MERCANTILE LAW

2016 GOLDEN NOTES

UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
MANILA
 The UST GOLDEN NOTES is the annual student-edited bar
review material of the University of Santo Tomas, Faculty of
Civil Law. Communications regarding the NOTES should be
addressed to the Academics Committee of the Team: Bar-Ops.

ADDRESS: Academics Committee

Team Bar-Ops
Faculty of Civil Law
University of Santo Tomas
España, Manila 1008

TEL. NO.: (02) 731-4027

(02) 4061611 loc. 8578

Academics Committee
Faculty of Civil Law
University of Santo Tomas
España, Manila 1008

All Rights Reserved by the Academics Committee of the Faculty of Civil Law of the Pontifical
and Royal University of Santo Tomas, the Catholic University of the Philippines.

2016 Edition

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No.____________

Printed in the Philippines, June 2016.

 ACADEMIC YEAR 2016-2017

CIVIL LAW STUDENT COUNCIL

JAMES CHRISTIAN S. BALLECER PRESIDENT
MAXIMILLAN JEAN T. PEROLA VICE PRESIDENT EXTERNAL
RHOSE AZCELLE L. MAGAOAY TREASURER

TEAM: BAR-OPS
MAXIMILLAN JEAN T. PEROLA
GEZELYN SP. BANIHIT
CAMILLE ARIANNE A. VERMUG
JANN PATRICIA M. TORRES
NIKKI MEI Q. KO
KAROL PAULINE C. MALUBAY
RHOSE AZCELLE L. MAGAOAY
CLARICE ANGELINE V. QUESTIN
JINNY M. APOSTOL
WILMALYN HERNANDEZ
REA MAE M. DIOCALES
FRANCIS XAVIER N. ENRIQUEZ
JOCHRIS DANIEL Z. GUADES
RALPH LOUIES O. MERCADO
CHAIRPERSON
VICE-CHAIRPERSON
SECRETARY
ASST. SECRETARY
HEAD, PUBLIC RELATIONS OFFICER
ASST. HEAD, PUBLIC RELATIONS OFFICER
HEAD, FINANCE COMMITTEE
ASST. HEAD, FINANCE COMMITTEE
HEAD, HOTEL ACCOMMODATIONS COMMITTEE
ASST. HEAD, HOTEL ACCOMMODATIONS
COMMITTEE
ASST. HEAD, HOTEL ACCOMMODATIONS
COMMITTEE
HEAD, LOGISTICS COMMITTEE
ASST. HEAD, LOGISTICS COMMITTEE
ASST. HEAD, LOGISTICS COMMITTEE

ATTY. AL CONRAD B. ESPALDON

ADVISER
 ACADEMICS COMMITTEE
KATRINA GRACE C. ONGOCO
REUBEN BERNARD M. SORIANO
ERINN MARIEL C. PEREZ
MA. NINNA ROEM A. BONSOL
REUBEN BERNARD M. SORIANO
JUAN PAOLO MAURINO R. OLLERO
MERCANTILE LAW COMMITTEE
REUBEN BERNARD M. SORIANO
CAMILLE ANGELICA GONZALES
ANDREA VICTORIA R. AMOG
SONIA MAE C. BALBABOCO
ERIKA DENICE G. ONG
KARMELA KATE SALVADOR
CHRISTINA PAULA V. ALONZO
MARIA SHIRIN T. AGNAR
AECAYA CHRISTINE V. CALERO
JUAN PAOLO MAURINO R. OLLERO
PATRICIA MAITA B. DIMAYUGA
ATTY. ALLAN B. GEPTY
ADVISER
MANAGING EDITOR
EXECUTIVE COMMITTEE
LAYOUT AND DESIGN
MERCANTILE LAW COMMITTEE HEAD
ASSISTANT COMMITTEE HEAD
ASSISTANT COMMITTEE HEAD
ASSISTANT COMMITTEE HEAD
ASSISTANT COMMITTEE HEAD
ASSISTANT COMMITTEE HEAD
MEMBER
MEMBER
MEMBER
MEMBER
MEMBER
 FACULTY OF CIVIL LAW
UNIVERSITY OF SANTO TOMAS

ACADEMIC OFFICIALS

ATTY. NILO T. DIVINA REV. FR. ISIDRO C. ABAÑO, O.P.

DEAN REGENT

ATTY. ARTHUR B. CAPILI

FACULTY SECRETARY

ATTY. ELGIN MICHAEL C. PEREZ

LEGAL COUNSEL
UST CHIEF JUSTICE ROBERTO CONCEPCION LEGAL AID CLINIC

JUDGE PHILIP A. AGUINALDO

SWDB COORDINATOR

LENY G. GADANIA, R.G.C.

GUIDANCE COUNSELOR
 OUR DEEPEST APPRECIATION TO OUR
MENTORS & INSPIRATION

DEAN NILO T. DIVINA

DEAN AMADO L. DIMAYUGA
ATTY. JACINTO D. JIMENEZ
ATTY. ALBERT R. PALACIOS +
JUDGE NOLI T. DIAZ
ATTY. AMADO T. TAYAG
ATTY. TEOFILO R. RAGADIO
ATTY. ALLAN B. GEPTY
JUSTICE GABRIEL T. ROBENIOL
JUSTICE JAPAR B. DIMAAMPAO
JUDGE MARIA ELLA CECILIA D. ESCALANTE
ATTY. MARIAN JOANNE K. CO-PUA

For being our guideposts in understanding the intricate sphere of Mercantile Law.
- Academics Committee 2016
 DISCLAIMER

THE RISK OF USING THIS BAR

REVIEW MATERIAL SHALL BE
BORNE BY THE USER.
TABLE OF CONTENTS
I. Letters of Credit
A. Definition and Nature of Letter of Credit 1
B. Parties to a Letter of Credit 2
1. Rights and Obligations of Parties 2
C. Basic Principles of Letter of Credit 4
1. Doctrine of Independence 4
2. Fraud Exception Principle 6
3. Doctrine of Strict Compliance 6

II. Trust Receipts Law

A. Definition/Concept of a Trust Receipt Transaction 8
1. Loan/Security Feature 9
2. Ownership of the Goods, Documents and Instruments under a Trust Receipt 10
B. Rights of the Entruster 10
1. Validity of the Security Interest as Against the Creditors of the Entrustee/Innocent Purchasers for 10
Value
C. Obligation and Liability of the Entrustee 10
1. Payment/Delivery of Proceeds of Sale or Disposition of Goods, Documents or 10
Instruments
2. Return of Goods, Documents or Instruments in Case of Sale 11
3. Liability for Loss of Goods, Documents or Instruments 11
4. Penal Sanction if Offender is a Corporation 12
D. Remedies Available 13
C. Warehouseman’s Lien 19

III. Negotiable Instruments Law

A. Forms and Interpretation 22
1. Requisites of Negotiability 22
2. Kinds of Negotiable Instruments 28
B. Completion and Delivery 29
1. Insertion of Date 30
2. Completion of Blanks 30
3. Incomplete and Undelivered Instruments 31
4. Complete but Undelivered Instruments 32
C. Signature 32
1. Signing in Trade Name 33
2. Signature of Agent 33
3. Indorsement by Minor or Corporation 33
4. Forgery 33
D. Consideration 35
E. Accommodation Party 37
F. Negotiation 39
1. Distinguished from Assignment 39
2. Modes of Negotiation 40
3. Kinds of Indorsements 41
G. Rights of the Holder 42
1. Holder in Due Course 42
2. Defenses Against the Holder 45
H. Liabilities of Parties 46
1. Maker 47
2. Drawer 48
3. Acceptor 48
4. Indorser 49
5. Warranties 50
I. Presentment for Payment 50
1. Necessity of Presentment for Payment 50
2. Parties to Whom Presentment for Payment Should Be Made 51
3. Dispensation with Presentment for Payment 52
4. Dishonor by Non-Payment 52
J. Notice of Dishonor 52
1. Parties to Be Notified 53
2. Parties Who May Give Notice and Dishonor 53
3. Effect of Notice 53
4. Form of Notice 53
5. Waiver 54
6. Dispensation with Notice 54
7. Effect of Failure to Give Notice 54
K. Discharge of Negotiable Instrument 55
1. Discharge of Negotiable Instrument 55
2. Discharge of Parties Secondarily Liable 55
3. Right of Party Who Discharged Instrument 56
4. Renunciation by Holder 56
L. Material Alteration 56
1. Concept 56
2. Effect of Material Alteration 57
M. Acceptance 57
1. Definition 57
2. Manner 57
3. Time for Acceptance 58
4. Rules Governing Acceptance 58
N. Presentment for Acceptance 58
1. Time/Place/Manner of Presentment 58
2. Effect of Failure to Make Presentment 59
3. Dishonor by Non-Acceptance 59
O. Promissory Notes 58
P. Checks 60
1. Definition 60
2. Kinds 61
3. Presentment for Payment 63
Time 63
Effect of Delay 63

IV. Insurance Code

A. Concept of Insurance 65
B. Elements of an Insurance Contract 67
C. Characteristics/Nature of Insurance Contracts 67
D. Classes 68
E. Insurable Interest 68
1. In Life/Health 69
2. In Property 71
3. Double Insurance and Over Insurance 72
4. Multiple or Several Interests on Same Property 73
F. Perfection of the Contract of Insurance 75
1. Offer and Acceptance/Consensual 76
Delay in Acceptance 76
Delivery of Policy 76
2. Premium Payment 76
3. Non-Default Options in Life Insurance 80
4. Reinstatement of a Lapsed Policy of Life Insurance 80
5. Refund of Premiums 81
G. Rescission of Insurance Contracts 82
1. Concealment 82
2. Misrepresentation/Omissions 84
3. Breach of Warranties 86
H. Claims Settlement and Subrogation 87
1. Notice and Proof of Loss 87
2. Guidelines on Claims Settlement 88
Unfair Claims Settlement; Sanctions 89
Prescription of Action 89
Subrogation 90
I. Classes of Insurance 90
1. Marine 91
2. Fire 100
3. Casualty 102
4. Suretyship 104
5. Life 105
6. Compulsory Motor Vehicle Liability Insurance 106

V. Transportation Laws
A. Common Carriers 111
1. Diligence Required of Common Carriers 113
2. Liabilities of Common Carriers 114
B. Vigilance over Goods 116
1. Exempting Causes 116
Requirement of Absence of Negligence 116
Absence of Delay 117
Due Diligence to Prevent or Lessen the Loss 118
2. Contributory Negligence 118
3. Duration of Liability 118
Delivery of Goods to Common Carrier 119
Actual or Constructive Delivery 119
Temporary Unloading or Storage 119
4. Stipulation for Limitation of Liability 119
Void Stipulations 120
Limitation of Liability to Fixed Amount 120
Limitation of Liability in Absence of Declaration of Greater Value 120
5. Liability for Baggage of Passengers 121
Checked-In Baggage 121
Baggage in Possession of Passengers 121
C. Safety of Passengers 121
1. Void Stipulations 121
2. Duration of Liability 122
Waiting for Carrier or Boarding of Carrier 122
Arrival at Destination 122
3. Liability for Acts of Others 123
Employees 123
Other Passengers and Strangers 123
4. Extent of Liability for Damages 125
D. Bill of Lading 126
1. Three-Fold Character 126
2. Delivery of Goods 126
Period of Delivery 127
Delivery Without Surrender of Bill of Lading 127
Refusal of Consignee to Take Delivery 127
3. Period for Filing Claims 127
4. Period for Filing Actions 128
E. Maritime Commerce 128
1. Charter Parties 128
Bareboat/Demise Charter 128
Time Charter 128
Voyage/Trip Charter 129
2. Liability of Ship Owners and Shipping Agents 129
Liability for Acts of Captain 130
Exceptions to Limited Liability 131
3. Accidents and Damages in Maritime Commerce 132
General Average 132
Collisions 133
4. Carriage of Goods by Sea Act 134
Application 134
Notice of Loss or Damage 135
Period of Prescription 135
Limitation of Liability 136
F. The Warsaw Convention 137
1. Applicability 137
2. Limitation of Liability 138
Liability to Passengers 138
Liability for Checked Baggage 138
Liability for Handcarried Baggage 138
3. Willful Misconduct 138
G. Public Service 139

