record of the bank representing a majority of the
capital stock. Obviously, this procedure is designed to protect the interest of all concerned
that is, the depositors, creditors and stockholders, the bank itself and the general public. The
protection afforded public interest warrants the exercise of a summary closure. (Alfeo D. Vi-
vas, on his behalf and on behalf of the Shareholders or Eurocredit Community Bank v. The
Monetary Board of the Bangko Sentral ng Pilipinas and the Philippine Deposit Insurance
Corporation, G.R. No. 191424, August 7, 2013)

Q. May the BIR require a tax clearance before the distribution of the assets of a bank un-
der liquidation?
A. No, the SC held the law expressly provides that debts and liabilities of the bank under liq-
uidation are to be paid in accordance with the rules on concurrence and preference of credit
under the Civil Code. With reference to the other real and personal property of the debtor,
sometimes referred to as free property, the taxes and assessments due the National Gov-
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ernment, other than those in Articles 2241 (1) and 2242 (1) of the Civil Code, such as the
corporate income tax, will only come in the ninth place in the order of preference. If the
BIRs contention that a tax clearance be secured first before the project of distribution of the
assets of a bank under liquidation may be approved, then the tax liabilities will be given ab-
solute preference in all instances, including those that do not fall under Articles 2241 (1) and
2242 (1) of the Civil Code. (PDIC v. BIR, G.R. 172892, June 13, 2013)

Go over distinction between bank deposits and bank substitutes; reasons why banks are
required to maintain reserves against them: control of volume of money created by
credit operations (Sec. 94 of the New Central Bank Act); to answer any withdrawal;
help government finance its operations and help government control money supply;
Central Bank will examine and look into deposits with Philippine banks in good stand-
ing and will not apply to foreign currency deposits made by individuals or juridical
persons in banks abroad (Sec. 2, R.A. No. 6426); Restriction on loans and credit accom-
modations; Review provisions on DOSRI loans and exemptions allowed under the re-
striction.

Q. What is the obligation of a creditor bank under the Truth in Lending Act?
A. It is the duty of the bank to disclose to the debtor in detail the interests, charges and other
figures indicating in detail the cost of the loan and the branch manager is not given the sole
discretion in the determination of such costs.

Q.Is there a ceiling when it comes to interest rates to be imposed on debts?

A. No. The Usury Law had been rendered legally ineffective by Resolution No. 224 dated 3
December 1982 of the Monetary Board of the Central Bank, and later by Central Bank Circu-
lar No. 905 which took effect on 1 January 1983. The lender and the borrower should agree
on the imposed rate, and such imposed rate should be in writing.
Here, the stipulations on interest rate repricing are valid because (1) the parties mutually
agreed on said stipulations; (2) repricing takes effect only upon the banks written notice to
the borrower of the new interest rate; and (3) Borrower has the option to prepay its loan if it
and the bank do not agree on the new interest rate. The phrases irrevocably authorize, at
any time and adjustment of the interest rate shall be effective from the date indicated in the
written notice sent to us by the bank, or if no date is indicated, from the time the notice was
sent. (Solidbank Corporation vs. Permanent Homes, Inc., G.R. No. 171925, July 23, 2010.)

Q. Can a bank unilaterally increase the interest rates on a loan?

A. No. it is a violation of the mutuality of contracts. Any modification in the contract, such as
the interest rates, must be made with the consent of the contracting parties. The minds of all
the parties must meet as to the proposed modification, especially when it affects an important
aspect of the agreement. In the case of loan agreements, the rate of interest is a principal
condition, if not the most important component. Thus, any modification thereof must be mu-
tually agreed upon; otherwise, it has no binding effect.

The SC annulled the escalation clause, allowing the unilateral increase of interest at the whim
of the bank, and the principal amount of the loan was subjected to the original or stipulated
rate of interest, and 12% legal interest. (Spouses Solis v. PNB GR 181045 July 2, 2014)

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* Please note that the Monetary Board issued Circular No. 799, declaring that, effective
July 1, 2013 the rate of interest for the loan or forbearance of any money, goods or
credits and the rate allowed in judgments, in the absence of an express contract as to
such rate of interest, shall be 6 percent per annum.

Q. What is the rule on legal interests beginning July 1, 2013?

A. The guidelines laid down in the case of Eastern Shipping Lines are accordingly modified
to embody BSP-MB Circular No. 799, as follows:
1. When an obligation, regardless of its source, i.e., law, contracts, quasicontracts, delicts or
quasi-delicts is breached, the contravenor can be held liable for damages.
2. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:
a. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a
loan or forbearance of money, the interest due should be that which may have been stipulated
in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judi-
cially demanded. In the absence of stipulation, the rate of interest shall be 6% per annum to
be computed from default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.
b. When an obligation, not constituting a loan or forbearance of money, is breached, an inter-
est on the amount of damages awarded may be imposed at the discretion of the court at the
rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or
damages, except when or until the demand can be established with reasonable certainty.
c. When the judgment of the court awarding a sum of money becomes final and executory,
the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall
be 6% per annum from such finality until its satisfaction, this interim period being deemed to
be by then an equivalent to a forbearance of credit. And, in addition to the above, judgments
that have become final and executory prior to July 1, 2013, shall not be disturbed and shall
continue to be implemented applying the rate of interest fixed therein. (Dario Nacar v. Gal-
lery Frames and/or Felipe Bordey, Jr., G.R. No. 189871, August 13, 2013.)

Bank Secrecy Law (R.A. No. 1402)

See Instances when deposits may be looked into: Under Sec.2, R.A. No. 1402 with
written permission of depositor, in cases of impeachment, money deposited is subject of
litigation and upon order of a competent court in cases of bribery or dereliction of duty
of public officers; upon order of the court for unexplained wealth under Sec. 8 of Anti-
Graft and Corrupt Practices Act; upon order of the BIR Commissioner with respect to
bank deposits of a decedent to determine gross estate or when taxpayer applies for
compromise for his tax liability; unclaimed balances; without need of court order if the
Anti Money Laundering Council determines that the source of deposits a particular ac-
count is related to an unlawful activity.

Q. What are the requirements for a Waiver of Confidentiality of Bank Accounts?

A. The existence of a waiver must be positively demonstrated since a waiver by implication
is not normally countenanced. The norm is that a waiver must not only be voluntary, but
must have been made knowingly, intelligently, and with sufficient awareness of the relevant

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circumstances and likely consequences. (Dona Adela Export International, Inc. v. Trade and
Investment Development Corporation and BPI, G.R. No. 201931, February 11, 2015.)

Q. Does the Foreign Currency Deposit Act prevail as an exception to the Bank Secrecy
Law?
A. Yes. Republic Act No. 1405 was enacted for the purpose of giving encouragement to the
people to deposit their money in banking institutions and to discourage private hoarding so
that the same may be properly utilized by banks in authorized loans to assist in the economic
development of the country. It covers all bank deposits in the Philippines and no distinction
was made between domestic and foreign deposits. Thus, Republic Act No. 1405 is consid-
ered a law of general application. On the other hand, Republic Act No. 6426 was intended to
encourage deposits from foreign lenders and investors. It is a special law designed especially
for foreign currency deposits in the Philippines. A general law does not nullify a specific or
special law. Generalia specialibus non derogant. (Government Service Insurance System vs.
Court of Appeals, et al., G.R. No. 189206. June 8, 2011.)

Q. What is the nature of a banks relationship with depositors?

A. A fiduciary nature does not convert the contract from a simple loan to a trust agreement;
bank must observe high standards of integrity and performance. The fiduciary relationship of
the depositor and the bank does not convert the contract between the bank and its depositors
from a simple loan to a trust agreement, whether express or implied. It simply means that
the bank is obliged to observe high standards of integrity and performance in complying
with its obligations under the contract of simple loan. Per Article 1980 of the Civil Code, a
creditor-debtor relationship exists between the bank and its depositor. The savings deposit
agreement is between the bank and the depositor; by receiving the deposit, the bank implied-
ly agrees to pay upon demand and only upon the depositors order. Joseph Goyanko, Jr., as
administrator of the Estate of Joseph Goyanko, Sr. vs. United Coconut Planters Bank, Man-
go Avenue Branch, G.R. No. 179096. February 6, 2013

Q. What are considered deposits under the bank secrecy law? .

A. The deposits covered by the law on secrecy of bank deposits should not be limited to
those creating a creditor-debtor relationship; the law must be broad enough to include de-
posits of whatever nature which banks may use for authorized loans to third persons. R.A.
No. 1405 extends to funds invested such as those placed in a trust account which the bank
may use for loans and similar transactions. (Ejercito v. Sandigandbayan, G.R. No. 157294-
95, 2006).

The law on secrecy of bank deposits cannot be used to preclude the bank deposits from be-
ing garnished for the satisfaction of a judgment. There is no violation of R.A. No. 1405
because the disclosure is purely incidental to the execution process and it was not the inten-
tion of the legislature to place bank deposits beyond the reach of the judgment creditor.
(PCIB v. CA, G.R. 84526, 1991)

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Anti-Money Laundering Law (R.A. No.9160, as amended by R.A. 9194)
Q.What are the Predicate Crimes under the Anti-Money Laundering Law?
A. Kidnapping for ransom (Art. 267, RPC); proceeds from illegal transactions under the
Dangerous Drug Act; prohibitions under the Anti-Graft and Corrupt Practices Act; Plunder
Law, Robbery and Extortion under Arts. 294, 295, 296,299, 300, 301 and 302 of RPC;
jueteng and masiao under P.D. 1602; piracy on the high seas under RPC as amended by P.D.
No. 532; qualified theft under Art. 310 of RPC; swindling under Art.315 of RPC; smuggling
under R.A. Nos. 455 and 1937; hijacking and other violations under R.A. No. 6235; destruc-
tive arson and murder, as defined under the RPC, including acts perpetrated by terrorists
against non-combatant persons and similar targets; and violations under the Electronic
Commerce Law of 2000. (Consider this also as a possible question in Criminal Law.)

Effect of Freeze Order; When it may be issued; Only the Court of Appeals may issue
Freeze Order over deposits in question; Defense of no prior criminal offense is not
available;

Q.Is garnishment of a peso account a violation of the law on secrecy of bank deposits?
Would your answer be the same if it was garnishment of a foreign currency deposit?
A. No. Garnishment is allowed if it is part of execution of judgment because money judg-
ment is considered money as subject of litigation. (China Banking Corporation v. Ortega,
1973). It would be different if the account to be garnished is a deposit protected by Foreign
Currency Deposit Act as Section 8 of said law expressly prohibits the garnishment of such
deposits.

Please take note of the AMLA amendments annexed to this reviewer

II. Letters of Credit, Negotiable Instruments Law, Warehouse Receipts Law and Trust
Receipts

Q. What is a Letter of Credit?

A. In commercial transactions, a letter of credit is a financial device developed by merchants
as a convenient and relatively safe mode of dealing with sales of goods to satisfy the seem-
ingly 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. (TPI v. Luzon Hydro-
Corp, 2004)

Q. What are the three distinct contractual relationships in letter of credit transaction?
A. The three relationships are: between applicant/buyer/importer and the benefi-
ciary/seller/exporter; between issuing bank and the beneficiary/seller/exporter and between
the issuing bank and the applicant/buyer/importer.

Q. What are the important principles to remember in letter of credit transactions?

A. Doctrine of Independence (the three related but independent relations mentioned above. A
controversy/ breach in one contract will not affect the performance of the other contracts).

Where there was a meeting of the minds between the buyer and the seller regarding the sale
of foundry pig iron to be paid for under a letter of credit, the failure of the buyer to open the
letter of credit did not prevent the perfection of the contract and neither did such failure ex-
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tinguish the contract. The opening of the letter of credit was not a condition precedent for
the birth of obligation of the buyer to purchase the foundry pig iron from the seller. Where
the buyer fails to open the letter of credit, as stipulated, the seller or exporter is entitled to
claim damages for such breach. Damages for failure to open the letter of credit may include
the loss of profit which the seller would have reasonably made had the transaction been car-
ried out (Reliance Commodities, Inc. v. Daewoo Industrial Co. Ltd, 228 SCRA 545, 1993).

The issuing bank is not liable for damages even if the shipment did not conform to the spec-
ifications of the applicant. Under the independence principle, the obligation of the issuing
bank to pay the beneficiary arises once the latter is able to submit the stipulated documents
under the letter of credit. Hence, the bank is not liable for damages even if the shipment did
not conform to the specifications of the applicant. (LBP v. Monets Export Manufacturing,
452 SCRA 173, 2005)

Q. Is the Fraud Exception Rule always applied to letters of credit?

A. No. It is only an exception to the doctrine of independence. Professor Dolan in The Law
of Letters of Credit, Revised Ed. (2000).opines that the untruthfulness of a certificate accom-
panying a demand for payment under a standby credit may qualify as fraud sufficient to sup-
port an injunction against payment. xxx The remedy for fraudulent abuse is an injunction.
However, injunction should not be granted unless: (a) there is clear proof of fraud; (b) the
fraud constitutes fraudulent abuse of the independent purpose of the letter of credit and not
only fraud under the main agreement; and (c) irreparable injury might follow if injunction is
not granted or the recovery of damages would be seriously damaged. (TPI v. Luzon Hydro-
Corp, 2004)

Doctrine of Strict Compliance The tender of documents by the beneficiary (seller) must
include all documents required by the letter. A correspondent bank which departs from what
has been stipulated under the letter of credit, as when it accepts a faulty tender, acts on its
own risks and it may not thereafter be able to recover from the buyer or the issuing bank, as
the case may be, the money thus paid to the beneficiary Thus the rule of strict compliance.
(Feati Bank v. CA, 1991)

Q. What is a Negotiable Instrument?

A. It is an unconditional promise to pay to order or to bearer on demand or at a fixed deter-
minable future time.

Q. What are the requisites of a Negotiable Instrument?

A. This is frequently asked in the bar in the form of problem solving. This will help you not
only identify whether the Instrument will be governed by NIL but it will also help you distin-
guish a Negotiable Instrument from other Commercial and non-commercial documents.
Section 1. Form of negotiable instruments. - An instrument to be negotiable
must conform to the following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in
money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer
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Distinguish (ex. Certificate of Time Deposit, Checks payable to order) from negotiable doc-
ument (Postal Money Order, Treasury Warrants, and Warehouse Receipts)

Q. Who is a holder in due course?

A. (This is also a bar favorite.)
Sec. 52. What constitutes a holder in due course. - A holder in due course is a
holder who has taken the instrument under the following conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and without notice
that it has been previously dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That 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.

Q. May a juridical person whose regional branch had notice of the failure of
consideration after the endorsement of a promissory note still be considered a
holder in due course?

A. Yes. As long as the holder accepted the note in good faith and for value and
had no notice of the defect at the time of endorsement, a holder may still sue on
the basis of the promissory note as a holder in due course. A holder in due
course holds the instrument free from any defect of title of prior parties and
from defenses available to prior parties among themselves, and may enforce
payment of the instrument for the full amount thereof. The defense of non-
delivery of the object and nullity of the sale , for instance, cannot be raised
against the corporation that is a holder in due course as the NIL considers eve-
ry negotiable instrument prima facie to have been issued for a valuable consid-
eration. ( Spouses Violago v. BA Finance, 2008, J. Velasco)

Q. What is the rule on forgery of a signature found in a negotiable instrument? (Another

bar favorite)
A. Sec. 23. When a signature is forged or made without the authority of the person
whose signature it purports to be, it is wholly inoperative, and no right to retain the
instrument, or to give a discharge therefor, or to enforce payment thereof against any
party thereto, can be acquired through or under such signature, unless the party
against whom it is sought to enforce such right is precluded from setting up the for-
gery or want of authority.

Note that this is a real defense available even against a holder in due course.

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If a bank orders payment on the basis of a check where the drawers signature was forged
by an expert who signed almost as if the true drawer signed, who will be ultimately liable?
The Drawee bank. The forgery may be so near like the genuine as to defy detection by the
depositor himself, and yet the bank is liable to the depositor if it pays the check. (Samsung
Construction v. FEBTC, 2004)

Q. Is demand always necessary for the debtor to be considered in delay?

A. Under Art. 1169 of the Civil Code, demand from the creditor is not necessary for the de-
lay to exist when the obligation or the law expressly so declare. However, it is not sufficient
that the law or obligation fixes a date for performance, but it must further state expressly that
after the period lapses, default will commence. (Rodrigo Rivera v. Spouses Chua, G.R.
184458, January 14, 2015)

Q. Can a check be delivered without indorsement?

A. Yes. The check delivered to was made payable to cash. Under the Negotiable Instruments
Law, this type of check was payable to the bearer and could be negotiated by mere delivery
without the need of an indorsement. People of the Philippines v. Gilbert Reyes Wagas, G.R.
No. 157943, September 4, 2013.

Q. What are crossed checks?

A. A crossed check is one where two parallel lines are drawn across its face or across its cor-
ner. Based on jurisprudence, the crossing of a check has the following effects: (a) the check
may not be encashed but only deposited in the bank; (b) the check may be negotiated only
once to the one who has an account with the bank; and (c) the act of crossing the check
serves as a warning to the holder that the check has been issued for a definite purpose and he
must inquire if he received the check pursuant to this purpose; otherwise, he is not a holder in
due course. In other words, the crossing of a check is a warning that the check should be de-
posited only in the account of the payee. When a check is crossed, it is the duty of the col-
lecting bank to ascertain that the check is only deposited to the payees account. Philippine
Commercial Bank vs. Antonio B. Balmaceda and Rolando N. Ramos, G.R. No. 158143, Sep-
tember 21, 2011.

Q .Can a crossed check be encashed?

A. No. The crossing of a check means that the check may not be encashed but only deposited
in the bank. The issuance of a crossed check reflects managements intention to safeguard the
funds covered thereby, its special instruction to have the same deposited to another account
and its restriction on its encashment. Wesleyan University Phils. V. Nowella Reyes, G.R.
No.208321, July 30, 2014

Q. Is an electronic message (known as SWIFT Society of Worldwide Interbank Finan-

cial Telecommunications) sent to a bank with an order to pay certain persons upon receipt
of securities a bill of exchange?
A. No. the requisites under Sec. 1 of the NIL are not present. There is no sign from the draw-
er, no unconditional order to pay as the amounts are from specific funds (the clients ac-
counts) and they are not order or bearer instruments because the payee is specified. (HSBA v.
CIR, 2014)

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Q. What is the liability of depositary/collecting bank in altered checks?

A. In check transactions, the depositary/collecting bank or last endorser generally suffers the
loss because it has the duty to ascertain the genuineness of all prior endorsements considering
that the act of presenting the check for payment to the drawee is an assertion that the party
making the presentment has done its duty to ascertain the genuiness of the endorsements. If
any of the warranties made by the depositary/collecting bank turns out to be false, then the
drawee bank may recover from it up to the amount of the check. (Cesar Areza and Lolita
Areza v. Savings Bank, Inc and Michael Potenciano, G.R. No. 176697, September 10, 2014)

Q. What is the rule on liability under an incomplete but undelivered instrument?

A. Under Section 14 of the NIL, if the maker or drawee delivers pre-signed blank paper to
another person for the purpose of converting it into a negotiable instrument, that person is
deemed to have a prima facie authority to fill it up. In order however that any such instru-
ment when completed may be enforced against any person who became a party thereto prior
to its completion, two requisites must exist: (1) that the blank must be filled strictly in ac-
cordance with the authority given and (2) it must be filled up strictly in accordance with the
authority given and within a reasonable time. The maker can set this up as a personal defense
and avoid liability. (Alvin Patrimonio v. Napoleon Gutierrez and Octavio Marasigan III,
G.R. 187769, June 4, 2014)

Promissory Note: parties, warranties, obligations and liabilities of parties; negotiability,

transfer of rights under deed of assignment

Q. Will the alteration of a promissory note result in the extinguishment of the original
debt?
A. No. While a promissory note is evidence of indebtedness, it is not the only evidence, for
the existence of the obligation can be proven by other documentary evidence such as a
written memorandum signed by the parties. A check may be considered as an evidence of
indebtedness and is a veritable proof of an obligation. It can be used in lieu of and for the
same purpose as a promissory note and can therefore be presented to establish the exist-
ence of indebtedness. (Leonardo Bognot v. RRI Lending Corporation, G.R. 180144, Sep-
tember 24, 2014)

Q. Bong, a long time client, dollar account holder and grantee of a credit line
of Randy Bank, helped his friends Jet and Michael get a loan from Randy
Bank by signing as a co-maker in a promissory note. After receiving the full
sum of the loan from the Bank, Michael and Jet failed to pay Randy Bank.
Randy Bank is now going after Bong who says he should not be liable as he
did not benefit from the loan. Is Bong correct?

11 | P a g e
A. No. By signing as borrower and co-borrower on the promissory notes with
the proceeds of the loans going to Jet and Michael, Bong has extended an ac-
commodation to said persons. As an accommodation party, Bong is solidarily
liable with the Jet and Michael for the loans. n accommodation party is a person
who has signs the instrument as maker, drawer, acceptor, or indorser, without
receiving value therefor, and for the purpose of lending his name to some other
person. The relation between an accommodation party and the accommodated
party is one of principal and surety, the accommodation party being the surety.
(Gonzales v. PCIB, 2011. J. Velasco)

Q. What is a trust receipt transaction?

A. A trust receipt transaction is one where the entrustee has the obligation to deliver to the
entruster the price of the sale, or if the merchandise is not sold, to return the merchandise to
the entruster. There are, therefore, two obligations in a trust receipt transaction: the first re-
fers to money received under the obligation involving the duty to turn it over (entregarla) to
the owner of the merchandise sold, while the second refers to the merchandise received under
the obligation to return it (devolvera) to the owner. (Hur Tin Yang v. People of the Philip-
pines, G.R. No. 195117, August 14, 2013)

Q. When is there a simple loan despite the execution of a trust receipt?

A. When both parties enter into an agreement knowing fully well that the return of the
goods subject of the trust receipt is not possible (when the goods are sued as construction
materials see (Ng v. People, 2010 and LBP v. Perez, 2012) even without any fault on the part
of the trustee, it is not a trust receipt transaction penalized under Sec. 13 of PD 115 in rela-
tion to Art. 315, par. 1(b) of the RPC, as the only obligation actually agreed upon by the par-
ties would be the return of the proceeds of the sale transaction. This transaction becomes a
mere loan, where the borrower is obligated to pay the bank the amount spent for the purchase
of the goods. (Hur Tin Yang v. People of the Philippines, G.R. No. 195117, August 14, 2013)

Another situation where there is a simple loan only despite the signing of a trust receipt is
when a debtor received the goods subject of the trust receipt before the trust receipt it-
self was entered into Colinares v. CA, 2000

When the goods subject of the transaction, such as chemicals and metal plates, were not in-
tended for sale or resale but for use in the fabrication of steel communication towers, the
agreement cannot be considered a trust receipt transaction but a simple loan. P.D. No. 115
punishes the entrustee for his failure to deliver the price of the sale, or if the goods are not
sold, to return them to the entruster, which, in the present case, is absent and could not
have been complied with; therefore, the liability of the entrustee is only civil in nature. (An-
thony L.Ng v. People of the Philippines, G.R. No. 173905, 2010)

When both parties entered into an agreement knowing fully well that the return of the
goods subject of the trust receipt is not possible even without any fault on the part of the
trustee, it is not a trust receipt transaction penalized under Sec. 13 of PD 115 in relation to
Art. 315, par. 1(b) of the RPC, as the only obligation actually agreed upon by the parties

12 | P a g e
would be the return of the proceeds of the sale transaction. This transaction becomes a mere
loan, where the borrower is obligated to pay the bank the amount spent for the purchase of
the goods. Hur Tin Yang v. People of the Philippines, G.R.195117, 2013)

III. Bulk Sales Law

Q. When is the Bulk Sales Law applicable?
A. It applies only to retail merchants, traders and dealer involving the sale of all or substan-
tially all of the assets used in the business of the vendor; Conditions which will allow a party
to invoke the provisions of the Bulk Sales Law inability to meet outstanding obligations in
the course of business but vendor must secure the approval of at least two-thirds of its stock-
holders and a majority vote of the members of its board of directors; Affidavit of Sale must
state the names of all its creditors, their addresses, the amount of credits and their maturities;
A sale and transfer in bulk is made by a public officer, acting under judicial process, said sale
or transfer is not covered by the Bulk Sales Law; If sale of assets was made in defraud of
creditors, the latter may have contracts rescinded or file a petition for involuntary insolvency
and sue for damages as well to recover the value of the contract with the vendor but secured
loans, with leave of court, may filed; guarantors may also file their claims.

IV. The Corporation Code, Securities Regulation Code, Insolvency and Foreign In-
vestments Act

A. The Corporation Code: Formalities of incorporation for stock and non-stock corpo-
rations; distinction between stock and non-stock corporations; distinction between pub-
lic and private corporations; what is a corporate sole; resolution of conflict involving
inter-locking directors; when may doctrine of corporate opportunity be availed; may a
stock corporation be converted into a non-stock corporation; may a non-stock corpora-
tion be converted into a stock corporation; residency of incorporators and directors;
what is a derivative suit (rights of minor stockholders); ultra vires doctrine; definition of
intra-corporate controversy (would cover corporation, partnership or association regis-
tered with the SEC); RTCs jurisdiction over intra-corporate controversies; rehabilitation
of a corporation; what is a Stay Order in rehabilitation; what is the Trust Fund Doc-
trine; distinction between stock and cash dividends; distinction between profit and cash
dividends; when may dividends be declared out of unrestricted retained earnings; what
is appraisal right, when may it be exercised; instances when a corporation may buy its
own shares; modes of dissolution of corporations voluntary and involuntary.