VI. The Corporation Code

A. Corporation 144
1. Definition 144
2. Attributes of the Corporation 144
B. Classes of Corporations 149
C. Nationality of Corporations 153
1. Place of Incorporation Test 153
2. Control Test 153
3. Grandfather Rule 154
D. Corporate Juridical Personality 156
1. Doctrine of Separate Juridical Personality 156
Liability for Torts and Crimes 160
Recovery of Moral Damages 160
2. Doctrine of Piercing the Corporate Veil 162
Grounds for Application of Doctrine 162
Test in Determining Applicability 166
E. Incorporation and Organization 168
1. Promoter 169
Liability of Promoter 170
Liability of Corporation for Promoter’s Contracts 170
2. Number and Qualifications of Incorporators 170
3. Corporate Name — Limitations on Use of Corporate Name 172
4. Corporate Term 174
5. Minimum Capital Stock and Subscription Requirements 174
6. Articles of Incorporation 174
Nature and Function of Articles 174
Contents 175
Amendment 176
Non-Amenable Items 176
7. Registration and Issuance of Certificate of Incorporation 177
8. Adoption of By-Laws 177
Nature and Functions of By-Laws b. Requisites of Valid By-Laws 177
Binding Effects 177
Amendment or Revision 180
F. Corporate Powers 180
1. General Powers, Theory of General Capacity 181
2. Specific Powers, Theory of Specific Capacity 182
Power to Extend or Shorten Corporate Term 183
Power to Increase or Decrease Capital Stock or Incur, Create, Increase
Bonded Indebtedness 183
Power to Deny Pre-Emptive Rights 185
Power to Sell or Dispose of Corporate Assets 186
Power to Acquire Own Shares 187
Power to Invest Corporate Funds in Another Corporation or Business 188
Power to Declare Dividends 189
Power to Enter Into Management Contract 191
Ultra Vires Acts 192
Applicability of Ultra Vires Doctrine 192
Consequences of Ultra Vires Acts 196
3. How Exercised 196
By the Shareholders 196
By the Board of Directors 196
By the Officers 197
4. Trust Fund Doctrine 199
G. Board of Directors and Trustees 200
1. Doctrine of Centralized Management 200
2. Business Judgment Rule 200
3. Tenure, Qualifications and Disqualifications of Directors or Trustees 201
4. Elections 203
Cumulative Voting/Straight Voting 204
Quorum 204
5. Removal 204
6. Filling of Vacancies 204
7. Compensation 205
8. Fiduciaries Duties and Liability Rules 206
9. Responsibility for Crimes 210
10. Inside Information 211
11. Contracts 211
By Self-Dealing Directors with the Corporation 211
Between Corporations with Interlocking Directors 211
Management Contracts 212
12. Executive Committee 212
13. Meetings 213
Regular or Special 213
When and Where 213
Notice 213
Who Presides 214
Quorum 215
Rule on Abstention 215
H. Stockholders and Members 215
1. Rights of a Stockholder and Members 215
Doctrine of Equality of Shares 216
2. Participation in Management 216
Proxy 216
Voting Trust 217
Cases When Stockholders’ Action is Required 219
By a Majority Vote 219
By a Two-Thirds Vote 219
By Cumulative Voting 220
3. Proprietary Rights 222
Right to Dividends 222
Right of Appraisal 222
Right to Inspect 224
Pre-Emptive Right 226
Right to Vote 227
Right to Dividends 227
Right of First Refusal 227
4. Remedial Rights 228
Individual Suit 228
Representative Suit 228
Derivative Suit 228
5. Obligation of a Stockholder 232
6. Meetings 232
Regular or Special 232
When and Where 232
Notice 232
Who Calls the Meetings 233
Quorum 233
Minutes of the Meetings 234
I. Capital Structure 234
1. Subscription Agreements 234
2. Consideration for Stocks 235
3. Shares of Stock 236
Nature of Stock 237
Subscription Agreements 237
Consideration for Shares of Stock 237
Watered Stock 237
Definition 237
 Liability of Directors for Watered Stocks 238
Trust Fund Doctrine for Liability for Watered Stocks 238
Situs of the Shares of Stock 238
Classes of Shares of Stock 238
4. Payment of Balance of Subscription 241
Call by Board of Directors 242
Notice Requirement 242
Sale of Delinquent Shares 242
Effect of Delinquency 242
Call by Resolution of the Board of Directors 243
Notice of Sale 243
Auction Sale and the Highest Bidder 243
5. Certificate of Stock 244
Nature of the Certificate 244
Uncertificated Shares 244
Negotiability 244
Requirements for Valid Transfer of Stocks 245
Issuance 248
Full Payment 248
Payment Pro-Rata 248
Lost or Destroyed Certificates 248
6. Stock and Transfer Book 250
Contents 250
Who May Make Valid Entries 250
7. Disposition and Encumbrance of Shares 250
Allowable Restrictions on the Sale of Shares 250
Sale of Partially Paid Shares 251
Sale of a Portion of Shares Not Fully Paid 251
Sale of All of Shares Not Fully Paid 251
Sale of Fully Paid Shares 251
Requisites of a Valid Transfer 251
Involuntary Dealings with Shares 251
J. Dissolution and Liquidation 252
1. Modes of Dissolution 253
Voluntary 254
Where No Creditors Are Affected 254
Where Creditors Are Affected 254
By Shortening of Corporate Term 255
Involuntary 255
By Expiration of Corporate Term 255
Failure to Organize and Commence Business Within 2 Years from 256
Incorporation 256
Legislative Dissolution 256
Dissolution by the SEC on Grounds under Existing Laws 256
2. Methods of Liquidation 256
By the Corporation Itself 258
Conveyance to a Trustee within a Three-Year Period 258
By Management Committee or Rehabilitation Receiver 259
Liquidation after Three Years 259
K. Other Corporations 263
1. Close Corporations 263
Characteristics of a Close Corporation 264
Validity of Restrictions on Transfer of Shares 265
Issuance or Transfer of Stock in Breach of Qualifying Conditions 266
When Board Meeting is Unnecessary or Improperly Held 266
Pre-Emptive Right 267
Amendment of Articles of Incorporation 267
Deadlocks 267
 2. Non-Stock Corporations 268
Definition 268
Purposes 270
Treatment of Profits 271
Distribution of Assets upon Dissolution 271
3. Foreign Corporations 271
Bases of Authority over Foreign Corporations 272
Consent 272
Doctrine of “Doing Business” (related to definition under the Foreign 272
Investments Act, R.A. No. 7042)
Necessity of a License to Do Business 274
Requisites for Issuance of a License 274
Resident Agent 275
Personality to Sue 276
Suability of Foreign Corporations 276
Instances When Unlicensed Foreign Corporations May Be Allowed to Sue 276
Isolated Transactions 277
Grounds for Revocation of License 277
L. Mergers and Consolidations 278
1. Definition and Concept 278
2. Constituent vs. Consolidated Corporation 282
3. Plan of Merger or Consolidation 282
4. Articles of Merger or Consolidation 282
5. Procedure 282
6. Effectivity 283
7. Limitations 284
8. Effects 284

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

A. State Policy, Purpose 286
B. Securities Required to Be Registered 286
1. Exempt Securities 288
2. Exempt Transactions 288
C. Procedure for Registration of Securities 289
D. Prohibitions on Fraud, Manipulation and Insider Trading 291
1. Manipulation of Security Prices 291
2. Short Sales 291
3. Fraudulent Transactions 292
4. Insider Trading 292
E. Protection of Investors 293
1. Tender Offer Rule 293
2. Rules on Proxy Solicitation 295
3. Disclosure Rule 296
F. Civil Liability 297

VIII. Banking Laws

A. The New Central Bank Act (R.A. No. 7653) 303
1. State Policies 303
2. Creation of the Bangko Sentral ng Pilipinas (BSP) 303
3. Responsibility and Primary Objective 303
4. Monetary Board—Powers and Functions 303
5. How the BSP Handles Banks in Distress 304
Conservatorship 304
Closure 304
Receivership 305
Liquidation 306
6. How the BSP Handles Exchange Crisis 308
Legal Tender Power 308
Rate of Exchange 309
B. Law on Secrecy of Bank Deposits (R.A. No. 1405, as amended) 309
1. Purpose 309
2. Prohibited Acts 309
3. Deposits Covered 309
 4. Exceptions 310
5. Garnishment of Deposits, including Foreign Deposits 313
C. General Banking Law of 2000 (R.A. No. 8791) 314
1. Definition and Classification of Banks 314
2. Distinction of Banks from Quasi-Banks and Trust Entities 316
3. Bank Powers and Liabilities 316
Corporate Powers 316
Banking and Incidental Powers 316
4. Diligence Required of Banks — Relevant Jurisprudence 317
5. Nature of Bank Funds and Bank Deposits 318
6. Stipulation on Interests 319
7. Grant of Loans and Security Requirements 320
Ratio of Net Worth to Total Risk Assets 320
Single Borrower’s Limit 320
Restrictions on Bank Exposure to DOSRI (Directors, Officers, Stockholders and their Related Interests) 320

IX. Intellectual Property Code

A. Intellectual Property Rights in General 322
1. Intellectual Property Rights 322
2. Technology Transfer Arrangements 322
B. Patents 323
1. Patentable Inventions 323
2. Non-Patentable Inventions 325
3. Ownership of a Patent 325
Right to a Patent 325
First-to-File Rule 326
Inventions Created Pursuant to a Commission d. Right of Priority 326
4. Grounds for Cancellation of a Patent 327
5. Remedy of the True and Actual Inventor 327
6. Rights Conferred by a Patent 329
7. Limitations of Patent Rights 329
Prior User 329
Use by the Government 329
8. Patent Infringement 330
Tests in Patent Infringement 330
Literal Infringement 330
Doctrine of Equivalents 330
Defenses in Action for Infringement 332
9. Assignment and Transmission of Rights 335
C. Trademarks 335
1. Definition of Marks, Collective Marks, Trade Names 335
2. Acquisition of Ownership of Mark 335
3. Acquisition of Ownership of Trade Name 337
4. Non-Registrable Marks 338
5. Prior Use of Mark as a Requirement 339
6. Tests to Determine Confusing Similarity between Marks 340
Dominancy Test 340
Holistic Test 342
7. Well-Known Marks 345
8. Rights Conferred by Registration 346
9. Use by Third Parties of Names, etc. Similar to Registered Mark 347
10. Infringement and Remedies 347
Trademark Infringement 347
Damages 348
Requirement of Notice 348
D. Copyrights 352
1. Basic Principles, Sections 172.2, 175 and 181 352
2. Copyrightable Works 353
Original Works 353
Derivative Works 353
3. Non-Copyrightable Works 353
4. Rights of Copyright Owner 354
5. Rules on Ownership of Copyright 358
 6. Limitations on Copyright 360
Doctrine of Fair Use 361
Copyright Infringement 362
E. Rules of Procedure for Intellectual Property Rights Cases (A.M. No. 10-3-10-SC) 366

X. Special Laws
A. Anti-Money Laundering Act (R.A. No. 9160, as amended by R.A. No. 9194) 376
1. Policy of the Law 376
2. Covered Institutions 376
3. Obligations of Covered Institutions 377
4. Covered Transactions 379
5. Suspicious Transactions 379
6. When Is Money Laundering Committed 379
7. Unlawful Activities or Predicate Crimes 380
8. Anti-Money Laundering Council 381
9. Functions 382
10. Freezing of Monetary Instrument or Property 383
11. Authority to Inquire Into Bank Deposits 383
B. Foreign Investments Act (R.A. No. 7042) 386
1. Policy of the Law 386
2. Definition of Terms 387
Foreign Investment 387
“Doing Business” in the Philippines 397
Export Enterprise 387
Domestic Market Enterprise 387
3. Registration of Investments on Non-Philippine Nationals 387
4. Foreign Investments in Export Enterprise 388
5. Foreign Investments in Domestic Market Enterprise 388
6. Foreign Investment Negative List 388
 LETTERS OF CREDIT
Duration of Letters of Credit
LETTERS OF CREDIT
DEFINITION AND NATURE OF 1. Upon the period fixed by the parties; or
LETTER OF CREDIT 2. If none is fixed, one year from the date of issuance.

Letter of Credit (L/C) Incidents in the life of a Letter of Credit (CAIS-ERR)

It is any arrangement, however named or described, 1. Contract of Sale between the buyer and seller
whereby the issuing bank acting at the request and on the 2. Application for L/C by the buyer with the bank
instructions of a customer (applicant) or on its own 3. Issuance of L/C by the bank
behalf, binds itself to: (PAN) 4. Shipping of goods by the seller
5. Execution of draft and tender of documents by the
1. Pay to the order of, or accept and pay drafts drawn seller
by a third party (Beneficiary), or 6. Redemption of draft (payment) and obtaining of
2. Authorize another bank to pay or to accept and pay documents by the issuing bank
such drafts, or 7. Reimbursement to the bank and obtaining of
3. Authorizes another bank to Negotiate, against documents by the buyer
stipulated documents
Essential conditions of a Letter of Credit
Provided, the terms and conditions of the credit are
complied with (Uniform Customs & Practice for 1. Issued in favor of a definite person.
Documentary Credits, Art. 2). 2. Limited to a fixed or specified amount, or to one or
more amounts, but with a maximum stated limit
Nature of Letters of Credit as a Financial Device (Code of Commerce, Art. 568).

A letter of credit is a financial device developed by NOTE: If any of these essential conditions is not present,
merchants as a convenient a relatively safe mode of the instrument is merely considered as a letter of
dealing with sales of goods to satisy the seemingly recommendation.
irreconcilable interests of a seller, who refuses to part
with his goods before he is paid, and a buyer, who wants Q: Letters of Credit are financial devices in
to have in control of the goods before paying. The use of commercial transactions which will ensure that the
credits in commercial transactions serves to reduce the seller of the goods is sure to be paid when he parts
risk of nonpayment of the purchase price under the with the goods and the buyer of the goods gets control
contract of sale of the goods and to reduce the risk of non- of the goods upon payment. Which statement is most
performance of an obligation in a non-sale setting accurate? (2012 Bar)
(Transfield Philippines, Inc. vs. Luzon Hydro Corp., GR. No.
146717, November 22,2004). A: The use of the Letter of Credit serves to reduce the risk
of nonpayment of the purchase price in a sale transaction.
Purpose of Letter of Credit
Kinds of Letter of Credit
The use of credits in commercial transactions serve to
reduce the risk of non-payment of the purchase price COMMERCIAL L/C STANDBY L/C
under the contract for the sale of goods. However, letters Involves the payment of
of credit are also used in non-sale settings where they Involves non-sale
money under a contract of
serve to reduce the risk of non-performance. Generally, transactions.
sale.
credits in the non-sale settings have come to be known as Payable upon certification
“standard credits” (Transfield Philippines, Inc. vs. Luzon by the beneficiary of the
Hydro Corp., GR. No. 146717, November 22,2004). applicant’s non-
performance of the
Laws governing Letters of Credit Payable upon the agreement. The
presentation by the seller- documents that
Letter of credit is governed by the Uniform Customs and beneficiary of documents accompany the
Practice for documentary Credits issued by the that show he has taken beneficiary's draft must
International Chamber of Commerce (Metropolitan affirmative steps to comply show that the applicant
Waterworks vs. Daway, G.R. No. 160723, July 21, 2004). with the sales agreement has not performed the
undertaking (Transfield
NOTE: The law on contracts and damages shall also apply Philippines, Inc. v. Luzon
to provide remedies to the party aggrieved by the breach Hydro Corp., supra).
of the main contract although such breach will not affect
the obligation of the bank to pay the beneficiary or its
right to obtain reimbursement from the applicant of the
letter of credit if the terms of the letters of credit have
been complied with.

UNIVERSITY OF SANTO TOMAS

1 FACULTY OF CIVIL LAW
 MERCANTILE LAW
Irrevocable Letter of Credit vs. Confirmed Letter of 2. Issuing Bank – one which, whether a paying bank or
Credit not, Issues the L/C and undertakes to pay the seller
upon receipt of the draft and proper documents of
BASIS IRREVOCABLE title from the seller and to surrender them to the
CONFIRMED L/C
L/C buyer upon reimbursement. After due payment,
What it Kind of obligation issuing bank is entitled to reimbursement as a matter
Duration of the of right. Reimbursement includes debiting the bank
pertains assumed by the
L/C account of the applicant, if any. The failure of the
to correspondent bank.
The correspondent beneficiary to present the draft to the applicant does
bank gives an not affect the right of the issuing bank to
absolute assurance to reimbursement.
The issuing
the beneficiary that it
bank may not, 3. Beneficiary/Seller/Exporter – in whose favor the
will undertake the
without the instrument is executed. One who delivers the
issuing bank’s
consent of the documents of title and draft to the issuing bank to
What it obligation as its own
beneficiary and recover payment. He has a prestation to do under the
means according to the
the applicant, main contract but his failure to fulfill his obligation
terms and condition
revoke its under the main contract does not negate his right to
of the credit. (FEATI
undertaking payment from the issuing bank as long as he is able
Bank and Trust
under the letter. to submit the required documents and comply with
Company v. CA, G.R.
No. 94209, April 30, the terms of the credit, without prejudice to his
1991). liability against the account party under the law on
contracts and damages.
Courts cannot order the release to the applicant of the
proceeds of an Irrevocable Letter of Credit without The number of parties may be increased. The following
the consent of the Beneficiary additional parties may be:

Such order violates the irrevocable nature of the L/C. The
terms of an irrevocable letter of credit cannot be changed
without the consent of the parties, particularly the
beneficiary thereof (Phil. Virginia Tobacco Administration
v. De Los Angeles, G.R. No. L-27829, August 19, 1988).
Non-payment of the buyer of its obligation under the
Letter of Credit does not give the bank the right to
take possession of the goods covered by the Letter of
Credit
The opening of a L/C does not vest ownership of the goods
in the bank in the absence of a trust receipt agreement. A
letter of credit is a mere financial device developed by
merchants as a convenient and relatively safe mode of
dealing with the sales of goods to satisfy the seemingly
irreconcilable interests of a seller, who refuses to part
with his goods before he is paid, and a buyer, who wants
to have control of the goods before paying (Transfield
Philippines, Inc. v. Luzon Hydro Corporation, G.R. No.
146717, November 22, 2004).
PARTIES TO A LETTER OF CREDIT
Parties to a Letter of Credit transaction
1. Applicant/Buyer/Importer/Account Party – procures
the letter of credit, purchases the goods and obliges
himself to reimburse the issuing bank upon receipt of
the documents of title. The applicant has no
obligation to reimburse the issuing bank if the latter
pays without the stipulated documents or in case of
discrepant documents, unless the applicant waives
the discrepancy. He has the right to have the
marginal deposit deducted from the principal
obligation under the L/C and to have the interest
computed only on the balance and not on the face
value thereof.
1. Advising/notifying bank – the correspondent bank
(agent) of the issuing bank and determines the
apparent authenticity of the L/C. it assumes no
liability except to notify and/or transmit to the
beneficiary the existence of the L/C (FEATI Bank and
Trust Company v. CA, G.R. No. 94209).
2. Confirming bank –lends credence to the L/C issued by
a lesser known bank as if it were the one that issued
the letter of credit. Its obligation is similar to the
issuing bank. Thus, beneficiary may tender
documents to the confirming bank and collect
payment. It collects fees for such engagement and
obtains reimbursement from the issuing bank (ibid).
3. Paying bank – bank on which the drafts are to be
drawn, which may be the issuing bank, the advising
bank or another bank not in the city of the
beneficiary (ibid).
4. Negotiating bank – buys or discounts a draft under
the letter of credit. Its liability is dependent upon the
stage of the negotiation. If before negotiation, it has
no liability with respect to the seller but after
negotiation, a contractual relationship will then
prevail between the negotiating bank and the
beneficiary (ibid).
RIGHTS AND OBLIGATIONS OF PARTIES
Three (3) distinct but intertwined contracts in a
Letter of Credit transaction (2002, 2008 Bar)
1. Between the applicant/buyer/importer/account
party and the beneficiary/seller/exporter - The
applicant is the one who procures the letter of credit
and obliges himself to reimburse the issuing bank
upon receipt of the documents of title while the