Q. Are PLDTs stock dividends subject to the NTCs assessment of Supervision and Regula-
tion Fees?
A. Yes. Dividends, regardless of the form these are declared, that is, cash, property or stocks,
are valued at the amount of the declared dividend taken from the unrestricted retained earn-
ings of a corporation. Thus, the value of the declaration in the case of a stock dividend is the
actual value of the original issuance of said stocks. In G.R. No. 127937 we said that "in the
case of stock dividends, it is the amount that the corporation transfers from its surplus profit
account to its capital account" or "it is the amount that the corporation receives in consider-
ation of the original issuance of the shares." It is "the distribution of current or accumulated
earnings to the shareholders of a corporation pro rata based on the number of shares
owned." Such distribution in whatever form is valued at the declared amount or monetary
13 | P a g e
equivalent. Thus, it cannot be said that no consideration is involved in the issuance of
stock dividends. In fact, the declaration of stock dividends is akin to a forced purchase of
stocks. By declaring stock dividends, a corporation ploughs back a portion of its entire un-
restricted retained earnings either to its working capital or for cap In essence, therefore,
the stockholders by receiving stock dividends are forced to exchange the monetary value of
their dividend for capital stock, and the monetary value they forego is considered the actu-
al payment for the original issuance of the stocks given as dividends. Therefore, stock divi-
dends acquired by shareholders for the monetary value they forego are under the coverage
of the SRF and the basis for the latter is such monetary value as declared by the board of
directors. ital asset acquisition or investments. It is simplistic to say that the corporation
did not receive any actual payment for these. When the dividend is distributed, it ceases to
be a property of the corporation as the entire or portion of its unrestricted retained earn-
ings is distributed pro rata to corporate shareholders. (PLDT v. NTC, et.al. G.R. No.
152685, 2007 penned by J. Velasco)

Q. What are the instances when corporate veil may be pierced?

A. The corporate veil may be pierced when the separate corporate entity is used to defeat
public convenience, justify wrong, protect fraud or defend a crime, as a shield to confuse le-
gitimate issues; where corporation is a mere alter ego or business conduit of a person; or
where a corporation is so organized and controlled and its affairs are so conducted as to make
it merely an instrumentality, agency, conduit, adjunct of another corporation;
It has long been settled that the law vests a corporation with a personality distinct and
separate from its stockholders or members. In the same vein, a corporation, by legal fiction
and convenience, is an entity shielded by a protective mantle and imbued by law with a char-
acter alien to the persons comprising it. Circumstances might de-
ny a claim for corporate personality, under the doctrine of piercing the veil of corporate fic-
tion.
Piercing the veil of corporate fiction is an equitable doctrine developed to address situations
where the separate corporate personality of a corporation is abused or used for wrongful pur-
poses. Under the doctrine, the corporate existence may be disregarded where the entity is
formed or used for non-legitimate purposes, such as to evade a just and due obligation, or to
justify a wrong, to shield or perpetrate fraud or to carry out similar or inequitable considera-
tions, other unjustifiable aims or intentions, in which case, the fiction will be disregarded and
the individuals composing it and the two corporations will be treated as identical. (Eric God-
frey Stanley Livesey v. Binswanger Philippines, Inc. and Keith Elliot, G.R. No. 177493,
March 19, 2014)

Any application of the doctrine of piercing the corporate veil should be done with caution. A
court should be mindful of the milieu where it is to be applied. It must be certain that the cor-
porate fiction was misused to such an extent that injustice, fraud, or crime was committed
against another, in disregard of its rights. The wrongdoing must be clearly and convincingly
established; it cannot be presumed. Otherwise, an injustice that was never unintended may
result from an erroneous application. (Heirs of Fe Tan Uy (Represented by her heir, Manling
Uy Lim) vs. International Exchange Bank/Goldkey Development Corporation vs. Interna-
tional Exchange Bank, (G.R. No. 166282/G.R. No. 166283, February 13, 2013)

14 | P a g e
The doctrine of piercing the corporate veil applies only in three (3) basic areas, namely: 1)
defeat of public convenience as when the corporate fiction is used as a vehicle for the evasion
of an existing obligation; 2) fraud cases or when the corporate entity is used to justify a
wrong, protect fraud, or defend a crime; or 3) alter ego cases, where a corporation is merely a
farce since it is a mere alter ego or business conduit of a person, or where the corporation is
so organized and controlled and its affairs are so conducted as to make it merely an instru-
mentality, agency, conduit or adjunct of another corporation. (Timoteo H. Sarona vs. Na-
tional Labor Relations Commission, Royale Security Agency, et al., G.R. No. 185280, Janu-
ary 18, 2012).
Corporations; liability of corporate officers. As a general rule, the officer cannot be held per-
sonally liable with the corporation, whether civilly or otherwise, for the consequences his
acts, if acted for and in behalf of the corporation, within the scope of his authority and in
good faith. (Rodolfo Laborte, et al. v. Pagsanjan Tourism Consumers Cooperative, et
al., G.R. No. 183860, January 15, 2014)

Q. What is the three pronged test?

A. Case law lays down a three-pronged test to determine the application of the alter ego theo-
ry, which is also known as the instrumentality theory, namely:
(1) Control, not mere majority or complete stock control, but complete domination,
not only of finances but of policy and business practice in respect to the transaction
attacked so that the corporate entity as to this transaction had at the time no separate
mind, will or existence of its own;
(2) Such control must have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty, or dishonest and
unjust act in contravention of plaintiffs legal right; and
(3) The aforesaid control and breach of duty must have proximately caused the injury
or unjust loss complained of.
The first prong is the "instrumentality" or "control" test. This test requires that the subsid-
iary be completely under the control and domination of the parent. It examines the parent
corporations relationship with the subsidiary. It inquires whether a subsidiary corporation is
so organized and controlled and its affairs are so conducted as to make it a mere instrumen-
tality or agent of the parent corporation such that its separate existence as a distinct corporate
entity will be ignored. It seeks to establish whether the subsidiary corporation has no auton-
omy and the parent corporation, though acting through the subsidiary in form and appear-
ance, "is operating the business directly for itself."
The second prong is the "fraud" test. This test requires that the parent corporations conduct
in using the subsidiary corporation be unjust, fraudulent or wrongful. It examines the rela-
tionship of the plaintiff to the corporation It recognizes that piercing is appropriate only if the
parent corporation uses the subsidiary in a way that harms the plaintiff creditor. As such, it
requires a showing of "an element of injustice or fundamental unfairness."

The third prong is the "harm" test. This test requires the plaintiff to show that the defend-
ants control, exerted in a fraudulent, illegal or otherwise unfair manner toward it, caused the
harm suffered. A causal connection between the fraudulent conduct committed through the
instrumentality of the subsidiary and the injury suffered or the damage incurred by the plain-

15 | P a g e
tiff should be established. The plaintiff must prove that, unless the corporate veil is pierced, it
will have been treated unjustly by the defendants exercise of control and improper use of the
corporate form and, thereby, suffer damages.
To summarize, piercing the corporate veil based on the alter ego theory requires the concur-
rence of three elements: control of the corporation by the stockholder or parent corporation,
fraud or fundamental unfairness imposed on the plaintiff, and harm or damage caused to the
plaintiff by the fraudulent or unfair act of the corporation. The absence of any of these ele-
ments prevents piercing the corporate veil. ( PNB V. Hydro Resources Contractors Corp,
2010)
Q. If a corporation is not impleaded in a suit, can such corporation be subject
to the piercing doctrine?
A. No. The principle of piercing the veil of corporate fiction, and the resulting
treatment of two-related corporations as one and the same juridical person
with respect to a given transaction, is basically applied only to determine lia-
bility; it is not available to confer on the court jurisdiction it has not acquired,
in the first place, over a party not impleaded in a case. (Kukan International
Corporation v. Hon. Amor Reyes, G.R. 182729, 2010, penned by J. Velasco)
Q. May a contract supposedly entered in to by a corporation before its incorporation
bind it?
A. No. The Court held that any contract executed prior to incorporation has no binding effect
on petitioner corporation. Logically, there is no corporation to speak of prior to an entitys
incorporation. And no contract entered into before incorporation can bind the corporation.
(March II Marketing, Inc. and Lucila V. Joson vs. Alfredo M. Joson, G.R. No. 171993, De-
cember 12, 2011)

Q. Randy sold Jet his shares of stock. Jet immediately exercised his rights as a stockholder
by requesting for a copy of the corporations financial statements which the corporation
allowed. Randy later on sold the same shares of stock to Eisel and delivered the stock cer-
tificates to her. Who owns the shares of stock?
A. The latter. In a sale of shares of stock, physical delivery of a stock certificate is one of the
essential requisites for the transfer of ownership of the stocks purchased. The enjoyment of
the rights under the stock certificates cannot suffice where the law, by its express terms, re-
quires a specific form to transfer ownership. (Fil-Estate Gold and Development, Inc., et al.
v. Vertex Sales and Trading, Inc., G.R. No. 202079, June 10, 2013.)

Q. What is the prevailing test to determine whether a corporation is a Filipino Corpora-

tion?
A. The control test is still the prevailing mode of determining whether or not a corporation
is a Filipino corporation, within the ambit of Sec. 2, Art. II of the 1987 Constitution, entitled
to undertake the exploration, development and utilization of the natural resources of the Phil-
ippines. When in the mind of the Court there is doubt, based on the attendant facts and cir-
cumstances of the case, in the 60-40 Filipino-equity ownership in the corporation, then it may
apply the grandfather rule. (Narra Nickel Mining and Development Corp., et al. v. Red-
mont Consolidated Mines,G.R. No. 195580, April 21, 2014)
16 | P a g e
Q. Does the control test exclude the application of the grandfather rule?
A. No. The control test can be applied jointly with the Grandfather Rule to
determine the observance of foreign ownership restriction in nationalized
economic activities. The Control Test and the Grandfather Rule are not in-
compatible ownership-determinant methods that can only be applied alterna-
tive to each other. Rather, these methods can, if appropriate, be used cumula-
tively in the determination of the ownership and control of corporations en-
gaged in fully or partly nationalized activities, as the mining operation in-
volved in this case or the operation of public utilities.

The Grandfather Rule, standing alone, should not be used to determine the
Filipino ownership and control in a corporation, as it could result in an oth-
erwise foreign corporation rendered qualified to perform nationalized or part-
ly nationalized activities. Hence, it is only when the Control Test is first com-
plied with that the Grandfather Rule may be applied. Put in another manner,
if the subject corporations Filipino equity falls below the threshold 60%, the
corporation is immediately considered foreign-owned, in which case, the need
to resort to the Grandfather Rule disappears.

In this case, using the control test, Narra, Tesoro and MacArthur appear to
have satisfied the 60-40 equity requirement. But the nationality of these cor-
porations and the foreign-owned common investor that funds them was in
doubt, hence, the need to apply the Grandfather Rule. Narra Nickel Mining v.
Redmont, G.R. 195580 (2014, penned by J. Velasco)

Q. Who are corporate officers?

A. In the context of Presidential Decree No. 902-A, corporate officers are those officers of a
corporation who are given that character either by the Corporation Code or by the corpora-
tions by-laws. Section 25 of the Corporation Code specifically enumerated who are these
corporate officers, to wit: (1) president; (2) secretary; (3) treasurer; and (4) such other offic-
ers as may be provided for in the by-laws. The Court held that unless and until petitioner
corporations by-laws is amended for the inclusion of General Manager in the list of its cor-
porate officers, such position cannot be considered as a corporate office within the realm of
Section 25 of the Corporation Code. March II Marketing, Inc. and Lucila V. Joson vs. Alfre-
do M. Joson, G.R. No. 171993, December 12, 2011.

Q. Will a case be dismissed if a corporation used its former name in the proceedings?
A. No. While the SC stands by in its pronouncement on the importance of the corporate name
to the very existence of corporations and the significance thereof in the corporations right to
sue, it shall not go so far as to dismiss a case filed by the proper party using its former name

17 | P a g e
when adequate identification is presented. NM Rothschild & Sons Ltd. V. Lepanto Consoli-
dated Mining, G.R. No. 175799, November 28, 2011.

Q. When are officers and directors of a corporation liable?

A. Basic is the rule in corporation law that a corporation is a juridical entity which is vested
with a legal personality separate and distinct from those acting for and in its behalf and, in
general, from the people comprising it. Following this principle, obligations incurred by the
corporation, acting through its directors, officers and employees, are its sole liabilities. A di-
rector, officer or employee of a corporation is generally not held personally liable for obliga-
tions incurred by the corporation. Nevertheless, this legal fiction may be disregarded if it is
used as a means to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an ex-
isting obligation, the circumvention of statutes, or to confuse legitimate issues.
Solidary liability will then attach to the directors, officers or employees of the corporation in
certain circumstances, such as:

1. When directors and trustees or, in appropriate cases, the officers of a corporation: (a) vote
for or assent to patently unlawful acts of the corporation; (b) act in bad faith or with gross
negligence in directing the corporate affairs; and (c) are guilty of conflict of interest to the
prejudice of the corporation, its stockholders or members, and other persons;
2. When a director or officer has consented to the issuance of watered stocks or who, having
knowledge thereof, did not forthwith file with the corporate secretary his written objec-
tion thereto;
3. When a director, trustee or officer has contractually agreed or stipulated to hold himself
personally and solidarily liable with the corporation; or
4. When a director, trustee or officer is made, by specific provision of law, personally liable
for his corporate action.
Before a director or officer of a corporation can be held personally liable for corporate obli-
gations, however, the following requisites must concur: (1) the complainant must allege in
the complaint that the director or officer assented to patently unlawful acts of the corporation,
or that the officer was guilty of gross negligence or bad faith; and (2) the complainant must
clearly and convincingly prove such unlawful acts, negligence or bad faith.
While it is true that the determination of the existence of any of the circumstances that would
warrant the piercing of the veil of corporate fiction is a question of fact which cannot be the
subject of a petition for review on certiorari under Rule 45, this Court can take cognizance of
factual issues if the findings of the lower court are not supported by the evidence on record or
are based on a misapprehension of facts. (Heirs of Fe Tan Uy (Represented by her heir,
Manling Uy Lim) vs. International Exchange Bank/Goldkey Development Corporation vs.
International Exchange Bank, G.R. No. 166282/G.R. No. 166283, February 13, 2013)

Q. The NBI caused the filing of a complaint against Omni Corporation and
its directors for violation of BP. No. 33 which penalizes the unauthorized use
of LPG cylinders. Can the directors be held personally liable?