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 LETTERS OF CREDIT
beneficiary is the one who in compliance with the
contract of sale ships the goods to the buyer and
delivers the documents of title and draft to the
issuing bank to recover payment for the goods. The
relationship between them is governed by the law on
sales if it is a commercial L/C but if it is a stand-by
letter of credit it is governed by the law on
obligations and contract.
2. Between the issuing bank and the beneficiary/
seller/exporter - The issuing bank is the one that
issues the letter of credit and undertakes to pay the
beneficiary upon strict compliance of the latter to the
requirements set forth in the letter of credit. On the
other hand, the beneficiary surrenders document of
title to the bank in compliance with the terms of the
L/C. Their relationship is governed by the terms of
the L/C.
3. Between the issuing bank and the applicant/
buyer/importer - The applicant obliges himself to
reimburse the issuing bank upon receipt of the
documents of title. Their relationship is governed by
the terms of the application and agreement for the
issuance of the L/C by the bank.
An Issuing Bank is not a guarantor
The concept of guarantee vis-a-vis the concept of
irrevocable L/C is inconsistent with each other. L/Cs are
primary obligations and not security contracts and while
Different roles and liabilities of the banks involved in Letter of Credit transactions
KIND OF BANK ROLE
Notifying/ Serves as an agent of the issuing bank;
Advising Bank
Warrants the apparent (Appearance to
unaided senses) authenticity of the
L/C (Bank of America NT & SA v. CA,
G.R. No. 105395, December 10, 1993).
Confirming Bank Lends credence to the L/C issued by a
lesser-known bank.
The confirming bank collects fees for
such engagement and obtains
reimbursement from the issuing bank.
Negotiating Bank Buys the seller’s draft and later on
sells the draft to the issuing bank.
3 FACULTY OF CIVIL LAW
they are security arrangements, they are not converted
thereby into contracts of guaranty (MWSS v. Hon. Daway,
G.R. No.160732, June 21, 2004).
The liability of issuing bank is primary and solidary.
Neither is the issuing bank entitled to the benefit of
excussion.
NOTE: By the Doctrine of Independence, the relationship
among: a) the issuing bank and the beneficiary; b) the
issuing bank and the applicant; and c) the nemeficiary and
the applicant while interrelated are separate, distinct and
independent of one another.
Entitlement of a bank to reimbursement
Once the issuing bank shall have paid the beneficiary after
the latter’s compliance with the terms of the L/C.
Presentment for acceptance to the customer/applicant is
not a condition sine qua non for reimbursement
(Prudential Bank v. IAC, G.R. No. 74886, December 8, 1992).
Consequence of payment upon an expired Letter of
Credit
An issuing bank which paid the beneficiary upon an
expired L/C can recover the payment from the applicant
which obtained the goods from the beneficiary to prevent
unjust enrichment (Rodzssen Supply Co. v. Far East Bank
and Trust Co, G.R. No. 109087, May 9, 2001).
LIABILITY
Does not incur any obligation more than just
notifying the seller/beneficiary of the opening of the
L/C after it has determined its apparent authority.
(Bank of America NT & SA v. CA, G.R. No. 105395,
December 10, 1993)
It does not guarantee the genuineness or due
execution of the L/C. It is not liable for damages even
if the L/C turns out to be spurious provided the
spurious character is not apparent on the face of the
instrument.
Direct obligation, as if it is the one which issued the
L/C.
Its obligation is similar to the issuing banks. Thus,
beneficiary may tender documents to the confirming
bank and collect payment.
Depends on the stage of negotiation, thus:
1. Before negotiation – No liability with respect to the
seller. Merely suggests its willingness to negotiate.
2. After negotiation – A contractual relationship will
then arise, making the bank liable. As holder, it has
the right to payment from the bank primarily liable
on the draft (either the issuing or confirming bank).
If the party primarily liable on the L/C refuses to
UNIVERSITY OF SANTO TOMAS
 MERCANTILE LAW
Paying Bank May either be the issuing bank or any
other bank in the place of the issuing
bank to facilitate payment to the
beneficiary.
BASIC PRINCIPLES OF LETTER OF CREDIT
Letters of Credit are not considered as Negotiable
Instruments
A L/C is not considered a negotiable instrument.
However, drafts issued in connection with L/C’s can be
considered negotiable instruments. The presumption that
the drafts drawn in connection with the L/C’s have
sufficient consideration applies (Lee v. CA, G.R. No. 117913,
February 1, 2002).
Q: ABC Company filed a Petition for Rehabilitation
with the Court. An order was issued by the Court, (1)
staying enforcement of all claims, whether money or
otherwise against ABC Company, its guarantors and
sureties not solidarily liable with the company; and
(2) prohibiting ABC Company from making payments
of the liabilities, outstanding as of the date of the filing
of the Petition. XYC Company is a holder of an
irrevocable Standby Letter of Credit which was
previously procured by ABC Company in favor of XYC
Company to secure performance of certain
obligations. In the light of the Order issued by the
Court, can XYC Company still be able to draw on their
Irrevovable Standby Letter of Credit when due?
Explain your answer. (2012 Bar)
A: XYC Company, the beneficiary of the standby letter of
credit, can draw on the letter of credit despite filing of
petition for corporate rehabilitation. The liability of the
bank that issued the letter of credit is primary and
solidary. Being solidary, the claims against them can be
pursued separately from and independently of the
rehabilitation case (MWSS v. Daway, supra).
DOCTRINE OF INDEPENDENCE
Doctrine of Independence/ Independence Principle
The relationship of the buyer and the bank is separate and
distinct from the relationship of the buyer and seller in the
main contract; the bank is not required to investigate if
the contract underlying the L/C has been fulfilled or not
because in transactions involving L/C, banks deal only
with documents and not goods (BPI v. De Reny Fabric
Industries, Inc., L-2481, October 16, 1970). In effect, the
buyer has no course of action against the issuing bank.
Two-Fold nature of the Independence Principle
1. Independence in toto where the credit is
independent from the justification aspect and is a
separate obligation from the underlying agreement.
This principle is illustrated by standby L/C; or
2. Independence only as to the justification aspect
which is identical with the same obligations under
the underlying agreement. This principle is
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
4
honor the draft, the negotiating bank has the right to
proceed against the drawer thereof.
Direct obligation.
illustrated by a commercial L/C or repayment
standby (Transfield v. Luzon Hydro Corp., supra).
Effect of the buyer’s failure to procure a Letter of
Credit to the main contract
The L/C is independent from the contract of sale. The
failure of Reliance to open, the appropriate L/C did not
prevent the birth of that contract, and neither did such
failure extinguish that contract. The opening of the L/C in
favor of Daewoo was an obligation of the buyer and the
performance of that obligation by buyer was a condition
of enforcement of the reciprocal obligation of seller to
ship the subject matter of the contract to buyer. But the
contract itself between the buyer and the sellerhad
already sprung into legal existence and was enforceable.
The failure of a buyer seasonably to furnish an agreed L/C
is a breach of the contract between buyer and seller.
Where the buyer fails to open a letter of credit as
stipulated, the seller or exporter is entitled to claim
damages for such breach. Damages for failure to open a
commercial credit may, in appropriate cases, include the
loss of profit which the seller would reasonably have
made had the transaction been carried out (Reliance
Commodities, Inc. v. Daewoo Industrial Co. Ltd., G.R. No.
100831, December 17, 1993).
Partial payments on the loan cannot be added in
computing the issuing bank’s liability under its own
Standby Letter of Credit
Although these payments could result in the reduction of
the actual amount, which could ultimately be collected
from the issuing bank, the latter’s separate undertaking
under its letters of credit remain. The letter of credit is an
absolute and primary undertaking which is separate and
distinct from the contract underlying it (Insular Bank of
Asia & America v. IAC, G.R. No. 74834, November 17, 1988).
In a standby letter of credit securing a loan obligation, any
payment of the debtor to the creditor should not be
deducted from the total obligation of the issuing bank to
the beneficiary. The issuing bank, after payment of the full
amount, is entitled to full reimbursement from the debtor.
But the debtor may recover excess payment from the
creditor to prevent unjust enrichment.
Q: SMC entered into an Exclusive Dealership
Agreement with Goroza wherein the latter was given
by SMC the right to trade, deal and market or
otherwise sell its various beer products.
Goroza applied for a credit line with SMC, but one of
the requirements for the credit line was a letter of
credit. Thus, Goroza applied for and was granted a
letter of credit by the PNB in the amount of
P2,000,000.00 and subsequently an additional credit
 LETTERS OF CREDIT
line of P2,400,000.00 which the latter approved.
Under the credit agreement, the PNB has the
obligation to release the proceeds of Goroza's credit
line to SMC upon presentation of the invoices and
official receipts of Goroza's purchases of SMC beer
products to PNB. Initially, Goroza was able to pay his
credit purchases with SMC. However, Goroza started
to become delinquent with his accounts. Demands
were made by the SMC against Goroza and PNB but
neither of them paid. SMC filed a Complaint for
collection of sum of money against PNB and Goroza.
RTC rendered a decision in favor of the plaintiff
ordering Goroza to pay. In the meantime, trial
continued with respect to PNB.
PNB moved to terminate the proceedings on the
ground that a decision was already rendered finding
Goroza solely liable. The RTC denied the PNB's motion
and issued a Supplemental Judgment which stated
that the RTC omitted by inadvertence to insert in its
decision the phrase "without prejudice to the decision
that will be made against the other co-defendant,
PNB, which was not declared in default." The CA
affirmed the Resolution of RTC.
Was the CA incorrect in affirming the RTC despite
complete adjudication of relief to SMC and the
perfection of appeal by Goroza?
A: No. It is clear from the proceedings held before and the
orders issued by the RTC that the intention of the trial
court is to conduct separate proceedings to determine the
respective liabilities of Goroza and PNB, and thereafter, to
render several and separate judgments for or against
them.
The propriety of a several judgment is borne by the fact
that SMC's cause of action against PNB stems from the
latter's alleged liability under the letters of credit which it
issued. On the other hand, SMC's cause of action against
Goroza is the latter's failure to pay his obligation to the
former. As to the separate judgment, PNB has a
counterclaim against SMC which is yet to be resolved by
the RTC. The so-called "independence principle" assures
the seller or the beneficiary of prompt payment
independent of any breach of the main contract and
precludes the issuing bank from determining whether the
main contract is actually accomplished or not.As the
principle's nomenclature clearly suggests, the obligation
under the letter of credit is independent of the related and
originating contract. In brief, the letter of credit is
separate and distinct from the underlying transaction.
In other words, PNB cannot evade responsibility on the
sole ground that the RTC judgment found Goroza liable
and ordered him to pay the amount sought to be
recovered by SMC. PNB's liability, if any, under the letter
of credit is yet to be determined (Philippine National Bank
vs San Miguel Corporation, GR No. 186063, January 15,
2014).
Q: AAA Carmakers opened an Irrevocable Letter of
Credit with BBB Banking Corporation with CCC Cars
Corporation as beneficiary. The irrevocable Letter of
Credit was opened to pay for the importation of ten
5 FACULTY OF CIVIL LAW
(10) units of Mercedes Benz S class. Upon arrival of
the cars, AAA Carmakers found out that the cars were
all not in running condition and some parts were
missing. As a consequence, AAA Carmakers instructed
BBB Banking Corporation not to allow drawdown on
the Letter of Credit. Is this legally possible? (2012
Bar)
A: a. No, because under the "Independence Principle",
conditions for the drawdown on the Letters of Credit are
based only on documents, like shipping documents, and
not with the condition of the goods subject of the
importation.
Q: X Corporation entered into a contract with PT
Construction Corporation for the latter to construct
and build a sugar mill within six (6) months. They
agreed that in case of delay, PT Construction
Corporation will pay X Corporation P100,000.00 for
everyday of the delay. To ensure payment of the
agreed amount of damages, PT Construction
Corporation secured from Atlantic Bank a confirmed
and irrevocable letter of credit which was accepted by
X Corporation in due time. One week before the
expiration of the six (6) month period, PT
Construction Corp. requested for an extension of time
to deliver claiming that the delay was due to the fault
of X Corporation. A controversy as to the cause of
delay which involved the worksmanship of the
building ensued. The controversy remained
unsolved. Despite the controversy, X corporation
presented a claim against Atlantic Bank by executing
a draft against the letter of credit.
a. Can Atlantic Bank refuse payment due to the
unresolved controversy? Explain.
b. Can X Corporation claim directly from PT
Construction Corp.? Explain. (2008 Bar)
A:
a. No. Atlantic Bank cannot refuse to pay X Corporation.
This is because of the Doctrine of Independence
which provides that the obligation of the issuing
bank to pay the beneficiary does not depend on the
fulfillment or non-fulfillment of the contract
supporting the letter of credit. The only instance
where Atlantic Bank can refuse payment is when X
Corporation was not able to strictly comply with the
letter of credit.
b. Yes. X Corporation may directly claim from PT
Construction Corporation. A letter of credit by itself
does not come into operation without a contract
supporting it. It is no a contract that can stand on its
own, it needs a supporting contract. It is merely an
alternative course and does not in any way prevent
the beneficiary from directly claiming from the
applicant (Transfield Philippines, Inc. v. Luzon Hydro
Corporation, supra).
UNIVERSITY OF SANTO TOMAS
 MERCANTILE LAW
FRAUD EXCEPTION PRINCIPLE
The Exception to the Independence Principle (2010
Bar)
The “Fraud Exception Principle” is the exception to the
Independence Principle. It provides that the
untruthfulness of a certificate accompanying a demand
for payment under a standby letter of credit may qualify
as fraud sufficient to support an injunction against
payment.
Under the fraud exception principle, the beneficiary may
be enjoined from collecting on the letter of credit if the
beneficiary committed fraud by substituting fraudulent
documents even if on their face the documents complied
with the requirements.
This principle refers to fraud in relation with the
independent purpose or character of the L/C and not only
fraud in the performance of the obligation or contract
supporting the letter of credit (Transfield vs. Luzon Hydro
Corp., supra).
Remedy for fraudulent abuse
Injunction against payment is the remedy; provided the
requisites enumerated immediately below this item are
present.
Requisites in order to enjoin the Beneficiary from
drawing or collecting under the Letter of Credit on the
basis of fraud (PAI)
1. Clear Proof of fraud;
2. Fraud constitutes fraudulent Abuse of the
independent purpose of the letter of credit and not
only fraud under the main agreement; and
3. Irreparable Injury might follow if injunction is not
granted or the recovery of damages would be
seriously damaged (Ibid.)
DOCTRINE OF STRICT COMPLIANCE
The documents tendered by the seller/beneficiary must
strictly conform to the terms of the L/C. The tender of
documents must include all documents required by the
letter. It is not a question of whether or not it is fair or
equitable to require submission of documents but
whether or not the documents were agreed upon. Thus, a
correspondent bank which departs from what has been
stipulated under the L/C acts on its own risk and may not
thereafter be able to recover from the buyer or the issuing
bank, as the case may be, the money thus paid to the
beneficiary (Feati Bank and Trust Company v. CA, supra).
Q: BV agreed to sell to AC, a Ship and Merchandise
Broker, 2500 cubic meters of logs at $27 per cubic
meter FOB. After inspecting the logs, CD issued a
purchase order.
On the arrangement made upon instruction of the
consignee, H&T Corporation of LA, California, the SP
Bank of LA issued an irrevocable letter of credit
available at sight in favor for the total purchase price
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
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of the logs. The letter of credit was mailed to FE Bank
with the instruction "to forward it to the beneficiary".
The letter of credit provided that the draft to be
drawn is on SP Bank and that it be accompanied by,
among other things, a certification from AC, stating
that the logs have been approved prior shipment in
accordance with the terms and conditions of the
purchase order.
Before loading of the vessel chartered by AC, the logs
were inspected by custom inspectors and
representatives of the Bureau of Forestry, who
certified to the good condition and exportability of
the logs. After loading was completed, the Chief Mate
of the vessel issued a mate receipt of the cargo which
stated that the logs are in good condition. However,
AC refused to issue required certification in the letter
of credit. Because of the absence of certification, FE
Bank refused to advance payment on the letter of
credit.
a. May FE Bank be held liable under the Letter of
Credit? Explain.
b. Under the facts above, the seller, BV, argued that
FE Bank, by accepting the obligation to notify him
that the irrevocable letter of credit has been
transmitted to it on his behalf, has confirmed the
letter of credit. Consequently, FE Bank is liable
under the letter of credit. Is the argument
tenable? Explain. (1993 Bar)
A.
a. FE Bank cannot be held liable under the letter of
credit since the certificate is not issued by BV. It is a
settled rule in commercial transactions involving
letters of credit that the documents tendered must
strictly conform to the terms of the letter of credit.
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 and Trust Company v. CA,
supra).
b. The argument made by BV is untenable. The FE Bank
in this case is only a notifying bank and not a
confirming bank. It is tasked only to notify and/or
transmit the required documents and its obligation
ends there. It is not privy to the contract between the
parties, its relationship is only with that of the issuing
bank and not with the beneficiary to whom he
assumes no liability.
Q: At the instance of CCC Corporation, AAA Bank
issued an irrevocable Letter of Credit in favor of BBB
Corporation. The terms of the irrevocable L/C state
that the beneficiary must present certain documents
including a copy of the Bill of Lading of the
importation for the bank to release the funds, BBB
Corporation could not find the original copy of the Bill
of Lading so it instead presented to the bank a Xerox
copy of the Bill of Lading. Would you advice the bank
 LETTERS OF CREDIT
to allow the drawdown on the Letter of Credit? (2012 documents set as conditions for the release of the fund has
Bar) to be strictly complied with or else funds will not be
released.
A: No, because the rule of strict compliance in commercial
transactions involving letters of credit, requiring

Doctrine of Strict Compliance vs. Independence Principle

Basis Doctrine of Strict Compliance Doctrine of Independence

Principle Documents tendered by the seller or Relationship of the buyer and the bank is
beneficiary must strictly conform to the separate and distinct from the relationship of
terms of the letter of credit. the buyer and seller in the main contract.
Consequence of the A correspondent bank which departs from The bank is not required to investigate whether
Doctrine what has been stipulated and acts on its the contract underlying the L/C has been
own risk may not thereafter be able to fulfilled or not.
recover.
Payment of the Beneficiary cannot draw on the letter of Fraud Exception Principle can enjoin
Beneficiary credit if he did not comply with its terms beneficiary from drawing or collecting under
and conditions. the L/C if there is fraud in relation with the
independent purpose of the L/C.

UNIVERSITY OF SANTO TOMAS

7 FACULTY OF CIVIL LAW
 MERCANTILE LAW
TRUST RECEIPTS LAW
DEFINITION/CONCEPT OF A
TRUST RECEIPT TRANSACTION
Trust Receipt (TR) transaction
It is any transaction between the entruster and entrustee:
1. Whereby the entruster who owns or holds title or
security interests over certain specified goods,
documents or instrument (GDI), releases the same to
the possession of entrustee upon the latter’s
execution of a TR agreement.
2. Wherein the entrustee binds himself to hold the GDI
in trust for the entruster and, in case of default,
a. to sell or otherwise dispose such GDI with the
obligation to turn over to the entruster the
proceeds to the extent of the amount owing to it
or
b. to turn over the GDI itself if not sold or otherwise
disposed of in accordance with the terms and
conditions specified in the TR.
A TR is a commercial document whereby the bank
releases the goods in the possession of the entrustee but
retains ownership thereof while the entrustee shall sell
the goods and apply the proceeds for the full payment of
his liability with the bank. It is a security arragement to
which a bank acquires ownership of the imported
personal property (Garcia vs. Court of Appeals, G.R. No.
119845, July 5, 1996). It is a document which expresses a
security transaction where the lender, having no prior
title to the goods on which the lien is to be constituted,
and not having possession over the same since possession
thereof remains in the borrower, lends him money to the
borrower on security of the goods which borrowe is
privileged to sell, clear of the lien, and with an agreement
to pay all or part of the sale proceeds to the lender
(Metropolitan Bank vs. Go, G.R. No. 155647, November 23,
2007).
Subjects of a Trust Receipt transaction (GDI)
1. Goods – shall include chattels and personal property
other than: money, things in action, or things so
affixed to land as to become a part thereof (P.D. 115,
Sec. 3 [d]). Goods must be object of lawful commerce.
2. Documents – written or printed evidence of title to
goods (P.D. 115, Sec. 3 [a]). E.g. L/C.
3. Instruments – negotiable instruments; certificates of
stock, or bond or debenture for the payment of
money issued by a corporation, or certificates of
deposit, participation certificates or receipts, credit
or investment instruments of a sort marketed in the
ordinary course of business or finance (P.D. 115, Sec.
3 [e]). E.g. checks, drafts, promissory notes, bills of
exchange.
Parties to a Trust Receipt transaction
1. Entruster - A lender, financer or creditor. Person
holding title over the GDI subject of a TR transaction;
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
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releases possession of the goods upon execution of
TR (P.D. 115, Sec. 3[c]).
2. Entrustee - A borrower, buyer, importer or debtor. He
is the person to whom the goods are delivered for
sale or processing in trust, with the obligation to
return the proceeds of sale of the goods or the goods
to the entruster (P.D. 115, Sec. 3[b]).
Transactions NOT considered as a Trust Receipt
1. A sale by a person in the business of selling for profit
who retains general property rights in the GDI.
2. Where the seller retains title or other interest as
security for the payment of the purchase price (P.D.
115, Sec. 4).
The sale of goods by a person in the business of
selling goods, for profit, who at the outset of the
transaction, has as against the buyer, general
property rights in such goods, or who sells goods to
the buyer on credit, retaining title or other interest as
security for the payment of the purchase price, does
not constitute as trust receipt transaction. There is
no trust receipt, notwithstanding the label, if goods
offered as security for a loan accommodation are
goods sold to the debtor unde a supposed trust
receipt transaction (Sps. Dela Cruz vs. Planters
Products, Inc., G.R. No. 158649, February 18, 2013, in
Divina, 2014).
3. If the entrustee is already the owner or in possession
of the goods before delivery of the loan and execution
of the trust receipt transaction, the transaction shall
be considered a simple loan even though the parties
may have denominated the agreement as one of TR.
To be in the nature of TR, the entruster should have
financed the acquisition or importation of the goods.
The funds should have been delivered before or
simultaneously with delivery of the goods.
4. Where the entruster bank knew even before the
execution of the trust receipt agreements that the
construction materials covered were never intended
by the entrustee for resale or for the manufacture of
items to be sold (Hur Tin Yang v. People, supra).
Two views regarding Trust Receipts
1. As a commercial document - the entrustee binds
himself to hold the designated GDI in trust for the
entruster and to sell or otherwise dispose of GDI with
the obligation to turn over to the entruster the
proceeds if they are unsold or not otherwise
disposed of, in accordance with the terms and
conditions specified in the TR (P.D. 115, Sec. 4).
2. As a commercial transaction – It is a separate and
independent security transaction intended to aid in
financing importers and retail dealers who do not
have sufficient funds (Nacu v. CA, G.R. No. 108638,
March 11, 1994).
 TRUST RECEIPTS LAW
A Trust Receipt is not a negotiable instrument
Like L/C’s, TR’s are not negotiable instruments. The
presumption of consideration under the negotiable
instrument law may not necessarily be applicable to trust
receipts (Lee v. CA, supra).
Q: C contracted D to renovate his commercial
building. D ordered construction materials from E
and received delivery thereof. The following day, C
went to F Bank to apply for a loan to pay the
construction materials. As security for the loan, C was
made to execute a trust receipt. One year later, after C
failed to pay the balance on the loan, F Bank was
charged with violation of the Trust Receipts Law. Will
the case against C prosper? Reason briefly. (2007 Bar)
A: The case of estafa against C will not prosper. PD 115
does not apply in this case because the proceeds of the
loan are used to renovate C's commercial building. TR
transactions are intended to aid in financial importers and
retail dealers who do not have sufficient funds or
resources to finance the importation or purchase of
merchandise and who may not be able to acquire credit
except through utilization, as collateral, of the
merchandise imported or purchased. The transactions
contemplated under the Trust Receipts Law mainly
involved acquisition of goods for the sale thereof. The
transaction is properly called a simple loan with the trust
receipt as merely a collateral or security for the loan (Ng
vs. People, supra).
Q: Supermax is a domestic corporation engaged in the
construction business. On various occasions,
Metrobank extended several commercial letters of
credit to Supermax. These commercial credits were
used by Supermax to pay for delivery of several
construction materials to be used in their
construction business. Thereafter, Metrobank
required Hur Tin Yang, as representative and Vice-
President for Internal Affairs of Supermax, to sign 24
trust receipts as security for the construction
materials. When 24 TRs fell due and despite the
receipt of demand letter, Supermax failed to pay or
deliver the goods or proceeds to Metrobank. As the
demands fell on deaf ears, Metrobank filed a
complaint for estafa against Hur Tin Yang.
Hur Tin Yang, while admitting signing the trust
receipts, argued that said trust receipts were
demanded by Metrobank as additional security for
the loans extended to Supermax for the purchase of
construction equipments and materials, and that
Metrobank knew all along that the construction
materials subject of the TRs were not intended for
resale but for personal use of Supermax relating to its
construction business.
Is Hur Tin Yang not guilty of estafa?
A: Yes. In the instant case, the factual findings of the trial
and appellate courts reveal that the dealing between Hur
Tin Yang and Metrobank was not a TR transaction but one
of simple loan. His admission – that he signed the TRs on
behalf on Supermax, which failed to pay the loan or turn
9 FACULTY OF CIVIL LAW
over the proceeds of the sale or the goods to Metrobank
upon demand – does not conclusively prove that the
transaction was, indeed, a trust receipts transaction. In
contract to the nomenclature of the transaction, the
parties really intended a contract of loan. The Court, in Ng
vs. People, and Land Bank of the Philippines v. Perez ,cases
which are in all four corners the same as the instant case,
ruled that the fact that the entruster bank knew even
before the execution of the trust receipt agreements that
the construction materials covered were never intended
by the entrustee for resale or for the manufacture of items
to be sold is sufficient to prove that the transaction was a
simple loan and not a trust receipts transaction.
When both parties enter into an agreement knowing fully
well that the return of the goods subject of the trust
receipt is not possible even without any fault on the part
of the trustee, it is not a trust receipt transaction
penalized under Sec. 13 of PD 115 in relation to Art. 315,
par. 1(b) of the RPC, as the only obligation actually agreed
upon by the parties would be the return of the proceeds
of the sale transaction. This transaction becomes a
mere loan, where the borrower is obligated to pay the
bank the amount spent for the purchase of the goods
(Hur Tin Yang vs. People, supra).
LOAN/SECURITY FEATURE
Two features of a Trust Receipt transaction
1. Loan feature - is brought about by the fact that the
entruster financed the importation or purchase of
the goods under TR (Sps. Vintola vs. Insular Bank of
Asia and America, G.R. No. 73271, May 29, 1987).
2. Security feature - property interest in the GDI to
secure performance of some obligation of the
entrustee or of some third persons to the entruster
(Rosario Textile Mills Corp. v. Home Bankers Savings
and Trust Company, G.R. No. 137232, June 29, 2005).
Effects of the dual features of a Trust Receipt
1. The entrustee cannot absolutely be relieved of the
obligation to pay his loan just because he
surrendered the goods to the entruster if the
entruster refuses to accept and subsequently
deposited them in the custody of the court (Sps.
Vintola vs. Insular Bank of Asia and America, supra).
2. The entrustee cannot be relieved of his obligation to
pay the loan in favor of the entruster bank in case of
loss or destruction of the GDI (Rosario Textile Mills
Corp. vs. Home Bankers Savings and Trust Company,
supra).
3. Where the proceeds of the sale are insufficient to
satisfy the loan executed by the entrustee, the
entruster bank can institute an action to collect the
deficiency (Landl Co. vs. Metropolitan Bank and Trust
Co. G.R. No. 159622, July 30, 2004).
4. Repossession by the entruster of the GDI does not
amount to dacion en pago. The repossession of the
goods by the entrustee was merely to secure the
payment of its obligation to the entrustor and not for
the purpose of transferring ownership in satisfaction
UNIVERSITY OF SANTO TOMAS
 MERCANTILE LAW
of the obligation (PNB vs. Pineda, G.R. No. L-46658
May 13, 1991).
OWNERSHIP OF THE GOODS, DOCUMENTS, AND
INSTRUMENTS UNDER A TRUST RECEIPT
Real owner of the articles subject of the Trust Receipt
transaction
The real owner of the articles subject of the TR is the
entrustee who binds himself to hold the designated GDI.
The entruster merely holds a security interest. If under
the trust receipt, the bank is made to appear as the owner,
it was but an artificial expedient, more of legal fiction than
fact, for if it were really so, it could dispose of the goods in
any manner it wants, which it cannot do, just to give
consistency with purpose of the trust receipt of giving a
stronger security for the loan obtained by the
importer. To consider the bank as the true owner from the
inception of the transaction would be to disregard the
loan feature thereof (Rosario Textile Mills Corp. vs. Home
Bankers Savings and Trust Company, supra).
The entrustee, however, cannot mortgage the goods
because one of the requisites of a valid mortgage is that
the mortgagor must be the absolute owner of the property
mortgaged or must have free disposal thereof. Entrustee
is not the absolute owner of the goods under trust receipt
nor has free disposal thereof.
The entrustee is not responsible as principal or vendor
under any sale or contract to sell made by the entrustee.
RIGHTS OF THE ENTRUSTER
1. To be entitled to the Proceeds from the sale of the
GDI to the extent of the amount owing to him.
2. To the Return of the GDI in case of non-sale and
enforcement of all other rights conferred to him in
the TR.
3. May Cancel the trust and take possession of the
goods, upon default or failure of the entrustee to
comply with any of the terms and conditions of the
TR (P.D. 115, Sec. 7).
4. To Sell the goods with at least five day notice to the
entrustee and apply the proceeds in payment of the
obligation. Entrustee liable to pay deficiency, if any.
VALIDITY OF THE SECURITY INTEREST AS AGAINST
THE CREDITORS OF THE ENTRUSTEE/ INNOCENT
PURCHASERS FOR VALUE
Entruster has a better right over the goods than that
of the creditors of the entrustee
The entruster’s security interest in goods, documents, or
instruments pursuant to the written terms of a TR shall be
valid as against all creditors of the entrustee for the
duration of the TR agreement (P.D. 115, Sec. 12).
The security interest of the entruster over the goods
under the trust receipt is superior to the monetary claims
of the laborers of the entrustee.
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
10
Purchaser in good faith can defeat the rights of the
entruster over the goods
A purchaser in good faith acquires the goods, documents
or instruments free from the entruster's security interest
(P.D. 115, Sec. 11).
OBLIGATION AND LIABILITY
OF THE ENTRUSTEE
Obligations and liabilitites of the Entrustee (HR-IKRO)
1. To Hold GDI in trust for the entruster and to dispose
of them strictly in accordance with the terms of TR;
2. To Receive the proceeds of the sale for the entruster
and to turn over the same to the entruster to the
extent of amount owing to the latter;
3. To Insure GDI against loss from fire, theft, pilferage
or other casualties;
4. To Keep GDI or the proceeds thereof, whether in
money or whatever form, separate and capable of
identification as property of the entruster;
5. To Return GDI to the entruster in case they could not
be sold or upon demand of the entruster; and
6. To Observe all other conditions of the TR (P.D. 115,
Sec. 9).
NOTE: Not all obligations of the entrustee are criminal in
nature. The gravamen of the criminal offense under the
trust receipts law is the failure of the entrustee to deliver
the proceeds of the sale to the entruster up to the extent
of the entrutee's obligations or the return of the same in
case of non-sale.
PAYMENT/DELIVERY OF PROCEEDS OF SALE
OR DISPOSITION OF GOODS, DOCUMENTS
OR INSTRUMENTS
Disposition of the proceeds of the sale of the goods,
documents or instruments
The proceeds of the sale of GDI shall be applied in the
following (SDP):
1. Expenses of the Sale;
2. Expenses Derived from re-taking, keeping and
storing the GDI; and
3. Principal obligation (P.D. 115, Sec. 7).
NOTE: Full payment of the loan or delivery of the sale
proceeds equivalent to the full amount of the obligation
extinguishes both criminal and civil liabilities of the
entrustee. In case of deficiency, the entrustee shall be
liable thereon. However, any excess shall belong to him.
Q: The President of Novachem, Crisologo, applied for
commercial letters of credits from private
respondent Chinabank to finance the purchase of
1,600 kgs. of amoxicillin trihydrite micronized from
Hyundai Chemical Company in South Korea and glass
containers from San Miguel Corporation.
Subsequently, Chinabank issued Letters of Credit.
After petitioner received the goods, he executed for
and in behalf of Novachem the corresponding trust
receipt agreements in favour of Chinabank.
 TRUST RECEIPTS LAW
On January 2004, Chinabank, through its staff
assistant, filed before the City Prosecutor’s Office a
Complaint-Affidavit charging Crisologo for violation
of P.D. No. 115 in relation to Article 315 of RPC for his
purported failure to turn-over the goods or the
proceeds from the sale thereof. RTC rendered a
Decision acquitting Crisologo of criminal charges. It
however adjudged him civilly liable to Chinabank. On
appeal of the civil aspect, the CA affirmed the RTC
Decision. It noted that the Crisologo signed the