A: Yes, as regards the President of the Corporation who manages the busi-
ness affairs of Omni, but No as regards to the other directors. Even if the cor-

18 | P a g e
porate powers of a corporation are reposed in it under the first paragraph of
Sec. 23 of the Corporation Code, the board of directors is not directly charged
with the running of the recurring business affairs of the corporation and may
not be held liable under BP 33. (Arnel U. Ty, et. al vs. NBI Supervising Agent
Marvin E. De Jemil, et. al., G.R. 182147 2010, penned by J. Velasco)

Q. Is prior approval of stockholders required of all corporate acts?

A. The general rule is that a corporation, through its board of directors, should act in the
manner and within the formalities, if any, prescribed by its charter or by the general law.
Thus, directors must act as a body in a meeting called pursuant to the law or the corpora-
tions by laws, otherwise, any action taken therein maybe questioned by any objecting di-
rector or shareholder. However, the actions taken in such a meeting by the directors or
trustees may be ratified expressly or impliedly. Ratification means that the principal volun-
tarily adopts, confirms and gives sanction to some unauthorized act of its agent on its be-
half. It is this voluntary choice, knowingly made, which amounts to a ratification of what
was theretofore unauthorized and becomes the authorized act of the party so making the
ratification. The substance of the doctrine is confirmation after conduct, amounting to a
substitute for a prior authority. (Lopez Realty, Inc. and Asuncion Lopez-Gonzales v. Sps.
Tanjangco, G.R. 154291, November 12, 2014)

Q. Can a corporate officer not authorized by the board in writing bind the corporation?
A. The Court reiterated its ruling in Peoples Aircargo and Warehousing Co., Inc. v. Court
of Appeals: Inasmuch as a corporate president is often given general supervision and con-
trol over corporate operations, the strict rule that said officer has no inherent power to act for
the corporation is slowly giving way to the realization that such officer has certain limited
powers in the transaction of the usual and ordinary business of the corporation.
In the absence of a charter or bylaw provision to the contrary, the president is presumed to
have the authority to act within the domain of the general objectives of its business and with-
in the scope of his or her usual duties. (Advance Paper Corporation and George Haw, in his
capacity as President of Advance Paper Corporation v. Arma Traders Corporation, Manuel
Ting, et al., G.R. No. 176897, December 11, 2013)

Section 23 of the Corporation Code expressly provides that the corporate powers of all cor-
porations shall be exercised by the board of directors. The power and the responsibility to
decide whether the corporation should enter into a contract that will bind the corporation are
lodged in the board, subject to the articles of incorporation, bylaws, or relevant provisions of
law. In the absence of authority from the board of directors, no person, not even its officers,
can validly bind a corporation.
The authority of a corporate officer or agent in dealing with third persons may be actual or
apparent. Actual authority is either express or implied. The extent of an agents express au-
thority is to be measured by the power delegated to him by the corporation, while the extent
of his implied authority is measured by his prior acts which have been ratified or approved,
or their benefits accepted by his principal. The doctrine of apparent authority, on the other
hand, with special reference to banks, had long been recognized in this jurisdiction. The ex-
istence of apparent authority may be ascertained through:

19 | P a g e
(1) the general manner in which the corporation holds out an officer or agent as having the
power to act, or in other words, the apparent authority to act in general, with which it clothes
him; or
(2) the acquiescence in his acts of a particular nature, with actual or constructive
knowledge thereof, within or beyond the scope of his ordinary powers. (Violeta Tudtud
Banate, et al. vs. Philippine Countryside Rural Bank (Liloan, Cebu), Inc. and Teofilo Soon,
Jr., G.R. No. 163825, July 13, 2010)

Q. Who may sign a certification against forum shopping in a suit filed by a corporation?
A. The requirement of the certification of non-forum shopping is rooted in the principle that a
party-litigant shall not be allowed to pursue simultaneous remedies in different fora. Howev-
er, the Court has relaxed, under justifiable circumstances, the rule requiring the submission of
such certification considering that, although it is obligatory, it is not jurisdictional. Not being
jurisdictional, it can be relaxed under the rule of substantial compliance. Thus, a President of
a corporation, among other enumerated corporate officers and employees, can sign the verifi-
cation and certification against non-forum shopping in behalf of the said corporation without
the benefit of a board resolution.
The following officials or employees of the company can sign the verification and certifica-
tion without need of a board resolution: (1) the Chairperson of the Board of Directors, (2) the
President of a corporation, (3) the General Manager or Acting General Manager, (4) Person-
nel Officer, and (5) an Employment Specialist in a labor case.
While the above cases do not provide a complete listing of authorized signatories to the veri-
fication and certification required by the rules, the determination of the sufficiency of the au-
thority was done on a case to case basis. The rationale applied in the foregoing cases is to
justify the authority of corporate officers or representatives of the corporation to sign the ver-
ification or certificate against forum shopping, being "in a position to verify the truthfulness
and correctness of the allegations in the petition. (South Cotabato Communications Corp.
and Gauvain Benzonan v. Hon. Patricia Sto. Tomas, et.al., G.R. 173326, December 15,
2010)

Q. What is an intra-corporate dispute?

A. An intra-corporate dispute is understood as a suit arising from intra-corporate relations or
between or among stockholders or between any or all of them and the corporation. Applying
what has come to be known as the relationship test, it has been held that the types of actions
embraced by the foregoing definition include the following suits: (a) between the corpora-
tion, partnership or association and the public; (b) between the corporation, partnership or
association and its stockholders, partners, members, or officers; (c) between the corporation,
partnership or association and the State insofar as its franchise, permit or license to operate is
concerned; and, (d) among the stockholders, partners or associates themselves. As the defini-
tion is broad enough to cover all kinds of controversies between stockholders and corpora-
tions, the traditional interpretation was to the effect that the relationship test brooked no dis-
tinction, qualification or any exemption whatsoever. ( Strategic Alliance Development Cor-
poration vs. Star Infrastructure Development Corporation, BEDE S. Tabalingcos, et al., G.R.
No. 187872, November 17, 2010).

20 | P a g e
An intra-corporate controversy, which falls within the jurisdiction of regular courts, has been
regarded in its broad sense to pertain to disputes that involve any of the following relation-
ships: (1) between the corporation, partnership or association and the public; (2) between the
corporation, partnership or association and the state in so far as its franchise, permit or li-
cense to operate is concerned; (3) between the corporation, partnership or association and its
stockholders, partners, members or officers; and (4) among the stockholders, partners or as-
sociates, themselves. Applying the foregoing to the present case, the LA had the original ju-
risdiction over the complaint for illegal dismissal because Cosare, although an officer of
Broadcom for being its AVP for Sales, was not a corporate officer as the term is defined by
law. (Raul C. Cosare v. Broadcom Asia, Inc., et al., G.R. No. 201298, February 5, 2014)

Q. What are the tests to determine whether a person is a corporate officer?

A. There are two circumstances which must concur in order for an individual to be consid-
ered a corporate officer, as against an ordinary employee or officer, namely: (1) the creation
of the position is under the corporations charter or by-laws; and (2) the election of the of-
ficer is by the directors or stockholders. It is only when the officer claiming to have been il-
legally dismissed is classified as such corporate officer that the issue is deemed an intra-
corporate dispute which falls within the jurisdiction of the trial courts. Raul C. Cosare v.
Broadcom Asia, Inc., et al., G.R. No. 201298, February 5, 2014.

Q. What is a derivative suit?

A. A derivative suit is an action brought by a stockholder on behalf of the corporation to en-
force corporate rights against the corporations directors, officers or other insiders. Under
Sections 23 and 36 of the Corporation Code, the directors or officers, as provided under the
by-laws, have the right to decide whether or not a corporation should sue. Since these direc-
tors or officers will never be willing to sue themselves, or impugn their wrongful or fraudu-
lent decisions, stockholders are permitted by law to bring an action in the name of the corpo-
ration to hold these directors and officers accountable. In derivative suits, the real party in
interest is the corporation, while the stockholder is a mere nominal party. Juanito Ang, for
and in behalf of Sunrise Marketing (Bacolod), Inc. v. Sps. Roberto and Rachel Ang, G.R. No.
201675, June 19, 2013.

Q. Can a corporation sole be converted to a corporation aggregate?

A. A corporation may change its character as a corporation sole into a corporation aggregate
by mere amendment of its articles of incorporation without first going through the process of
dissolution. The amendment needs the concurrence of at least two-thirds of its membership.
If such approval mechanism is made to operate in a corporation sole, its one member in
whom all the powers of the corporation technically belongs, needs to get the concurrence of
two-thirds of its membership. The one member, here the General Superintendent, is but a
trustee, according to Section 110 of the Corporation Code, of its membership. Iglesia Evan-
gelica Metodista En Las Islas Filipinas (IEMELIF), Inc., et al. vs. Bishop Nathanael Lazaro,
et al., G.R. No. 184088, July 6, 2010.

Q. Can a corporation continue its regular business during the winding up period after dis-
solution?
A. No. Section 122 of the Corporation Code prohibits a dissolved corporation from continu-
ing its business, but allows it to continue with a limited personality for a period of three years
21 | P a g e
from the time it would have been dissolved in order to settle and close its affairs, including
its complete liquidation but not for the purpose of continuing the business for which it was
established.
Vitaliano N. Aguirre II and Fidel N. Aguirre II and Fidel N. Aguirre vs. FQB+, Inc., Na-
thaniel D. Bocobo, Priscila Bocobo and Antonio De Villa, G.R. No. 170770. January 9,
2013.

Q. Does the dissolution of a corporation mean the cessation of the board of directors pow-
ers?
A. A corporations board of directors is not rendered functus officio by its dissolution. Since
Section 122 allows a corporation to continue its existence for a limited purpose, necessarily
there must be a board that will continue acting for and on behalf of the dissolved corporation
for that purpose. (Vitaliano N. Aguirre II and Fidel N. Aguirre II and Fidel N. Aguirre
vs. FQB+, Inc., Nathaniel D. Bocobo, Priscila Bocobo and Antonio De Villa, G.R. No.
170770. January 9, 2013.

Q. Are property rights of stockholders affected by the dissolution of the corporation?

A. A partys stockholdings in a corporation, whether existing or dissolved, is a property right
which he may vindicate against another party who has deprived him thereof. The corpora-
tions dissolution does not extinguish such property right. Vitaliano N. Aguirre II and Fidel
N. Aguirre II and Fidel N. Aguirre vs. FQB+, Inc., Nathaniel D. Bocobo, Priscila Bocobo
and Antonio De Villa, G.R. No. 170770. January 9, 2013.

Q. Are all corporations that are not GOCCs considered private corporations not under
Commission on Audit jurisdiction?
A. No. Not all corporations, which are not government owned or controlled, are ipso facto to
be considered private corporations as there exists another distinct class of corporations or
chartered institutions which are otherwise known as public corporations. These corpora-
tions are treated by law as agencies or instrumentalities of the government which are not sub-
ject to the tests of ownership or control and economic viability but to different criteria relat-
ing to their public purposes/interests or constitutional policies and objectives and their ad-
ministrative relationship to the government or any of its Department or Offices. The COA
may, thus, audit the finances of BSP. Boy Scouts of the Phils. V. COA. G.R. No. 177131,
June 7, 2011

Q. Is there a distinction between a case filed before and after the winding up period of a
corporation?
A. Yes. A dissolved corporation or any person representing it cannot file a case beyond the
three year winding up period even if the purpose of such suit is the liquidation of the assets of
the dissolved corporation as it has no more capacity to sue. To allow such suit would be to
circumvent Section 122 of the Corporation Code. (Alabang Development Corporation v. Al-
abang Hills Village Association and Rafael Tinio, G.R. No. 187456, June 2, 2014.)

Q. Is the refusal to allow inspection of the stock and transfer book a criminal offense?
A. Yes. Such refusal, when done in violation of Section 74(4) of the Corporation Code,
properly falls within the purview of Section 144 of the same code and thus may be penalized

22 | P a g e
as an offense. (Aderito Z. Yujuico and Bonifacio C. Sumbilla v. Cezar T. Quiambao and Eric
C. Pilapil, G.R. No. 180416, June 2, 2014).

A criminal action based on the violation of the second or fourth paragraphs of Section 74 can
only be maintained against corporate officers or such other persons that are acting on behalf
of the corporation.

Violations of the second and fourth paragraphs of Section 74 contemplates a situation where-
in a corporation, acting thru one of its officers or agents, denies the right of any of its stock-
holders to inspect the records, minutes and the stock and transfer book of such corporation.

Q. Are corporate officers liable for the illegal dismissal of an employee of the corporation?
A. No. A corporation has a personality separate and distinct from its officers and the board of
directors may only be held personally liable for damages if it is proven that they acted with
malice or bad faith in the dismissal of an employee. Absent any evidence on record that peti-
tioner Bautista acted maliciously or in bad faith in effecting the termination of respondent,
plus the apparent lack of allegation in the pleadings of respondent that petitioner Bautista
acted in such manner, the doctrine of corporate fiction dictates that only petitioner corpora-
tion should be held liable for the illegal dismissal of respondent. (Mirant (Philippines) Cor-
poration, et al. v. Joselito A. Caro, G.R. No. 181490, April 23, 2014)

Q. What is a merger?
A. Merger is a re-organization of two or more corporations that results in their consolidating
into a single corporation, which is one of the constituent corporations, one disappearing or
dissolving and the other surviving. To put it another way, merger is the absorption of one or
more corporations by another existing corporation, which retains its identity and takes over
the rights, privileges, franchises, properties, claims, liabilities and obligations of the absorbed
corporation(s). The absorbing corporation continues its existence while the life or lives of
the other corporation(s) is or are terminated.

Q. What is a de facto merger?

A. A de facto merger can be pursued by one corporation acquiring all or substantially all of
the properties of another corporation in exchange of shares of stock of the acquiring corpora-
tion. The acquiring corporation would end up with the business enterprise of the target cor-
poration; whereas, the target corporation would end up with basically its only remaining as-
sets being the shares of stock of the acquiring corporation.
It is clear that no merger took place between Bank of Commerce and TRB as the require-
ments and procedures for a merger were absent. A merger does not become effective upon
the mere agreement of the constituent corporations. All the requirements specified in the law
must be complied with in order for merger to take effect. Section 79 of the Corporation Code
further provides that the merger shall be effective only upon the issuance by the Securities
and Exchange Commission (SEC) of a certificate of merger. (Bank of Commerce v. Radio
Philippines Netwcork, Inc., et al., G.R. No. 195615, April 21, 2014)

Q. Is the Philippine National Red Cross a private corporation required to incorporate un-
der the Corporation Code?

23 | P a g e
A. No. PNRC is a sui generis entity that is neither public nor private. PNRC is a govern-
ments partner in the observance of its international commitments under the Geneva Conven-
tions. It is treated as an auxiliary of the State. (Liban v. Gordon, 2011)

B. Securities Regulation Law

Protection of public interest as primary purpose of the law; registration requirements
of stocks/ securities; what are exempt securities (Please read Section 9, Securities Regu-
lation Code) and exempt transactions; registration of a company with the SEC is a pre-
requisite before registration of securities in the stock market; liabilities for fraud, ma-
nipulation of stock prices, insider trading, short sales; reason behind margin trading
rule; what are the minimum requirements for disclosure of publicly-listed companies;
what is a tender offer; what is a water down share; remedies avail to parties under the
law; penalties which may be imposed on company, officers, stock brokers and individu-
als.

Q. How do you determine the existence of an investment contract?

A. For an investment contract to exist, the Howey Test comprising of the following elements
must concur: (1) a contract, transaction, or scheme; (2) an investment of money; (3) invest-
ment is made in a common enterprise; (4) expectation of profits; and (5) profits arising pri-
marily from the effort of others. The Securities and Regulation Code treats investment con-
tracts as securities that have to be registered with the SEC before they can be distributed
and sold. SEC v. Prosperity.com, Inc., G.R.164197, January 25, 2012.

Q. Can the SEC issue a Cease and Desist Order without any complaint filed before it?
A. Yes. Under Sec. 64 of the SRC, a cease and desist order maybe issued by the SEC motu
proprio, it being unnecessary that it results from a verified complaint from an aggrieved party
and even without a prior hearing whenever the Commission finds it appropriate to issue a
cease and desist order that aims to curtail fraud or grave or irreparable injury to investors.
There is good reason for this provision as any delay in the restraint of acts that yield such re-
sults can only generate further injury to the public that the SEC is obliged to protect. To
equally protect individuals and corporations from baseless and improvident issuances, the
authority of the SEC is also with defined limits. A cease and desist order may only be issued
by the Commission after proper investigation or verification and upon showing that the acts
sought to be restrained could result in injury or fraud to the investing public. Primanila
Plans, Inc. v. SEC, G.R. 193791, August 6, 2014

Q. What is the Jurisdiction of the RTC and the SEC over issues on validation of proxies?
A. The power of the SEC to regulate proxies remains in place in instances when stockholders
vote on matters other than the election of directors. The test is whether the controversy re-
lates to such election. All matters affecting the manner and conduct of the election of direc-
tors are properly cognizable by the regular courts. Otherwise, these matters may be brought
before the SEC for resolution based on the regulatory powers it exercises over corporations,
partnerships and associations. SEC v. CA, G.R. 187702, October 22, 2014.

24 | P a g e
C. Insolvency Law -
Voluntary Insolvency is filed by the insolvent while Involuntary Insolvency is filed by
the creditors of the insolvent; Unsecured loans cannot be filed in any insolvency pro-
ceeding provided they present proof that they paid the obligation of the creditor of the
insolvent and they substitute for the creditors; Preferred claims funeral expenses of
the debtor is the most preferred claim, debts due for personal services rendered to the
insolvent immediately preceding the commencement of insolvency proceeding; obliga-
tions under Workmens Compensation Act, legal expenses and expenses incurred in the
administration of insolvents estate for the common interest of creditors upon order of
the court, debts, taxes and assessments due the national government, provincial gov-
ernment and local government units; remaining non-preferred creditors shall be enti-
tled pro rata in the balance of assets, without priority or preference.

Q. What is the concept of technical insolvency?

A. There are 2 kinds of insolvency contemplated by law: actual insolvency,
i.e., the corporations assets are not enough to cover its liabilities; and tech-
nical insolvency defined under Sec. 3-12, i.e., the corporation has enough as-
sets but it foresees its inability to pay its obligations for more than one year.
The period mentioned under Sec. 3-12, "longer than one year from the filing
of the petition," does not refer to a year-long waiting period when the SEC
can finally say that the ailing corporation is technically insolvent to qualify
for rehabilitation. The period referred to the corporations inability to pay its
obligations; when such inability extends beyond one year, the corporation is
considered technically insolvent. Said inability may be established from the
start by way of a petition for rehabilitation, or it may be proved during the
proceedings for suspension of payments, if the latter was the first remedy cho-
sen by the ailing corporation. If the corporation opts for a direct petition for
rehabilitation on the ground of technical insolvency, it should show in its pe-
tition and later prove during the proceedings that it will not be able to meet its
obligations for longer than one year from the filing of the petition.(PNB and
Equitable PCI Bank v. CA, G.R. 165571, J. Velasco)

Free Insolvency Act (FRIA)

Q. May FRIA be applied retroactively?

A. Sec. 146 of the FRIA, which makes it applicable to all further proceedings in insolvency,
suspension of payments and rehabilitation cases x x x except to the extent that in the opinion
of the court their application would not be feasible or would work injustice, still presuppos-
es a prospective application. The wording of the law clearly shows that it is applicable to all
further proceedings. In no way could it be made retrospectively applicable to the Stay Order
issued by the rehabilitation court back in 2002. Thus, it was beyond the jurisdiction of the
rehabilitation court to suspend foreclosure proceedings against properties of third-party
mortgagors. (Situs Development Corporation, et al. vs. Asia Trust Bank, et al, G.R. No.
180036, January 16, 2013)
25 | P a g e
Q. When is Rehabilitation appropriate?
A. Rehabilitation contemplates a continuance of corporate life and activities in an effort to
restore and reinstate the corporation to its former position of successful operation and sol-
vency. The purpose of rehabilitation proceedings is to enable the company to gain a new
lease on life and thereby allow creditors to be paid their claims from its earnings. The reha-
bilitation of a financially distressed corporation benefits its employees, creditors, stockhold-
ers and, in a larger sense, the general public.
Rehabilitation proceedings in our jurisdiction, much like the bankruptcy laws of the United
States, have equitable and rehabilitative purposes. On one hand, they attempt to provide for
the efficient and equitable distribution of an insolvent debtors remaining assets to its credi-
tors; and on the other, to provide debtors with a fresh start by relieving them of the weight
of their outstanding debts and permitting them to reorganize their affairs. The rationale of
Presidential Decree No. 902-A, as amended, is to effect a feasible and viable rehabilitation.

Q. What is the Cram-down Power of Rehabilitation Courts?

A. The cram-down principle consists of two things: (1) approval despite opposition and (2)
binding effect of the approved plan. The Rehabilitation Rules maintains that the court may
approve a rehabilitation plan over the objection of the creditors if, in its judgement, the reha-
bilitation of the debtors is feasible and the opposition of the creditors is manifestly unreason-
able. The required number of creditors opposing such plan under the Interim Rules (i.e.,
those holding the majority of the total liabilities of the debtor) was in fact, removed. Also, the
Rehabilitation Receiver has the duty and authority to recommend any modification of an ap-
proved rehabilitation plan as he may deem appropriate and for the purpose of achieving the
desired targets or goals set forth therein and the Rehabilitation Rules allow the modification
and alteration of the rehabilitation plan precisely because of conditions that may supervene or
affect the implementation thereof subsequent to its approval. (Marilyn Aquino v. Pacific
Plans, G.R. 193108, December 10, 2014)

Q. Is Material Financial Commitment an indispensable requisite in corporate rehabilita-

tion?
A. Yes. SMMCIs Rehabilitation Plan lacks a material financial commitment to support the
rehabilitation and accompanying liquidation analysis of the petitioning debtor which are in-
dispensable requisites in corporate rehabilitation proceedings under Sec 18 of Rule 3 of the
Interim Rules of corporate rehabilitation. (BPI Family Savings Bank, Inc. v. St. Michael Med-
ical Center, G.R. 205469, March 25, 2015)

Q. Is the HLURBs prior request for the appointment of a rehabilitation receiver is a con-
dition precedent before the trial court can give due course to a rehabilitation petition?
A. No. Unlike banks and financial institutions under the jurisdiction of the BSP, and insur-
ance companies and similar institutions under the jurisdiction of the Insurance Commission,
construction and real estate companies, such as Lexber, under the jurisdiction of the HLURB
are allowed to file petitions for rehabilitation even without prior request for the appointment
of a receiver by HLURB. This is because the power to appoint receivers is not found in
HLURBs charter unlike the BSP and the IC which are specifically authorized to appoint a
receiver in case a company under their regulation is undergoing corporate rehabilitation.
Lexber Inc v. Spouses Dalman GR 183587 April 20, 2015
26 | P a g e
Q. Will the lapse of the 180-day period for the approval of the rehabilitation plan automat-
ically result to the dismissal of the rehabilitation petition?
A. No. Rule 4, Section 11 of the Interim Rules states:
Section 11.Period of the Stay Order - The stay order shall be effective from the date of its
issuance until the dismissal of the petition or the termination of the rehabilitation proceed-
ings. The petition shall be dismissed if no rehabilitation plan is approved by the court upon
the lapse of one hundred eighty (180) days from the date of the initial hearing. The court may
grant an extension beyond this period only if it appears by convincing and compelling evi-
dence that the debtor may successfully be rehabilitated. In no instance, however, shall the
period for approving or disapproving a rehabilitation plan exceed eighteen (18) months from
the date of filing of the petition.

Rule 2, Section 2 of the Interim Rules may be properly applied as it dictates the courts to lib-
erally construe the rehabilitation rules in order to carry out the objectives of Sections 6(c) of
PD 902-A, as amended, and to assist the parties in obtaining a just, expeditious, and inexpen-
sive determination of rehabilitation cases. (Lexber Inc v. Spouses Dalman GR 183587 April
20, 2015)

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

Q. What is doing business?
A. The phrase "doing business" shall include soliciting orders, service contracts, opening of-
fices, whether called "liaison" offices or branches; appointing representatives or distributors
domiciled in the Philippines or who in any calendar year stay in the country for a period or
periods totaling one hundred eighty (180) days or more; participating in the management,
supervision or control of any domestic business, firm, entity or corporation in the Philip-
pines; and any other act or acts that imply a continuity of commercial dealings or arrange-
ments, and contemplate to that extent the performance of acts or works, or the exercise of
some of the functions normally incident to, and in progressive prosecution of, commercial
gain or of the purpose and object of the business organization: Provided, however, That the
phrase "doing business: shall not be deemed to include mere investment as a shareholder by a
foreign entity in domestic corporations duly registered to do business, and/or the exercise of
rights as such investor; nor having a nominee director or officer to represent its interests in
such corporation; nor appointing a representative or distributor domiciled in the Philippines
which transacts business in its own name and for its own account; (sec. 3.d. Foreign Invest-
ments Act.)

In Mentholatum Co., Inc. v.. Anacleto Mangaliman, the Supreme Court laid down the juris-
prudential test of what constitutes "doing business" in the Philippines for foreign corpora-
tions known as the "Twin Characterization Test".
Under this test, a foreign corporation is considered to be "doing business" in the Philippines
when:

a) The foreign corporation is maintaining or continuing in the Philippines "the body or sub-
stance of the business or enterprise for which it was organized or whether it has substantially
retired from it and turned it over to another."

27 | P a g e
b) The foreign corporation is engaged in activities which necessarily imply "a continuity of
commercial dealings and arrangements, and contemplates, to that extent, the performance of
acts or works or the exercise of some of the functions normally incidental to, and in progres-
sive prosecution of, the purpose and object of its organization. (SEC-OGC Opinion 10-22
s.2010)

Please note that aliens may be allowed to invest in companies involved in the exploitation,
development and utilization of natural resources provided 60% of the shares is owned by
Filipino citizens. Aliens may also register their companies and enjoy tax incentives un-
der the BOI and PEZA laws.

V. Insurance Code

Q. What is the effect of a contract of insurance being a contract of adhesion?

A. A contract of insurance is a contract of adhesion. When the terms of the insurance contract
contain limitations on liability, courts should construe them in such a way as to preclude the
insurer from non-compliance with his obligation. Alpha Insurance and Surety Co. v. Arsenia
Sonia Castor, G.R. No. 198174, September 2, 2013.

Q. How do you construe limitations on the liability of an insurer?

A. In Philamcare Health Systems, Inc. v. CA, we ruled that a health care agreement is in the
nature of a non-life insurance. It is an established rule in insurance contracts that when their
terms contain limitations on liability, they should be construed strictly against the insurer.
These are contracts of adhesion the terms of which must be interpreted and enforced strin-
gently against the insurer which prepared the contract. This doctrine is equally applicable to
health care agreements. Fortune Medicare, Inc. v. David Robert U. Amorin, G.R. No.
195872, March 12, 2014.

Q. When is there double insurance?

A. By the express provision of Section 93 of the Insurance Code, double insurance exists
where the same person is insured by several insurers separately in respect to the same sub-
ject and interest. The requisites in order for double insurance to arise are as follows:
1. The person insured is the same;
2. Two or more insurers insuring separately;
3. There is identity of subject matter;
4. There is identity of interest insured; and
5. There is identity of the risk or peril insured against. (Malayan Insurance Co., Inc. vs. Phil-
ippine First Insurance, Co., Inc., et al., G.R. No. 184300, July 11, 2012).

Q. What is an additional insurance clause?

A. Section 5 is actually the other insurance clause (also called additional insurance and
double insurance), one akin to Condition No. 3 in issue in Geagonia v. CA, which validity
was upheld by the Court as a warranty that no other insurance exists. The Court ruled that
Condition No. 3 is a condition which is not proscribed by law as its incorporation in the poli-
cy is allowed by Section 75 of the Insurance Code. It was also the Courts finding that unlike
the other insurance clauses, Condition No. 3 does not absolutely declare void any violation
thereof but expressly provides that the condition shall not apply when the total insurance or
28 | P a g e
insurances in force at the time of the loss or damage is not more than
P200,000.00. (Malayan Insurance Co., Inc. vs. Philippine First Insurance, Co., Inc., et
al., G.R. No. 184300, July 11, 2012).

Q. What is an over insurance clause?

A. Section 12 of the SR Policy, on the other hand, is the over insurance clause. More par-
ticularly, it covers the situation where there is over insurance due to double insurance. In
such case, Section 15 provides that Malayan shall not be liable to pay or contribute more
than its ratable proportion of such loss or damage. This is in accord with the principle of
contribution provided under Section 94(e) of the Insurance Code, which states that where
the insured is over insured by double insurance, each insurer is bound, as between himself
and the other insurers, to contribute ratably to the loss in proportion to the amount for which
he is liable under his contract. (Malayan Insurance Co., Inc. vs. Philippine First Insurance,
Co., Inc., et al., G.R. No. 184300, July 11, 2012).