“Guarantee Clause” of the trust receipt agreements in
his personal capacity and even waived the benefit of
excussion against Novachem. As such, he is personally
and solidarily liable with Novachem. Is the decision of
CA correct?
A: Yes. Section 13 of the Trust Receipts Law explicitly
provides that if the violation or offense is committed by a
corporation, as in this case, the penalty provided for
under the law shall be imposed upon the directors,
officers, employees or other officials or person
responsible for the offense, without prejudice to the civil
liabilities arising from the criminal offense.
In this case, Crisologo was acquitted of the charge for
violation of the Trust Receipts Law in relation to Article
315 of the RPC. As such, he is relieved of the corporate
criminal liability as well as the corresponding civil
liability arising therefrom. However, as correctly found by
the RTC and CA, he may still be held liable for the trust
receipts and L/C transactions he had entered into in
behalf of Novachem.
Settled is the rule that debts incurred by directors,
officers, and employees acting as corporate agents are not
the direct liability but of the corporation they represent,
EXCEPT if they contractually agree/stipulate or assume to
be personally liable for the corporate’s debts, as in this
case. The RTC and CA correctly adjudged petitioner
personally and solidarily liable with Novachem for the
obligations secured by the subject trust receipts based on
the finding that he signed the guarantee clauses therein in
his personal capacity an even waived the benefit of
excussion (Crisologo vs. People of the Philippines, G.R. No.
199481, December 3, 2012).
RETURN OF GOODS, DOCUMENTS OR
INSTRUMENTS IN CASE OF NON-SALE
Obligation of the Entrustee in case the goods,
documents or instruments were not sold
The entrustee should return the GDI to the entruster (P.D.
115, Sec. 4).
The return of the GDI in case of non-sale extinguishes only
the criminal liability of the entrustee unless he pays in full
his loan obligation. The consequent acquittal of the
entrustee in the criminal case does not bar the filing of a
separate civil action to enforce the civil liability of the
entrustee.
The failure to turn over goods or proceeds realized from
the sale thereof is a criminal offense under Art. 315(l) (b)
11
of RPC (estafa) except if he disposed of the goods in
accordance with the terms.
Q: CCC Car, Inc. obtained a loan from BBB Bank, which
fund was used to import ten (10) units of Mercedes
Benz S class vehicles. Upon arrival of the vehicles and
before release of said vehicles to CCC Car, Inc. X and Y,
the President and Treasurer, respectively, of CCC Car,
Inc. signed the Trust Receipt to cover tha value of the
ten (10) units of Mercedes Benx S class vehicles after
which, the vehicles were all delivered to the Car
display room of CCC Car, Inc. Sale of the vehicles were
slow, and it took a month to dispose of the ten (10)
units. CCC Car, Inc. wanted to be in business and to
save on various documentations required by the
bank, decided that instead of turning over the
proceeds of the sales, CCC Car Inc. used the proceeds
to buy another ten (10) units of BMW 3 series.
a. Is the action of CCC Car, Inc. legally justified?
Explain your answer.
b. Will the corporate officers of CCC Car, Inc. be held
liable under the circumstances? Explain your
answer. (2012 Bar)
A:
a. No. It is the obligation of the entrustee, CCC Car,Inc.
to receive the proceeds of the sale of the goods
covered by the trust receipts in trust for the entruster
and to turn over the same to him th extent of the
obligation (P.D. 115, Sec. 4)
b. Yes. Failure of the entrustee to turn over the
proceeds of the sale of the goods shall constitute the
crime of estafa. If the violation is committed by a
juridical entity, the penalty shall be imposed upon
the directors, officers, employees or other officials or
persons therein responsible for the offense, without
prejudice to the civil liabilities arising from the
criminal offense. Hence, the corporate officers are
criminally liable for the violation of the law being he
human agent responsible for the same (P.D. 115, Sec.
13).
LIABILITY FOR LOSS OF GOODS,
DOCUMENTS OR INSTRUMENTS
Entrustee shall bear the loss of the goods, documents,
or instruments which are the subject of a Trust
Receipt
Loss of the GDI which is the subject of a TR, pending their
disposition, irrespective of whether or not it was due to
the fault or negligence of the entrustee, shall not
extinguish his obligation to the entruster for the value
thereof (P.D. 115, Sec. 10).
Res Perit Domino in Trust Receipt
Principle of Res Perit Domino is not a valid defense against
an Entrustee in cases of loss or destruction of the goods,
documents, or instruments secured by a Trust Receipt.
For the principle of res perit domino to apply the entrustee
must be the owner of the goods at the time of the loss. A
TR is a security agreement, pursuant to which a bank
acquires a ‘security interest’ in the goods. It secures an
indebtedness and there can be no such thing as security
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
interest that secures no obligation. If under a trust receipt
transaction, the entruster is made to appear as the owner,
it was but an artificial expedient, more of legal fiction than
fact, for if it were really so, it could dispose of the goods in
any manner it wants. Thus, the ownership of the goods
remaining with the entrustee, he cannot be relieved of the
obligation to pay his/her loan in case of loss or
destruction (Rosario Textile Mills vs. Home Bankers
Association, supra).
PENAL SANCTION IF OFFENDER IS A CORPORATION
Elements Estafa in Trust Receipt
In order that the entrustee may be validly prosecuted for
estafa under Art. 315, paragraph 1(b) of the RPC, in
relation with Sec. 13 of PD 115, the following elements
must be established (R-MAD):
1. The entrustee Received the subject goods in trust or
under the obligation to sell the same and to remit the
proceeds thereof to the entruster, or to return the
goods if not sold;
2. The entrustee Misappropriated or converted the
goods and/or the proceeds of the sale;
3. The entrustee performed such acts with Abuse of
confidence to the damage and prejudice of entruster;
and
4. A Demand was made on the entrustee by entruster
for the remittance of the proceeds or the return of the
unsold goods (Land Bank of the Philippines vs. Perez,
GR No. 166884, June 13, 2012).
NOTE: If proof as regards the delivery of GDI to the
accused (entrustee) is insufficient, estafa cannot lie
(Ramos vs. CA, G.R. No. L-3992-25, August 21, 1987).
Compliance with the obligation under the Trust
Receipt agreement vis-a-vis criminal liability
1. If compliance occurred before the criminal charge-
there is no criminal liability.
2. If compliance occurred after the charge even before
conviction- the criminal action will not be
extinguished.
P.D. 115 does not violate the prohibition in the
Constitution against imprisonment for non-payment
of a debt
What is being punished is the dishonesty and abuse of
confidence in the handling of money or goods to the
prejudice of another regardless of whether the latter is
the owner or not. It does not seek to enforce payment of
the loan. Thus, there can be no violation of a right against
imprisonment for non-payment of a debt (People vs.
Nitafan, G.R. No. 81559, April 6, 1992).
Q: Is lack of intent to defraud a bar to the prosecution
of these acts or omissions? (2006 Bar)
A: No. The mere failure to account or return gives rise to
the crime which is malum prohibitum. There is no
requirement to prove intent to defraud (Ching vs.
Secretary of Justice, G.R. No. 164317, February 6, 2006).
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
12
Penal sanction is not available if the goods are not
intended for sale or resale
To be a TR transaction, the goods must be intended for
sale or resale. The Supreme Court, in one case, held that
the trial court erred in ruling that the agreement in the
case was a TR transaction because the goods involved
were intended to be used in the fabrication of steel
communication towers.
The Court further ruled that, “the true nature of a trust
receipt transaction can be found in the ‘whereas’ clause of
PD 115 which states that a trust receipt is to be utilized
‘as a convenient business device to assist importers and
merchants solve their financing problems.’ Obviously,
the State, in enacting the law, sought to find a way to assist
importers and merchants in their financing in order to
encourage commerce in the Philippines.”
The principle is of course not limited in its application to
financing importations, since the principle is equally
applicable to domestic transactions. Regardless of
whether the transaction is foreign or domestic, it is
important to note that the transactions discussed in
relation to trust receipts mainly involved sales (Ng vs.
People, G.R. No. 173905, April 23, 2010).
In another case it was held that when both parties enter
into an agreement knowing that the return of the goods
subject of the trust receipt is not possible even without
any fault on the part of the entrustee, it is not a trust
receipt transaction penalized under Section 13 of P.D.
115; the only obligation actually agreed upon by the
parties would be the return of the proceeds of the sale
transaction. The transaction becomes a mere loan, where
the borrower is obligated to pay the bank the amount
spent for the purchase of the goods (LBP vs. Perez, supra).
Penal sanction when the offender is a corporation
Though the entrustee is a corporation, nevertheless, the
law specifically makes the officers, employees or other
officers or persons responsible for the offense, without
prejudice to the civil liabilities of such corporation and/or
board of directors, officers, or other officials or employees
responsible for the offense.
If the crime is committed by a corporation or other
juridical entity, the directors, officers, employees or other
officers thereof responsible for the offense rshall be
charged and penalized for the crime, precisely because of
the nature of the crime and the penalty therefor. A
corporation cannot be arrested and imprisoned; hence,
cannot be penalized for a crime punishable by
imprisonment (Ching vs. Secretary of Justice, supra).
Rationale behind the accountability of the officers of
the corporation
The rationale is that such officers or employees are vested
with the authority and responsibility to devise means
necessary to ensure compliance with the law and, if they
fail to do so, are held criminally accountable; thus, they
have a responsible share in the violations of the law (ibid).
 TRUST RECEIPTS LAW
NOTE: An officer of a corporation who signed a TR cannot
hide behind the cloak of the separate corporate
personality of the corporation, where “he is the actual,
present and efficient actor.” Corporate officers or
employees, through whose act, default or omission the
corporation commits a crime, are individually guilty of the
crime. The principle applies whether or not the crime
requires the consciousness of wrongdoing (Ching vs.
Secretary of Justice, supra).
REMEDIES AVAILABLE
Defenses available to negate CRIMINAL liability of the
Entrustee (CoCo CaCo No LP)
1. Compliance with the terms of the TR either by
payment, return of the proceeds or return of the
goods (P.D. 115, Sec. 13).
2. Consignment.
3. Cancellation of the TR agreement and taking into
possession of the goods by the entruster.
NOTE: Repossession of the goods will extinguish
only the criminal liability.
4. Compromise by parties before filing of information in
court. Compromise of estafa case arising from TR
transaction, after the case has been filed in court does
not amount to novation and does not erase the
criminal liability of the accused (Ong vs. CA, G.R. No.
L-58476, September 2, 1983).
5. Non-receipt of the goods by the entrustee or where
proof of delivery of goods to the accused is
insufficient. (Ramos vs. CA, supra).
6. Loss of goods without fault of the entrustee.
7. The transaction does not fall under PD 115 (Colinares
vs. CA, G.R. No. 90828, September 5, 2000, Consolidated
Bank and Trust Corporation vs. CA, G.R. No. 114286,
April 19, 2001).
NOTE: In these cases, the execution of a TR was made
after the goods covered by it had been purchased, making
the buyer the owner thereof. The transaction does not
involve a TR but a simple loan even though the parties
denominate the transaction as one of a TR.
Q: Ricardo mortgaged his fishpond to AC Bank to
secure a P1M loan. In a separate transaction, he
opened a letter of credit with the same bank for
$500,000 in his favor of HS Bank, a foreign bank, to
purchase outboard motors. Likewise, Ricardo
executed a Surety Agreement in favor of AC Bank.
a. Can AC Bank take possession of the outboard
motors? Why?
b. Can AC Bank also foreclose the mortgage over the
fishpond? (2005 Bar)
A:
a. If what Ricardo executed is a trust receopt, AC Bank
can take possession of the outboard motors so that it
can exercise its lien and sell them. If what Ricardo
executed is a Surety Agreement, AC Bank cannot take
possession of the outboard motors because it has no
lien on them.
13
b. AC Bank can also foreclose the mortgage over the
fishpond if Ricardo fails to pay the loan of P1M.
Failure of the entrustee to deliver the proceeds of sale
will give the entruster the right to file a civil action
and a criminal action for estafa (1991, 1997, 2006
Bar)
Sec. 13 of P.D. 115, Trust Receipts Law, provides that the
failure of an entrustee to turn over the proceeds of the
sale of the goods, documents or instruments covered by a
trust receipt to the extent of the amount owing to the
entruster or as appears in the trust receipt or to return
said goods, documents or instruments if they were not
sold or disposed of in accordance with the terms of the
trust receipt shall constitute the crime of estafa.
The civil action may be instituted in the criminal action or
separately filed independently of the criminal action. The
criminal action is based on ex-delictu for violation of the
law while the civil action is based on ex-contractu for
violation of the trust receipt arrangement.
Repossession of goods
Repossession of the goods by the Entruster cannot be
considered as payment. Payment would legally result only
after the entruster has foreclosed on the securities, sold
the same and applied the proceeds thereof to the
entrustee’s obligation. Since the TR is a mere security
arrangement, the repossession by the entruster cannot be
considered payment of the loan/advances given to the
entrustee under the letter of credit/trust receipt (PNB v.
Pineda, supra).
Cancellation of Trust Receipt in case of default
In the event of default by the Entrustee on his obligation
under the Trust Receipt agreement, it is NOT absolutely
necessary for the Entruster to cancel the trust and take
possession of the goods to be able to enforce his right
thereunder. The law uses the word "may" in granting to
the entruster the right to cancel the trust and take
possession of the goods. Consequently, the entrustee has
the discretion to avail of such right or seek any alternative
action, such as a third party claim or a separate civil action
which it deems best to protect its right, at any time upon
default or failure of the entrustee to comply with any of
the terms and conditions of the trust agreement (South
City Homes, Inc. vs. BA Finance Corporation, G.R. No.
135462, December 7, 2001).
Q: BBB Banking Corporation issued a Letter of Credit
in the amount of P5Million, for the purchase of five (5)
tons of corn by X. Upon arrival of the goods, the goods
were delivered to the warehouse of X. Thereafter he
was asked to sign a Trust Receipt covering the goods.
When the goods were sold, X did not deliver the
proceeds to BBB Banking Corporation, arguing that
he will need the fund for the subsequent importation.
Is there sufficient basis to sue for criminal action?
(2012 Bar)
A: B. When the trust receipt was signed, the ownership of
the goods was already with X.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Q. Dennis failed to comply with his undertaking under
the TR he issued in favor of ABC bank. The bank filed
both criminal and civil cases against Dennis. The
court proceeded with the civil case independently
from the criminal case. Is the court correct in
proceeding independently although a criminal case is
also instituted?
document is issued. The warehouse receipt has two-fold
(NCC, Art.1507-1520)
Warehouseman (WHM)
A person, natural or juridical, lawfully engaged in the
business of storing of goods for profit (WHR Law, Sec. 58).

A: Yes, the complaint against Dennis is based on the Warehouse (WH)

failure of the latter to comply with his obligation as
spelled out in the TR. This breach of obligation is separate The building or place where goods are deposited and
and distinct from any criminal liability for "misuse and/or stored for profit.
misappropriation of goods or proceeds realized from the
sale of goods, documents or instruments released under Persons who may issue a Warehouse Receipt
trust receipts", punishable under Sec. 13 of the PD 115.
Being based on an obligation ex contractu and not ex 1. WHM, whether public or private, bonded or not
delicto, the civil action may proceed independently of the (WHR Law, Sec. 1).
criminal proceedings instituted against petitioners 2. A person authorized by a WHM.
regardless of the result of the latter (Sarmiento vs. CA, G.R.
No. 122502, December 27, 2002). Form and essential terms of a Warehouse Receipt

Effect of novation of a Trust Agreement It need not be in particular form but must embody within
its written or printed terms (LCD-DSWD-LF):
Where the entruster and entrustee entered into an
agreement which provides for conditions incompatible 1. Location of the WH
with the TR agreement, the obligation under the trust 2. Consecutive number of the receipt
receipt is extinguished. Hence, the breach in the 3. Date of the issue
subsequent agreement does not give rise to a criminal 4. A statement whether the goods received will be
liability under P.D. 115 but only civil liability (Philippine Delivered to bearer, to a specified person or to a
Bank vs. Ong, G.R. No. 133176, August 8, 2002). specified person or his order
5. Signature of the WHM
Deposits in a savings account opened by the buyer 6. If the receipt is issued for goods of which the
subsequent to the Trust Receipt transaction cannot be Warehouseman is the owner, either solely or jointly
automatically applied to outstanding obligations under or in common with others, the fact of such
the Trust Receipt account. The receipt of the bank of a sum ownership; and
of money without reference to the TR obligation does not 7. Description of the goods
obligate the bank to apply the money received against the 8. A statement of the amount of advances made and of
trust receipt obligation. Neither does compensation arise liabilities incurred for which the warehouseman
because compensation is not proper when one of the claims a Lien.
debts consists in civil liability arising from criminal 9. Fees (WHR Law, Sec. 2)
(Metropolitan Bank and Trust Co. v. Tonda, G.R. No.
134436, Aug. 16, 2000). Effects of omission of any of the essential terms (CIV-
N)
Q: E received goods from T for display and sale in E's
store. E was to turn over to T the proceeds of any sale 1. Conversion of the contract to ordinary deposit.
and return the ones unsold. To document their 2. Injured person can hold WHM liable for all damages
agreement, E executed a trust receipt in T’s favor caused by the omission
covering the goods. When E failed to turn over the 3. Validity of receipt not affected
proceeds from his sale of the goods or return the ones 4. Negotiability of receipts not affected (Gonzales vs. Go
unsold despite demand, he was charged in court for Fiong & Luzon Surety Co., G.R. No. 91776, August 30,
estafa. E moved to dismiss on the ground that his 1958).
liability is only civil. Is he correct? (2011 Bar)
Prohibited terms in a Warehouse Receipt
A: No, since his breach of the trust receipt agreement
subjects him to both civil and criminal liability for estafa. A warehouseman may insert in a receipt issued by him,
any other terms and conditions provided that such terms
and conditions shall not be (C2-RMN):
WAREHOUSE RECEIPTS LAW
1. Contrary to the Warehouse Receipts Law (Sec. 3).
(ACT 2137, AS AMENDED)
2. Contrary to law, morals, good customs, public order
or public policy.
Warehouse Receipt (WHR) 3. Terms Reducing the required diligence of the
warehouseman (Ibid)
It is a written acknowledgment by the warehouseman 4. Those exempting the warehouseman from liability
that he has received and holds certain goods therein for Misdelivery or for not giving statutory notice in
described in his warehouse for the person to whom the case of sale of goods.