Q. What is the nature of a health care agreement?

A. For purposes of determining the liability of a health care provider to its members,
jurisprudence holds that a health care agreement is in the nature of non-life insurance,
which is primarily a contract of indemnity. Once the member incurs hospital, medical or
any other expense arising from sickness, injury or other stipulated contingent, the health care
provider must pay for the same to the extent agreed upon under the contract. (Fortune Medi-
care, Inc. v. David Robert U. Amorin, G.R. No. 195872, March 12, 2014).

Q. What is the effect of a fraudulent claim in insurance?

A. It has long been settled that a false and material statement made with an intent to deceive
or defraud voids an insurance policy. In Yu Cua v. South British Insurance Co., the claim
was fourteen times bigger than the real loss; in Go Lu v. Yorkshire Insurance Co, eight times;
and in Tuason v. North China Insurance Co., six times. In the present case, the claim
is twenty five times the actual claim proved.
The most liberal human judgment cannot attribute such difference to mere innocent error in
estimating or counting but to a deliberate intent to demand from insurance companys pay-
ment for indemnity of goods not existing at the time of the fire. This constitutes the so-
called fraudulent claim which, by express agreement between the insurers and the in-
sured, is a ground for the exemption of insurers from civil liability.
While it is a cardinal principle of insurance law that a contract of insurance is to be construed
liberally in favor of the insured and strictly against the insurer company, contracts of insur-
ance, like other contracts, are to be construed according to the sense and meaning of the
terms which the parties themselves have used. If such terms are clear and unambiguous, they
must be taken and understood in their plain, ordinary and popular sense. Courts are not per-
mitted to make contracts for the parties; the function and duty of the courts is simply to en-
force and carry out the contracts actually made. (United Merchants Corporation vs. Country
Bankers Insurance Corporation, G.R. No. 198588, July 11, 2012).

Q. When may an insurance contract be rescinded?

A. Accordingly, an insurer can exercise its right to rescind an insurance contract when the
following conditions are present, to wit:
1) the policy limits the use or condition of the thing insured;
29 | P a g e
2) there is an alteration in said use or condition;
3) the alteration is without the consent of the insurer;
4) the alteration is made by means within the insureds control; and
5) the alteration increases the risk of loss.
In the case at bench, all these circumstances are present. It was clearly established that the
renewal policy stipulated that the insured properties were located at the Sanyo factory; that
PAP removed the properties without the consent of Malayan; and that the alteration of the
location increased the risk of loss. (Malayan Insurance Company, Inc. v. PAP co., Ltd. (Phil-
ippine Branch), G.R. No. 200784, August 7, 2013).

Q. What is a suretyship agreement? What is the liability of a surety?

A. Section 175 of the Insurance Code defines a suretyship as a contract or agreement where-
by a party, called the surety, guarantees the performance by another party, called the princi-
pal or obligor, of an obligation or undertaking in favor of a third party, called the obligee. It
includes official recognizances, stipulations, bonds or undertakings issued under Act 536, as
amended. Suretyship arises upon the solidary binding of a person deemed the surety with
the principal debtor, for the purpose of fulfilling an obligation. Such undertaking makes a
surety agreement an ancillary contract as it presupposes the existence of a principal contract.
Although the contract of a surety is in essence secondary only to a valid principal obligation,
the surety becomes liable for the debt or duty of another although it possesses no direct or
personal interest over the obligations nor does it receive any benefit therefrom. And notwith-
standing the fact that the surety contract is secondary to the principal obligation, the surety
assumes liability as a regular party to the undertaking. (First Lepanto-Taisho Insurance
Corporation (now known as FLT Prime Insurance Corporation) vs. Chevron Philippines,
inc. (formerly known as Caltex Philippines, Inc.), G.R. No. 177839, January 18, 2012).

Q. When is a suretyship effective?

A. Sec. 177 of the Insurance Code provides: The surety is entitled to payment of the premi-
um as soon as the contract of suretyship or bond is perfected and delivered to the obligor. No
contract of suretyship or bonding shall be valid and binding unless and until the premi-
um therefor has been paid, except where the obligee has accepted the bond, in which
case the bond becomes valid and enforceable irrespective of whether or not the premi-
um has been paid by the obligor to the surety: Provided, That if the contract of suretyship
or bond is not accepted by, or filed with the obligee, the surety shall collect only reasonable
amount, not exceeding fifty per centum of the premium due thereon as service fee plus the
cost of stamps or other taxes imposed for the issuance of the contract or bond: Provided,
however, That if the non-acceptance of the bond be due to the fault or negligence of the sure-
ty, no such service fee, stamps or taxes shall be collected. (Country Bankers Insurance Cor-
poration v. Antonio Lagman, G.R. No. 165487, July 13, 2011).

Q. If a loss is alleged to be an exception to the insurance coverage, who has the burden of
proving such exception?
A. An insurer who seeks to defeat a claim because of an exception or limitation in the policy
has the burden of establishing that the loss comes within the purview of the exception or
limitation. If loss is proved apparently within a contract of insurance, the burden is upon the
insurer to establish that the loss arose from a cause of loss which is excepted or for which it
is not liable, or from a cause which limits its liability. In the present case, CBIC failed to dis-
30 | P a g e
charge its primordial burden of establishing that the damage or loss was caused by arson, a
limitation in the policy. (United Merchants Corporation vs. Country Bankers Insurance Cor-
poration, G.R. No. 198588, July 11, 2012)

Q. If Eisel Insurance presents a subrogation receipt in a case to recover from Randy Lines,
a common carrier that caused damage to Eisel Insurances client, may Randy Lines avoid
liability if Eisel Insurance fails to present the Insurance policy?
A. No. The presentation in evidence of the marine insurance policy is not indispensable be-
fore the insurer may recover from the common carrier the insured value of the lost cargo in
the exercise of its subrogatory right. The subrogation receipt, by itself, is sufficient to estab-
lish the amount paid to settle the insurance claim. The right of subrogation accrues simply
upon payment by the insurance company of the insurance claim. (Asian Terminals, Inc. v.
Malayan Insurance, Co., Inc., G.R. No. 171406, April 4, 2011).

Same application of the doctrine: As a general rule, the marine insurance policy needs to be
presented in evidence before the insurer may recover the insured value of the lost/damaged
cargo in the exercise of its subrogatory right since it is the legal basis of the insurers right to
subrogation. Nevertheless, a marine insurance policy is dispensable evidence in reimburse-
ment claims instituted by the insurer especially when a subrogation receipt has been executed
between the insured and the insurer. (Asian Terminals, Inc. v. First Lepanto-Taisho Insur-
ance Corporation, G.R. 185964, June 16, 2014).

Q. What are the kinds of interest for premium refund?

A. There are two kinds of interest monetary and compensatory. The former refers to the
compensation set by the parties for the use or forbearance of money and shall not be due un-
less it has been expressly stated in writing while the latter refers to the penalty of indemnity
for damages imposed by law or by the courts. The interest mentioned in Art 2209 and 2212
of the Civil Code applies to compensatory interest. As a form of damages, compensatory in-
terest is due only if the obligor is proven to have failed to comply with his obligation. (Sun
Life of Canada v. Sandra Tan Kit and Estate of the Deceased Norberto Tan Kit, G.R. No
183272, October 15, 2014)

Q. Marion imported rare collectible toys from Europe. Upon arrival of the ship carrying
the goods, it was discovered that the container of Marions goods got wet with seawater.
The goods were not severely damaged but their individual boxes and packaging were dam-
aged. Marion claims that she can still sell the goods but at a lower price because collectors
require the packaging to be intact. May Marion recover even if no portion of the goods
were lost?
A. Yes. Under Art 365 of the Code of Commerce, if the goods are rendered useless for sale,
consumption, or for the intended purpose, the consignee may reject the goods and demand
the payment of such goods at their market price on that day. In case the damaged portion of
the goods can be segregated from those delivered in good condition, the consignee may reject
those in damaged condition and accept merely those which are in good condition. But if the
consignee is able to prove that it is impossible to use those goods which were delivered in
good condition without the others, then the entire shipment may be rejected. Thus the nature
of damage must be such that the goods are rendered useless for sale, consumption, or intend-
ed purpose for the consignee to be able to validly reject them. On the other hand, under Art
31 | P a g e
364 of the Code of Commerce, if the effect of damage on the goods consisted merely of dim-
inution in value, the carrier is bound to pay only the difference between its price on that day
and its depreciated value. (Loadstar Shipping Company, Inc. and Loadstar International
Shipping Company, Inc. v. Malayan Insurance Company, G.R. 185565, November 26, 2014).

VI. Transportation Law

Contract of carriage as a contract of lease ( transport of persons and goods by land, air
and water) under Title V of the Civil Code; definition of contract of carriage of a com-
mon carrier; distinguish from private carrier; degree of diligence required; when liabil-
ities may attach to common carriers and when may injured partys claim may be re-
duced due to contributory negligence; definition of proximate cause; liability under the
Warsaw Convention; liability under COGSA; when may jettison be resorted to (review
the kinds of averages in maritime accidents) ;what is maritime protest; prescription peri-
od within which to file claims; instances when insurer may be subrogated to the rights
of the passenger and/or shipper; other than actual loss, what other damages may be
awarded.

Q. What is the dual concept of jurisdiction under the Warsaw convention?

A. Jurisdictio est potestas de publico introducta cum necessitate juris dicendi. Jurisdiction is
a power introduced for the public good, on account of the necessity of dispensing justice.
Under Article 28(1) of the Warsaw Convention, the plaintiff may bring the action for damag-
es before
1. the court where the carrier is domiciled;
2. the court where the carrier has its principal place of business;
3. the court where the carrier has an establishment by which the contract has been made; or
4. the court of the place of destination.ch
In other words, where the matter is governed by the Warsaw Convention, jurisdiction takes
on a dual concept. Jurisdiction in the international sense must be established in accordance
with Article 28(1) of the Warsaw Convention, following which the jurisdiction of a particular
court must be established pursuant to the applicable domestic law. Only after the question of
which court has jurisdiction is determined will the issue of venue be taken up. (Lluillier v.
British Airways, G.R. No. 171092, March 15, 2010)
Take note that the Warsaw Convention has been amended by the Montreal Agreement.

Q. What is the prescriptive period under the Carriage of Goods by Sea Act?
A. The COGSA is the applicable law for all contracts for carriage of goods by sea to and
from Philippine ports in foreign trade; it is thus the law that the Court shall consider in the
present case since the cargo was transported from Brazil to the Philippines.
Under Section 3(6) of the COGSA, the carrier is discharged from liability for loss or damage
to the cargo unless the suit is brought within one year after delivery of the goods or the date
when the goods should have been delivered. Jurisprudence, however, recognized the validi-
ty of an agreement between the carrier and the shipper/consignee extending the one-year pe-
riod to file a claim. (Benjamin Cua [Cua Hian Tek] v. Wallem Philippines Shipping, Inc. and
Advance Shipping Corporation, G.R. No. 171337. July 11, 2012)

32 | P a g e
Q. What is the liability of a common carrier under Carriage of Goods by Sea?
A. It is to be noted that the Civil Code does not limit the liability of the common carrier to a
fixed amount per package. In all matters not regulated by the Civil Code, the rights and obli-
gations of common carriers are governed by the Code of Commerce and special laws. Thus,
the COGSA supplements the Civil Code by establishing a provision limiting the carriers lia-
bility in the absence of a shippers declaration of a higher value in the bill of lading.
In the present case, the shipper did not declare a higher valuation of the goods to be shipped.
In light of the foregoing, petitioners liability should be limited to $500 per steel drum. In this
case, as there was only one drum lost, private respondent is entitled to receive only $500 as
damages for the loss. In addition to said amount, as aptly held by the trial court, an interest
rate of 6% per annum should also be imposed, plus 25% of the total sum as attorneys fees.
(Unsworth Transportation International [Phils.], Inc. vs. Court of Appeals and Pioneer In-
surance and Surety Corporation, G.R. No. 166250, July 26, 2010).

Q. What is the prescription for a claim under Carriage of Goods by Sea Act?
A. Under Section 3 (6) of the Carriage of Goods by Sea Act, notice of loss or damages must
be filed within three days of delivery. Admittedly, respondent did not comply with this provi-
sion.
Under the same provision, however, a failure to file a notice of claim within three days will
not bar recovery if a suit is nonetheless filed within one year from delivery of the goods or
from the date when the goods should have been delivered.
In Loadstar Shipping Co., Inc. v. Court of Appeals, the Court ruled that a claim is not barred
by prescription as long as the one-year period has not lapsed. Thus, in the words of
the ponente, Chief Justice Hilario G. Davide Jr.: Inasmuch as neither the Civil Code nor the
Code of Commerce states a specific prescriptive period on the matter, the Carriage of Goods
by Sea Act (COGSA) which provides for a one-year period of limitation on claims for
loss of, or damage to, cargoes sustained during transit may be applied suppletorily to the
case at bar. Wallem Philippines Shipping, Inc. vs. S.R. Farms, Inc., G.R. No. 161849, July
9, 2010.

Q. What is a freight forwarder?

A. The term freight forwarder refers to a firm holding itself out to the general public (other
than as a pipeline, rail, motor, or water carrier) to provide transportation of property for com-
pensation and, in the ordinary course of its business, (1) to assemble and consolidate, or to
provide for assembling and consolidating, shipments, and to perform or provide for break-
bulk and distribution operations of the shipments; (2) to assume responsibility for the trans-
portation of goods from the place of receipt to the place of destination; and (3) to use for any
part of the transportation a carrier subject to the federal law pertaining to common carriers.
(Unsworth Transportation International (Phils.), Inc. vs. Court of Appeals and Pioneer In-
surance and Surety Corporation,G.R. No. 166250, July 26, 2010).

Q. What is the liability of a Freight forwarder? A freight forwarders liability is limited to

damages arising from its own negligence, including negligence in choosing the carrier; how-
ever, where the forwarder contracts to deliver goods to their destination instead of merely
arranging for their transportation, it becomes liable as a common carrier for loss or damage to
goods. A freight forwarder assumes the responsibility of a carrier, which actually executes
the transport, even though the forwarder does not carry the merchandise itself. Unsworth
33 | P a g e
Transportation International (Phils.), Inc. vs. Court of Appeals and Pioneer Insurance and
Surety Corporation, G.R. No. 166250, July 26, 2010.

Q. Who may avail of the doctrine of Limited Liability?

A. The shipowner may avail of the doctrine of limited liability.
With respect to petitioners position that the Limited Liability Rule under the Code of Com-
merce should be applied to them, the argument is misplaced. The said rule has been ex-
plained to be that of the real and hypothecary doctrine in maritime law where the shipowner
or ship agents liability is held as merely co-extensive with his interest in the vessel such that
a total loss thereof results in its extinction. In this jurisdiction, this rule is provided in three
articles of the Code of Commerce. These are:
Art. 587. The ship agent shall also be civilly liable for the indemnities in favor of third per-
sons which may arise from the conduct of the captain in the care of the goods which he load-
ed on the vessel; but he may exempt himself therefrom by abandoning the vessel with all her
equipment and the freight it may have earned during the voyage.
Art. 590. The co-owners of the vessel shall be civilly liable in the proportion of their interests
in the common fund for the results of the acts of the captain referred to in Art. 587.
Each co-owner may exempt himself from this liability by the abandonment, before a notary,
of the part of the vessel belonging to him.
Art. 837. The civil liability incurred by shipowners in the case prescribed in this section, shall
be understood as limited to the value of the vessel with all its appurtenances and freightage
served during the voyage.
Article 837 specifically applies to cases involving collision which is a necessary consequence
of the right to abandon the vessel given to the shipowner or ship agent under the first provi-
sion Article 587. Similarly, Article 590 is a reiteration of Article 587, only this time the sit-
uation is that the vessel is co-owned by several persons. Obviously, the forerunner of the
Limited Liability Rule under the Code of Commerce is Article 587. Now, the latter is quite
clear on which indemnities may be confined or restricted to the value of the vessel pursuant
to the said Rule, and these are the indemnities in favor of third persons which may arise
from the conduct of the captain in the care of the goods which he loaded on the vessel.
Thus, what is contemplated is the liability to third persons who may have dealt with the ship-
owner, the agent or even the charterer in case of demise or bareboat charter.
The only person who could avail of this is the shipowner, Concepcion. He is the very person
whom the Limited Liability Rule has been conceived to protect. The petitioners cannot in-
voke this as a defense. (Agustin P. Dela Torre v. The Hon. Court of Appeals, et
al./Philippine Trigon Shipyard Corporation, et al. v. Crisostomo G. Concepcion, et al., G.R.
No. 160088/G.R. No. 160565, July 13, 2011)

Q. What is the liability of a charterer and a sub-charterer?

A. In the present case, the charterer and the sub-charterer through their respective contracts
of agreement/charter parties, obtained the use and service of the entire LCT-Josephine. The
vessel was likewise manned by the charterer and later by the sub-charterers people. With the
complete and exclusive relinquishment of possession, command and navigation of the vessel,
the charterer and later the sub-charterer became the vessels owner pro hac vice. Now, and in
the absence of any showing that the vessel or any part thereof was commercially offered for
use to the public, the above agreements/charter parties are that of a private carriage where the

34 | P a g e
rights of the contracting parties are primarily defined and governed by the stipulations in
their contract.
Although certain statutory rights and obligations of charter parties are found in the Code of
Commerce, these provisions as correctly pointed out by the RTC, are not applicable in the
present case. Indeed, none of the provisions found in the Code of Commerce deals with the
specific rights and obligations between the real shipowner and the charterer obtaining in this
case. Necessarily, the Court looks to the New Civil Code to supply the deficiency. In any
case, all three petitioners are liable under Article 1170 of the New Civil Code. (Agustin P.
Dela Torre v. The Hon. Court of Appeals, et al./Philippine Trigon Shipyard Corporation, et
al. v. Crisostomo G. Concepcion, et al., G.R. No. 160088/G.R. No. 160565, July 13, 2011)

Q. What is the Package Limitation Liability and Prescriptive Period under COGSA? Is
there an exception to these rules?
A. Under Sec. 4(5) of the COGSA, when the shipper fails to declare the value of the goods in
the bill of lading, neither the carrier nor the ship shall in any event be or become liable for
any loss or damage to or in connection with the transportation of goods in an amount exceed-
ing US$500 per package. Under Sec. 3(6) of the COGSA which provides, among others, that
the notice in writing need not be given if the state of the goods has at the time of their receipt
been the subject of joint survey or inspection, and in any event the carrier and the ship shall
be discharged from all liability in respect of loss or damage unless suit is brought within one
(1) year after delivery of the goods or the date when the goods should have been delivered,
provided that if a notice of loss or damage, either apparent or concealed, is not given, that
fact shall not affect or prejudice the right of the shipper to bring suit within one year after the
delivery of the goods or the date when the goods should have been delivered. Philam Insur-
ance Company, Inc. v. Heung-A Shipping Corporation and Wallem Philippines Shipping,
Inc., G.R. No. 187701, July 23, 2014.

Exception: Mere proof of the delivery of the goods in good order to a common carrier and of
their arrival in bad order at their destination constitutes a prima facie case of fault or negli-
gence against the carrier. If no adequate explanation is given as to how the deterioration, loss,
or destruction of the goods happened, the transporter shall be held responsible. Eastern Ship-
ping, Inc. v. BPI/MS Insurance Corporation and Mitsui Sumitomo Insurance Co., Ltd. G.R.
193986, January 15, 2014

VII. Intellectual Property Law

What may protected under the Copyright Law: (original works and derivative works ;
limitations doctrine of fair use and copyright infringement); registration of trademark
(definition of marks, collective marks, trade names; prior use of mark as requirement; tests
to determine confusing or similar marks: dominancy test and holistic test) ; what may
covered by a patent (first to file rule and limitations of patent rights prior user and use
by government); what are the requisites of a Technology Transfer Arrangements (ex.
McDonalds USA has a Technology Transfer Agreement with all Franchise Holders of
McDonalds in the Philippines); in case of infringement, what are the available remedies
and what damages may be claimed.

35 | P a g e
Q. Is a trade name protected even without registration?
A. Under the Paris Convention, the Philippines is obligated to assure nationals of the signato-
ry-countries that they are afforded an effective protection against violation of their intellectu-
al property rights in the Philippines in the same way that their own countries are obligated to
accord similar protection to Philippine nationals. Thus, under Philippine law, a trade name
of a national of a State that is a party to the Paris Convention, whether or not the trade name
forms part of a trademark, is protected without the obligation of filing or registration.
The present law on trademarks, Republic Act No. 8293, otherwise known as the Intellectual
Property Code of the Philippines, as amended, has already dispensed with the requirement of
prior actual use at the time of registration. (Cole De Cuisine Manille (Cordon Bleu of the
Philippines), Inc. v. Renaud Cointreau & CIE and Le Condron Bleu Intl., B.V., G.R. No.
185830, June 5, 2013).

Q. What is a Mark for purposes of an infringement case?

A. A mark is any visible sign capable of distinguishing the goods (trademark) or services
(service mark) of an enterprise and shall include a stamped or marked container of goods.
In McDonalds Corporation and McGeorge Food Industries, Inc. v. L.C. Big Mak Burger,
Inc., this Court held:
To establish trademark infringement, the following elements must be shown: (1) the validity
of plaintiffs mark; (2) the plaintiffs ownership of the mark; and (3) the use of the mark or
its colorable imitation by the alleged infringer results in likelihood of confusion. Of these,
it is the element of likelihood of confusion that is the gravamen of trademark infringement.
A mark is valid if it is distinctive and not barred from registration. Once registered, not only
the marks validity, but also the registrants ownership of the mark is prima facie pre-
sumed. (Gemma Ong a.k.a. Ma. Theresa Gemma Catacutan vs. People of the Philip-
pines, G.R. No. 169440,. November 23, 2011).

Q. What are the elements of infringement?

A. The essential element of infringement under R.A. No. 8293 is that the infringing mark is
likely to cause confusion. In determining similarity and likelihood of confusion, jurispru-
dence has developed tests the Dominancy Test and the Holistic or Totality Test. The Domi-
nancy Test focuses on the similarity of the prevalent or dominant features of the competing
trademarks that might cause confusion, mistake, and deception in the mind of the purchasing
public. Duplication or imitation is not necessary; neither is it required that the mark sought to
be registered suggests an effort to imitate. Given more consideration are the aural and visual
impressions created by the marks on the buyers of goods, giving little weight to factors like
prices, quality, sales outlets, and market segments.
In contrast, the Holistic or Totality Test necessitates a consideration of the entirety of the
marks as applied to the products, including the labels and packaging, in determining confus-
ing similarity. The discerning eye of the observer must focus not only on the predominant
words, but also on the other features appearing on both labels so that the observer may draw
conclusion on whether one is confusingly similar to the other.
Relative to the question on confusion of marks and trade names, jurisprudence has noted two
(2) types of confusion, viz.: (1) confusion of goods (product confusion), where the ordinarily
prudent purchaser would be induced to purchase one product in the belief that he was pur-
chasing the other; and (2) confusion of business (source or origin confusion), where, alt-
hough the goods of the parties are different, the product, the mark of which registration is
36 | P a g e
applied for by one party, is such as might reasonably be assumed to originate with the regis-
trant of an earlier product, and the public would then be deceived either into that belief or
into the belief that there is some connection between the two parties, though inexistent.
Applying the Dominancy Test to the case at bar, this Court finds that the use of the stylized
S by respondent in its Strong rubber shoes infringes on the mark already registered by peti-
tioner with the IPO. While it is undisputed that petitioners stylized S is within an oval de-
sign, to this Courts mind, the dominant feature of the trademark is the stylized S, as it is
precisely the stylized S which catches the eye of the purchaser. Thus, even if respondent
did not use an oval design, the mere fact that it used the same stylized S, the same being
the dominant feature of petitioners trademark, already constitutes infringement under the
Dominancy Test. (Skechers, U.S.A., Inc. vs. Inter Pacific Industrial Trading Corp., et al.,
G.R. No. 164321, March 28, 2011.)

Q. Is selling counterfeit cigarettes a form of infringement?

A. Yes. To establish trademark infringement, the following elements must be shown:
(1) the validity of plaintiffs mark; (2) the plaintiffs ownership of the mark; and (3)
the use of the mark or its colorable imitation by the alleged infringer results in likeli-
hood of confusion. Of these, it is the element of likelihood of confusion that is the
gravamen of trademark infringement.

A mark is valid if it is distinctive and not barred from registration. Once registered, not only
the marks validity, but also the registrants ownership of the mark is prima facie presumed.
The prosecution was able to establish that the trademark Marlboro was not only valid for be-
ing neither generic nor descriptive, it was also exclusively owned by PMPI, as evidenced by
the certificates of registration issued by the Intellectual Property Office of the Department of
Trade and Industry. Anent the element of confusion, both the RTC and the Court of Appeals
have correctly held that the counterfeit cigarettes seized from Gammas possession were in-
tended to confuse and deceive the public as to the origin of the cigarettes intended to be sold,
as they not only bore PMPIs mark, but they were also packaged almost exactly as PMPIs
products. (Ong v. People, 2011)
Q. What are the rights of patentees?
A. It is clear from Section 37 of Republic Act No. 165 that the exclusive right of a patentee
to make use and sell a patented product, article or process exists only during the term of the
patent. In the instant case, Philippine Letters Patent No. 21116, which was the basis of re-
spondents in filing their complaint with the BLA-IPO, was issued on July 16, 1987. This fact
was admitted by respondents themselves in their complaint. They also admitted that the va-
lidity of the said patent is until July 16, 2004, which is in conformity with Section 21 of RA
165, providing that the term of a patent shall be seventeen (17) years from the date of issu-
ance thereof. Section 4, Rule 129 of the Rules of Court provides that an admission, verbal or
written, made by a party in the course of the proceedings in the same case, does not require
proof and that the admission may be contradicted only by showing that it was made through
palpable mistake or that no such admission was made. In the present case, there is no dispute
as to respondents admission that the term of their patent expired on July 16, 2004. Neither is
there evidence to show that their admission was made through palpable mistake. Hence, con-
trary to the pronouncement of the CA, there is no longer any need to present evidence on the
issue of expiration of respondents patent. Phil Pharmawealth, Inc. vs. Pfizer, Inc and Pfizer
(Phil.) Inc., G.R. No. 167715, November 17, 2010.
37 | P a g e
Q. Is an internationally well-known mark protected in this jurisdiction?
A. Yes. There is no question then, and this Court so declares, that Harvard is a well-known
name and mark not only in the United States but also internationally, including the Philip-
pines. The mark Harvard is rated as one of the most famous marks in the world. It has been
registered in at least 50 countries. It has been used and promoted extensively in numerous
publications worldwide. It has established a considerable goodwill worldwide since the
founding of Harvard University more than 350 years ago. It is easily recognizable as the
trade name and mark of Harvard University of Cambridge, Massachusetts, U.S.A., interna-
tionally known as one of the leading educational institutions in the world. As such, even be-
fore Harvard University applied for registration of the mark Harvard in the Philippines, the
mark was already protected under Article 6bis and Article 8 of the Paris Convention. Again,
even without applying the Paris Convention, Harvard University can invoke Section 4(a) of
R.A. No. 166 which prohibits the registration of a mark which may disparage or falsely
suggest a connection with persons, living or dead, institutions, beliefs x x x. ( Fredco Manu-
facturing Corporation vs. President and Fellows of Harvard College (Harvard Universi-
ty), G.R. No. 185917, June 1, 2011.)

Q. EYIS is a domestic corporation engaged in the production, distribution

and sale of air compressors and other industrial tools and equipment. On the
other hand, Shen Dar is a Taiwan-based foreign manufacturer of air com-
pressors. From 1997 to 2004, EYIS imported air compressors from Shen Dar.
Both of them sought to register the mark VESPA for use on air compressors,
but it was Shen Dar who first filed the application on June 1997. EYIS appli-
cation was first granted on 2004, so Shen Dar sought for its cancellation on
the ground of Sec 123 of the Intellectual Property Code which provides that
the registration of a similar mark is prevented with the filing of an earlier ap-
plication for registration. On the other hand, EYIS contended that Shen Dar
is not entitled to register the mark VESPA on its products because EYIS has
been using it as the sole assembler and distributor of air compressors since
the 1990s. EYIS was able to prove such fact. Who is the true owner?
A. EYIS is the true owner because it is the prior and continuous user of the
mark VESPA. Section 123.1 of the IPC should not be interpreted to mean that
ownership is based upon an earlier filing date. While RA 8293 removed the
previous requirement of proof of actual use prior to the filing of an applica-
tion for registration of a mark, proof of prior and continuous use is necessary
to establish ownership of a mark. Ownership of a mark or trade name may be
acquired not necessarily by registration but by adoption and use in trade or
commerce. As between actual use of a mark without registration, and regis-
tration of the mark without actual use thereof, the former prevails over the
latter. Hence, EYIS is entitled to the registration of the mark in its name. (E.Y
Industrial Sales v. Shen Dar, G.R. 184850, 2010, penned by J. Velasco)

38 | P a g e
Q. Taiwan Kolin Corp sought to register the trademark KOLIN for the array of goods it
offers which are audio visual equipment. However, Kolin Electronics opposed the applica-
tion on the ground that the trademark KOLIN is identical, if not confusingly similar,
with its registered trademark KOLIN which also covers its products that fall under the
category as devices for controlling the distribution and use of electricity. Are the products
closely related?
A. No, the products are not related and the use of the trademark KOLIN on them would
not likely cause confusion. To confer exclusive use of a trademark, emphasis should be on
the similarity or relatedness of the goods and/or services involved and not on the arbitrary
classification or general description of their properties or characteristics.
Taiwan Kolins goods are categorized as audio visual equipments, while Kolin Electronics
goods fall under devices for controlling the distribution and use of electricity. Thus, it is
erroneous to assume that all electronic products are closely related and that the coverage
of one electronic product necessarily precludes the registration of a similar mark over an-
other.
Second, the ordinarily intelligent buyer is not likely to be confused. The distinct visual and
aural differences between the two trademarks KOLIN, although appear to be minimal,
are sufficient to distinguish between one brand or another. The casual buyer is predis-
posed to be more cautious, discriminating, and would prefer to mull over his purchase be-
cause the products involved are various kind of electronic products which are relatively
luxury items and not considered affordable. They are not ordinarily consumable items
such as soy sauce, ketsup or soap which are of minimal cost. Hence, confusion is less like-
ly. (Taiwan Kolin v. Kolin Electronics, G.R. 209843, 2015, Velasco J.)
PLEASE NOTE OF THIS PORTION OF THE DECISION penned by Justice Velasco on
infringement:
In resolving one of the pivotal issues in this casewhether or not the products
of the parties involved are relatedthe doctrine in Mighty Corporation is au-
thoritative. There, the Court held that the goods should be tested against several
factors before arriving at a sound conclusion on the question of
relatedness. Among these are:
(a) the business (and its location) to which the goods belong;
(b) the class of product to which the goods belong
(c) the products quality, quantity, or size, including the nature of the package,
wrapper or container;
(d) the nature and cost of the articles;
(e) the descriptive properties, physical attributes or essential characteristics with
reference to their form, composition, texture or quality;
(f) the purpose of the goods;
(g) whether the article is bought for immediate consumption, that is, day-to-day
household items;
(h) the fields of manufacture;
(i) the conditions under which the article is usually purchased; and
(j) the channels of trade through which the goods flow, how they are distribut-
ed, marketed, displayed and sold. (Taiwan Kolin Corporation, Ltd. v. Kolin Electronics
Co., Inc. G.R. No. 209843 | March 25, 2015)
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AMLA AMENDMENTS AnnexA

The first section of the amending law added the following to the list of covered persons
under the AMLA. The amendment reads:
Section 3 (a). Covered persons, natural or juridical, refer to:
(4) jewelry dealers in precious metals, who, as a business, trade in precious metals, for trans-
actions in excess of One million pesos (P1,000,000.00);
(5) jewelry dealers in precious stones, who, as a business, trade in precious stones, for trans-
actions in excess of One million pesos (P1,000,000.00);
(6) company service providers which, as a business, provide any of the following services to
third parties:
(i) acting as a formation agent of juridical persons;
(ii) acting as (or arranging for another person to act as) a director or corporate secretary of a
company, a partner of a partnership, or a similar position in relation to other juridical per-
sons;
(iii) providing a registered office, business address or accommodation, correspondence or
administrative address for a company, a partnership or any other legal person or arrangement;
and (iv) acting as (or arranging for another person to act as) a nominee shareholder for anoth-
er person; and
(7) persons who provide any of the following services:
(i) managing of client money, securities or other assets;
(ii) management of bank, savings or securities accounts;
(iii) organization of contributions for the creation, operation or management of companies;
and
(iv) creation, operation or management of juridical persons or arrangements, and buying and
selling business entities.
Notwithstanding the foregoing, the term covered persons shall exclude lawyers and ac-
countants acting as independent legal professionals in relation to information concerning
their clients or where disclosure of information would compromise client confidences or the
attorney-client relationship: Provided, That these lawyers and accountants are authorized to
practice in the Philippines and shall continue to be subject to the provisions of their respec-
tive codes of conduct and/or professional responsibility or any of its amendments.

The following are the new predicate crimes (from 14 to 34):

Section 3(i). Unlawful activity refers to any act or omission or series or combination there-
of involving or having direct relation to the following:
(13) Terrorism and conspiracy to commit terrorism as defined and penalized under Sections 3
and 4 of Republic Act No. 9372;
(14) Financing of terrorism under Section 4 and offenses punishable under Sections 5, 6, 7
and 8 of Republic Act No. 10168, otherwise known as the Terrorism Financing Prevention
and Suppression Act of 2012;
(15) Bribery under Articles 210, 211 and 211-A of the Revised Penal Code, as amended, and
Corruption of Public Officers under Article 212 of the Revised Penal Code, as amended;
(16) Frauds and Illegal Exactions and Transactions under Articles 213, 214, 215 and 216 of
the Revised Penal Code, as amended;

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(17) Malversation of Public Funds and Property under Articles 217 and 222 of the Revised
Penal Code, as amended;
(18) Forgeries and Counterfeiting under Articles 163, 166, 167, 168, 169 and 176 of the Re-
vised Penal Code, as amended;
(19) Violations of Sections 4 to 6 of Republic Act No. 9208, otherwise known as the Anti-
Trafficking in Persons Act of 2003;
(20) Violations of Sections 78 to 79 of Chapter IV, of Presidential Decree No. 705, otherwise
known as the Revised Forestry Code of the Philippines, as amended;
(21) Violations of Sections 86 to 106 of Chapter VI, of Republic Act No. 8550, otherwise
known as the Philippine Fisheries Code of 1998;
(22) Violations of Sections 101 to 107, and 110 of Republic Act No. 7942, otherwise known
as the Philippine Mining Act of 1995;
(23) Violations of Section 27(c), (e), (f), (g) and (i), of Republic Act No. 9147, otherwise
known as the Wildlife Resources Conservation and Protection Act;
(24) Violation of Section 7(b) of Republic Act No. 9072, otherwise known as the National
Caves and Cave Resources Management Protection Act;
(25) Violation of Republic Act No. 6539, otherwise known as the Anti-Carnapping Act of
2002, as amended;
(26) Violations of Sections 1, 3 and 5 of Presidential Decree No. 1866, as amended, other-
wise known as the decree Codifying the Laws on Illegal/Unlawful Possession, Manufacture,
Dealing In, Acquisition or Disposition of Firearms, Ammunition or Explosives;
(27) Violation of Presidential Decree No. 1612, otherwise known as the Anti-Fencing Law;
(28) Violation of Section 6 of Republic Act No. 8042, otherwise known as the Migrant
Workers and Overseas Filipinos Act of 1995, as amended by Republic Act No. 10022;
(29) Violation of Republic Act No. 8293, otherwise known as the Intellectual Property Code
of the Philippines;
(30) Violation of Section 4 of Republic Act No. 9995, otherwise known as the Anti-Photo
and Video Voyeurism Act of 2009;
(31) Violation of Section 4 of Republic Act No. 9775, otherwise known as the Anti-Child
Pornography Act of 2009;
(32) Violations of Sections 5, 7, 8, 9, 10(c), (d) and (e), 11, 12 and 14 of Republic Act No.
7610, otherwise known as the Special Protection of Children Against Abuse, Exploitation
and Discrimination;
(33) Fraudulent practices and other violations under Republic Act No. 8799, otherwise
known as the Securities Regulation Code of 2000; and
(34) Felonies or offenses of a similar nature that are punishable under the penal laws of other
countries.

Republic Act No. 10365 also amended the provisions of the AMLA on the ways by which
money laundering may be committed as well as the manner of its prosecution. Firstly,
money laundering may now be committed through the following:

Section 4. Money Laundering Offense. Money laundering is committed by any person

who, knowing that any monetary instrument or property represents, involves, or relates to the
proceeds of any unlawful activity:
(a) transacts said monetary instrument or property;

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(b) converts, transfers, disposes of, moves, acquires, possesses or uses said monetary instru-
ment or property;
(c) conceals or disguises the true nature, source, location, disposition, movement or owner-
ship 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 re-
ferred to in paragraphs (a), (b) or (c) above; and
(f) performs or fails to perform any act as a result of which he facilitates the offense of mon-
ey laundering referred to in paragraphs (a), (b) or (c) above.
Money laundering is also committed by any covered person who, knowing that a covered or
suspicious transaction is required under this Act to be reported to the Anti-Money Launder-
ing Council (AMLC), fails to do so.
Parts (b), (c), (d), and (e) are new additions to the law. Hence, knowingly converting or con-
cealing a monetary instrument, including an attempt thereof, and assisting in the commission
of money-laundering now constitute the crime. Prior to the amendment, only the act of trans-
acting the monetary instrument or property is made criminal in its attempted stage.
Secondly, the prosecution for the crime of money-laundering may now proceed simultane-
ously with the case relating to the unlawful activity. The amending law provided that both
cases are now independent of each other. Prior to the amendment, the case involving the un-
lawful activity was given precedence.

The Anti-Money Laundering Council (AMLC) was also a given new function under the
amending law. Section 7 now reads:
Section 7. Creation of Anti-Money Laundering Council (AMLC). The AMLC shall act
unanimously in the discharge of its functions as defined hereunder:
(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 hun-
dred thousand pesos (P500,000.00) 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 doc-
uments of all real estate transactions.
In addition to this, the power of the AMLC to apply for a freeze order before the Court of
Appeals now includes monetary instruments or properties alleged to be laundered as well as
instrumentalities used in or intended for use in any unlawful activity. Prior to the amendment,
the AMLC may obtain a freeze order only for monetary instruments or properties alleged to
be the proceeds of an unlawful activity.
More on the freeze order, R.A. No. 10365 also extended its maximum effectiveness period to
six months provided that if no case is filed against the person whose account has been frozen
within the period determined by the court, the freeze order will be automatically lifted. Note
that the freeze order was previously effective only for 20 days unless extended by the court.
This new rule, however, shall not apply to cases already pending before the courts.
Section 7
The provisions of the amending law on prevention of money laundering include the follow-
ing amendments:
(1) Covered persons must report covered and suspicious transactions to the AMLA within
five working days from the occurrence thereof, unless the AMLC prescribes a different peri-
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od not exceeding 15 working days. Before, the maximum period provided by law was 10
days.
(2) Lawyers and accountants acting as independent legal professionals are exempt from the
reporting requirement if the relevant information was obtained in circumstances where they
are subject to professional secrecy or legal professional privilege. This is a new provision.
(3) Covered persons as well as their officers and employers are prohibited from communi-
cating to any person or entity including the media the transactions about to be reported to the
AMLC. Prior to the amendment, the confidentiality clause applied only to transactions al-
ready reported to the AMLC.
With the new amendments, other monetary instruments or properties having an equivalent
value to that of the monetary instrument or property found to be related in any way to unlaw-
ful activity or a money laundering offense may now be forfeited as an alternative. This arises
when the latter, with due diligence, (1) cannot be located, or (2) it has been substantially al-
tered, destroyed, diminished in value or otherwise rendered worthless by any act or omis-
sion, or (3) it has been concealed , removed, converted or otherwise transferred, or (4) it is
located outside the Philippines or has been placed or brought outside the jurisdiction of the
court, or (5) it has been commingled with other monetary instrument or property belonging
to either the offender himself or a third person or entity, thereby rendering the same difficult
to identify or be segregated for purposes of forfeiture.
If no other monetary instrument or property may be located, the court can order the convict-
ed offender to pay an amount equal to the value of the monetary instrument or property in-
stead. The AMLC may promulgate rules on fines and penalties taking into consideration the
attendant circumstances, such as the nature and gravity of the violation or irregularity.
While the amending law did not increase the penalties already provided for the crime of
money laundering, it nevertheless introduced penal sanctions for covered persons, its di-
rectors, officers and personnel who knowingly participated in the commission of the crime.
Administrative sanctions are now also imposable upon persons responsible for the viola-
tion of the AMLA.

Section 11
The last provision of R.A. No. 10365 added two new provisions to the AMLA:
Section. 20. Non-intervention in the Bureau of Internal Revenue (BIR) Operations. Noth-
ing contained in this Act nor in related antecedent laws or existing agreements shall be con-
strued to allow the AMLC to participate in any manner in the operations of the BIR.
Section. 21. The authority to inquire into or examine the main account and the related ac-
counts shall comply with the requirements of Article III, Sections 2 and 3 of the 1987 Consti-
tution, 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.

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