UNIVERSITY OF SANTO TOMAS

2016 GOLDEN NOTES
14
 WAREHOUSE RECEIPTS LAW
5. Those exempting the warehouseman from liability
for Negligence.
Effect when the goods deposited are incorrectly
described
GR: Warehouseman shall be liable for damages for non-
existence or misdescription of goods at the time of its
issue.
XPN: When the goods are described based on:
1. Series or labels upon them
2. Statement that the goods are of certain kind.
Person to whom the goods should be delivered (PDO)
1. To the person lawfully entitled to the Possession of
the goods, or his agent;
2. To the person entitled to Delivery under a non-
negotiable instrument or with written authority; or
3. To the lawful Order of a negotiable receipt (person in
possession of a negotiable receipt) (WHR Law, Sec. 9).
KINDS
Kinds of Warehouse Receipt
1. Negotiable warehouse receipt
2. Non-negotiable warehouse receipt
Negotiable WHR
It is a receipt in which it states that the goods received will
be delivered to the bearer or to the order of any person
named in such receipt (WHR Law, Sec. 5). It is negotiated
by delivery or indorsement plus delivery.
NOTE: No provision shall be inserted in a negotiable
receipt that it is non-negotiable. Such provision, if
inserted, shall be void, and the receipt shall remain
negotiable. A negotiable warehouse receipt cannot be
converted into non-negotiable (WHR Law, Sec. 5).
Person who may negotiate a Negotiable WHR
1. The owner;
2. Any person to whom the possession or custody of the
receipt has been entrusted by the owner, if, by the
terms of the receipt, the goods are deliverable to the
order of the person to whom the possession or
custody of receipt has been entrusted or in such form
that it may be negotiated by delivery (WHR Law, Sec.
40).
Effect when a Negotiable Warehouse Receipt was
delivered without the necessary indorsement (Ac -
DC)
1. The transferee Acquires title against the transferor
2. There is no Direct obligation of the WHM; and
3. The transferee can Compel the transferor to
complete the negotiation by indorsing the
instrument. Negotiation takes effect as of the time
when the indorsement is actually made.
Forged signature of the owner
15
In case the signature of an owner was forged and the
forger was able to withdraw the goods from the
Warehouseman, the owner has the following rights:
1. If under WHR, the goods are deliverable to the
depositor or to his order, the owner of the said
negotiable receipt may proceed against the WHM
and/or the holder.
2. Without the valid indorsement of the owner to the
holder or in blank, the WHM is liable to the owner for
conversion in the misdelivery.
3. If the goods are deliverable to bearer, the owner may
only proceed against the holder. The WHM is not
liable for conversion where the goods are delivered
to a person in possession of a bearer negotiable
instrument.
Duplicate receipts must be so marked in case one
negotiable receipt is issued for the same goods
A WHM shall be liable for all damages caused by his failure
to do so to anyone who purchased the subsequent receipt
for value supposing it to be an original, even though the
purchase be after the delivery of the goods by the WHM to
the holder of the original receipt (WHR Law, Sec. 6).
The word “duplicate” shall be plainly placed upon the face
of every such receipt, except the first one issued (ibid.).
Non-Negotiable Warehouse Receipt
It is a receipt in which it is stated that the goods received
will be delivered to the depositor or to any other specified
person (WHR Law, Sec. 4).
NOTE: To make it non-negotiable, it is needed to be
indicated in the face of the WHR by the warehouseman
issuing it that the same is “non-negotiable,” or “not
negotiable” (WHR Law, Sec.7).
Failure to mark the WR as “non-negotiable” shall entitle
the holder, who purchased it for value supposing it to be
negotiable, to treat such receipt negotiable (ibid).
Transfer of a Non-Negotiable Warehouse Receipt
A non-negotiable WHR may be transferred by its delivery
to the transferee accompanied by a deed of assignment,
donation or other form of transfer.
Effect of indorsement of a Non-Negotiable Warehouse
Receipt
Even if the receipt is indorsed, the transferee acquires no
additional right (WHR Law, Sec. 39).
Warranties on a Warehouse Receipt
A person who, for value, negotiates or transfers a receipt
by indorsement or delivery, including one who assigns for
value a claim secured by a receipt, unless a contrary
intention appears warrants(GRIT):
1. Receipt is Genuine
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
2. Legal Right to negotiate or transfer it
3. No knowledge of defects that may Impair the validity
or worth of the receipt
4. That he has a right to Transfer title to the goods and
that the goods are merchantable or fit for a particular
purpose whenever such warranties would have been
to transfer without a receipt of goods represented
thereby (WHR Law, Sec. 44).
NOTE: The indorsee does not guarantee that the WHM
will comply with his duties (WHR Law, Sec. 45).
DISTINCTION BETWEEN NEGOTIABLE INSTRUMENT AND NEGOTIABLE WAREHOUSE RECEIPT
NEGOTIABLE INSTRUMENT
Contains an unconditional promise to pay a sum certain in
money.
The subject is money.
The negotiable instrument is the object of value.
Intermediate parties become secondarily liable.
The general endorsers warrant that the instrument after due
presentment shall be paid and in case of dishonor and notice
of dishonor given, the endorser shall pay the holder.
Rights of a holder of a Negotiable Warehouse Receipt vs. the Rights of a transferee of a Non-Negotiable Warehouse
Receipt
NEGOTIABLE WAREHOUSE RECEIPT
May be acquired through negotiation
Rights of the holder of the receipt:
1. If indorsed:
a. Acquires title to the goods as the person negotiating
(WHR Law, Sec. 41).
b. Acquires the direct obligation of the warehouseman to
hold possession of the goods for him as if the
warehouseman directly contracted with him (ibid).
2. If not indorsed:
He may compel indorsement; other-wise, he would acquire
title as that of an assignee (WHR Law, Sec. 43).
Defeats the lien of the seller of the goods covered thereby
(WHR Law, Sec. 49).
Good covered cannot be garnished, attached or levied on
execution by unless:
1. Receipt is surrendered.
2. Its negotiation is enjoined by the court.
3. The goods are impounded by the court (WHR Law, Sec. 25).
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
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When no warranty implied
A mortgagee, pledgee, or holder for security of a receipt
who, in good faith, demands or receives payment of the
debt for which such receipt is security, whether from a
party to a draft drawn for such debt or from any other
person, shall not, by so doing, be deemed to represent or
to warrant the genuineness of such receipt or the quantity
or quality of the goods therein described. In short, a
creditor receiving the WHR given as collateral makes no
warranty (WHR Law, Sec. 46).
NEGOTIABLE WHR
Does not contain an unconditional promise to pay a sum
certain in money. The obligation is to deliver goods.
The subject is merchandise.
The warehouse receipt is not the object of value.
Intermediate parties are not liable for the warehouse man’s
failure to deliver the goods.
Although endorsers or intermediate parties are not liable
for any failure on the part of the warehouseman or previous
endorsers of the receipt to fulfill their obligations they may
be held liable for breach of warranties such as: (1) receipt is
genuine and in respect what it purports to be (2) they have
legal title to the instrument (3) goods are fit for
consumption and merchantable (4) they are not aware of
any information that will make the instrument worthless
NON-NEGOTIABLE WAREHOUSE RECEIPT
May be acquired through transfer or assignment
Rights of transferee:
1. Acquires title to the goods subject to the terms of any
agreement with the transferor (WHR Law, Sec. 42).
2. Acquires the right to notify the warehouseman of the
transfer and thereby acquires the direct obligation of the
warehouseman to hold possession of the goods for him
(ibid).
NOTE: Prior to notice, the title of the transferee may be
defeated by the levy of an attachment or execution upon the
goods by a creditor of the transferor or by a notification to
the warehouseman by the transferor or a subsequent
purchaser from the transferor of a subsequent sale of the
goods by the transferor (ibid.).
Acquires the title as that of his transferor.
Pending notification to the warehouseman, goods can be
garnished, attached or levied on execution
Reason: Absent such notice, both the warehouseman and the
sheriff have a right to assume that the goods are still owned
by the person whose name appears in the receipt.
 WAREHOUSE RECEIPTS LAW
NOTE: This shall not apply if the person depositing is not the
owner of the goods or one who has no right to convey title to
the goods binding upon the owner.
Protects the purchaser in good faith and for value.
Breach of duty on the part of the person making the
negotiation or fraud, mistake or duress on the owner of
the receipt to entrust possession or custody DOES NOT
impair the validity of negotiation of a WHR. The same is
true provided that the person to whom the receipt was
negotiated or a person to whom the receipt was
subsequently negotiated paid value therefor, without
notice of the breach of duty, or fraud, mistake or duress
(WHR Law, Sec. 47).
Q: Coco was issued by a Warehouseman a negotiable
receipt for safekeeping by the latter of his goods. Can
the judgment creditor of Coco levy by execution the
goods covered by the negotiable receipt?
A: The goods cannot, while in the possession of the WHM,
be attached by garnishment or otherwise, or be levied
upon under an execution unless the receipt is first
surrendered to the WHM, or its negotiation enjoined. The
warehouseman cannot be compelled to deliver the actual
possession of the goods until the receipt is surrendered to
it or impounded by the court.
Q: Assuming that prior to the levy, the receipt was
sold to Yoyo on the basis of which he filed a claim with
the sheriff. Would Yoyo have better rights to the
goods than the creditor? Explain your answer. (1999
Bar)
A: Yes. Yoyo, as a holder for value of the receipt, has a
better right to the goods than the creditor. It is Yoyo that
can surrender the receipt which is in its possession and
can comply with the other requirements which will oblige
the warehouseman to deliver the goods, namely, to sign a
receipt for the delivery of the goods, and to pay the
warehouseman's liens and fees and other charges.
Q: What is the proper recourse of the warehouseman
if he is uncertain as to who is entitled to the goods?
Explain. (2005 Bar)
A: Since there is a conflicting claim of ownership or title,
the warehouseman should file a complaint in interpleader
requiring the claimants to interplead. The matter involves
a judicial question as to whose claim is valid.
Rule where a warehouse receipt is transferred to
secure payment of a loan by way of pledge or
mortgage
The pledgee or mortgagee does not automatically become
the owner of the goods but merely retains the right to
keep, and with the consent of the owner to sell them so as
to satisfy the obligation from the proceeds for the simple
reason that the transaction is not a sale but only a
mortgage or pledge. Likewise, if the property is lost
without the fault or negligence of the mortgagee or
pledgee, then said goods are to be regarded as lost on
account of the real owner, mortgagor or pledgor (PNB vs.
Sayo, Jr., G.R. No. 129198, July 9, 1998).
17
The assignee only steps into the shoes of the assignor.
Non-payment by the original depositors of the
purchase price will NOT render the further
negotiation of the receipt invalid
The negotiation of the warehouse receipt by the buyer of
goods purchased from and deposited to the
warehouseman is valid even if the warehouseman who
issued the negotiable warehouse receipt was not paid by
the buyer. The validity of the negotiation cannot be
impaired by the fact that the owner/warehouseman was
deprived of the possession of the same by fraud, mistake
or conversion (PNB vs. Noah’s Ark Sugar Refinery, G.R. No.
107243, September 1, 1993).
Q: Alex deposited goods for which Billy,
warehouseman, issued a negotiable warehouse
receipt wherein the goods were deliverable to Alex or
order. Alex negotiated the receipt to Caloy.
Thereafter, Dario, a creditor secured judgment
against Alex and served notice of levy over the goods
on the warehouseman.
a. To whom should the warehouseman deliver
goods upon demand?
b. Would your answer be the same if the
warehouseman issued a non-negotiable
werehouse receipt? (2007 Bar)
A:
a. Billy should deliver the goods to Caloy. Under the
Warehouse Receipts Act, the goods covered by the
negotiable receipt cannot be attached or levied upon
directly by the creditor. The creditor must resort to
attaching or levying the receipt itself, not the goods,
while in the possession of the debtor, Alex. Since Alex
has already negotiated it to Caloy, Dario cannot
anymore attach or levy the goods under the
warehouse receipt.
b. A non-negotiable WHR is transferred thru simple
assignment. Since Alex negotiated it instead of having
it assigned, the conveyance of the warehouse receipt
to Caloy is not valid. Hence, Alex is still the owner of
the said goods. Dario could now attach or levy the
goods.
Q: Jojo deposited several cartons of goods with SN
Warehouse Corporation. The correseponding
warehouse receipt was issued to the order of Jojo. He
endorsed the warehouse receipt to EJ who paid the
value of the goods deposited. Before EJ could
withdraw the goods, Melchor informed SN
Warehouse Corporation that the goods belonged to
him and were taken by Jojo without his consent.
Melchor wants to get the goods, but EJ also wants to
withdraw the same.
a. Who has a better right to the goods? Why?
b. If SN Warehouse Corporation is uncertain as to
who is entitled to the property, what is the proper
recourse of the corporation? Explain (2005 Bar)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
A:
a. Ej has better right to the goods. The goods are
covered by a negotiable warehouse receipt which
was indorsed to EJ for value. The negotiation to EJ
was not impaired by the fact that Jojo took the goods
without the consent of Melchor, as EJ had no notice
of such fact. Moreover, EJ is in possession of the
warehouse receipt and only he can surrender it to the
warehouseman (Sec. 8, WHL).
b. Under the Sec. 17 of Act 2137, Warehouse Receipts
Law, SN Warehouse Corporation may file an action
for interpleader and implead EJ and Melchor to
determine who is entitled to the said goods.
Q: T delivers two refrigerators to the warehouse of W
who then issues a negotiable receipt undertaking the
delivery of the refrigerators to “T or bearer.” T
entrusted the receipt to B for safekeeping only. B
negotiated it, however, to F who bought it in good
faith and for value. Who is entitled to the delivery of
the refrigerators? (2011 Bar)
A: F, since he is a purchaser in good faith and for value.
Between the real owner of the goods and an innocent
purchaser for value acquiring the Warehouse Receipt
from a thief, the former prevails
If the goods were stolen from the owner and deposited to
the warehouseman who subsequently issued a
warehouse receipt which in turn was duly negotiated to
an innocent purchaser for value, the owner has the better
right than the holder of the negotiable warehouse receipt.
This is because a thief transfers no title.
DUTIES OF A WAREHOUSEMAN
Obligations of a warehouseman (TD [sasusi] K)
1. Take care of the goods entrusted to his safekeeping
with the same care as a reasonably careful owner of
similar goods would exercise.
2. Deliver them to the holder of the receipt or the
depositor provided there is demand by the depositor
accompanied by either:
a. An offer to satisfy the warehouseman’s lien
b. An offer to surrender the receipt, if negotiable
with such indorsements as would be necessary
for the negotiation of the receipts
c. A readiness and willingness to sign, when the
goods are delivered, an acknowledgment that
they have been delivered, if such signature is
requested by the warehouseman (WHR Law, Sec.
8).
3. Keep the goods separate from the goods of other
depositors, except if authorized by agreement or by
custom, fungible goods may be mingled with other
goods of the same kind and grade.
Instance when the need for a demand by the depositor
is not necessary
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
18
A demand by the depositor is not necessary when the
warehouseman has rendered it beyond his power to
deliver the goods.
Justified refusal to deliver by the warehouseman
1. If the warehouseman’s lien is not satisfied by the
claimants (WHR Law, Sec. 31);
2. Where the goods have already been sold to satisfy the
warehouseman’s lien or because of their perishable
or hazardous nature (WHR Law, Sec. 34);
3. If the warehouse receipt is negotiated back to him;
4. When the holder does not satisfy the conditions
prescribed in Sec. 8, WHR Law:
a. Non-satisfaction of warehouseman’s lien.
b. Failure to surrender warehouse receipt.
c. Refusal to sign the Acknowledgement receipt,
acknowledging the receipt of the goods from the
warehouse;
5. The failure was not due to any Fault on the part of the
warehouseman:
a. Upon request by or on behalf of the person
lawfully entitled (WHR Law, Sec. 10).
b. If the goods are lost, due to a fortuitous event
exclusively.
c. If the warehouseman needs reasonable time to
ascertain the validity of the claim if someone
other than the depositor claims title to the goods
(WHR Law, Sec. 18).
d. If he had information that the delivery about to
be made was to one not lawfully entitled (WHR
Law, Sec. 10)
e. If several persons claim the goods (WHR Law,
Sec. 17).
Q: The warehouseman, by issuing the warehouse
receipt, acknowledges that the goods are in his
possession, but he can refuse to deliver the goods to
the holder of the warehouse receipt covering the
goods if - (2012 Bar)
A: A WHM is bound to deliver the goods upon a demand
made if such is accompanied with (1) an offer to satisfy
the WHM’s lien; (2) offer to surrender the receipt if
negotiable; and (3) readiness to sign an acknowledgment
receipt when the goods are delivered (WHR Law, Sec. 8).
HOWEVER, Sec. 31 of the said Law expressly provides that
a WHM having a lien valid against the person demanding
the goods may refuse to deliver the goods to him until the
lien is satisfied.
Further, Sec. 13 provided that the alteration of a receipt
shall not excuse the WHM who issued it from any liability
if such alteration was: (1) immaterial, (2) authorized, or
(3) made without fraudulent intent.
NOTE: Warehouseman has no cause of action for
repossession and damages on the basis of a falsified
delivery permit. Warehouseman has no cause of action
against the person to whom it delivered deposited articles
where the real parties interested in the questioned
articles have not yet sued the warehouseman for damages
on account of wrongful delivery (Consolidated Terminals
 WAREHOUSE RECEIPTS LAW
Inc. vs. Artex Development Co. Inc. G.R. No. L-25748, March
10, 1975).
Remedy if the Warehouse Receipt is lost or destroyed
A court of competent jurisdiction may order the delivery
of the goods only:
a. Upon satisfactory proof of the loss or destruction of
the receipt; and
b. Upon the giving of a bond with sufficient sureties to
be approved by the court (WHR Law, Sec. 14).
The delivery of the goods under an order of the court shall
NOT relieve the WHM from liability to a person to whom
the negotiable receipt has been or shall be negotiated for
value without notice of the proceedings or of the delivery
of the goods (ibid.).
Instances when the duty to insure the goods arise
(RIEL)
1. Where the warehouse receipt contains a
Representation to that effect.
2. Where it was an Inducement for the depositor to
enter into the contract;
3. Established practice; or
4. Where the Law provides
Conversion
It is an unauthorized assumption and exercise of the right
of ownership over goods belonging to another through
the alteration of their condition or the exclusion of the
owner’s right (Bouvier’s Law Dictionary).
Instances where a Warehouseman is liable for
conversion
1. Where the delivery is made to person other than
those authorized;
2. Even if delivered to persons entitled, he may still be
liable for conversion if prior to delivery:
a. He had been requested not to make such
delivery; or
b. He had received notice of the adverse claim or
title of a third person.
Effects of alteration of the receipt on the liability of
the warehouseman
1. Alteration immaterial – whether fraudulent or not,
whether authorized or not, the warehouseman is
liable on the altered receipt according to its original
tenor
2. Authorized material alteration – the warehouseman
is liable according to the terms of the receipt as
altered
3. Material alteration innocently made – the
warehouseman is liable on the altered receipt
according to its original receipt
4. Material alteration fraudulently made – 2.
warehouseman is liable according to the original
tenor of the receipt to a purchaser of the receipt for
value without notice, and even to the alterer and
subsequent purchasers with notice except that as
19
regards to the last two, the warehouseman’s liability
is limited only to delivery as he is excused from any
liability.
Instances where a Warehouse man is criminally liable
for his acts (GF-DOOM-C)
1. Issuance of warehouse receipts for Good not
received (WHR Law, Sec. 50).
2. Issuance of receipt containing False statement (WHR
Law, Sec. 51).
3. Issuance of Duplicate negotiable warehouse receipt
not marked as such (WHR Law, Sec. 52).
4. Issuance of a negotiable warehouse receipt of which
he is an Owner without stating such fact of
ownership (WHR Law, Sec. 53).
5. Delivery of goods without Obtaining negotiable
warehouse receipt (WHR Law, Sec. 54).
6. Negotiation of receipt for Mortgaged goods (WHR
Law, Sec. 55).
7. Commingling of goods (WHR Law, Sec. 24).
Other acts for which Warehouse Man is liable (DuMP-
SICC)
1. Failure to stamp “Duplicate” on copies of negotiable
receipt (WHR Law, Sec.6).
2. Misdelivery of goods (WHR Law, Sec. 10).
3. Failure to Place “non-negotiable” or “not-negotiable”
on a non-negotiable receipt (WHR Law, Sec. 7).
4. Failure to give notice in case of Sale of goods to
satisfy lien (WHR Law, Sec. 33) or because the goods
are perishable or hazardous (WHR Law, Sec. 34).
5. Issuing receipt for non-existing goods or
misdescribed goods (WHR Law, Sec.20).
6. Failure to take Care of the goods (Sec. 21, WHR Law).
7. Failure to effect Cancellation of a negotiable receipt
upon delivery of the goods (WHR Law, Sec. 11).
WAREHOUSEMAN’S LIEN
Charges covered by a Warehouseman’s lien (PMA)
1. Charges for storage and Preservation of the goods
(insurance and others may be included as long as it is
stipulated)
2. Money advanced, interest, insurance, transportation,
labor, weighing, coopering and other charges and
expenses in relation to such goods
3. Charges and expenses for notice, and
Advertisements of sale, and for sale of the goods
where default had been made in satisfying the
WHM’s lien (WHR Law, Sec. 27).
Remedies available to a Warehouseman to enforce his
Warehouseman’s lien (REC)
1. By Refusing to deliver the goods until the lien is
satisfied;
By causing the Extrajudicial sale of the property and
applying the proceeds of the value of the lien;
3. By filing a civil action for Collection of the unpaid
charges or by way of counterclaim in an action to
recover the property from him or such other
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
remedies allowed by law for the enforcement of a
lien against personal property or to a creditor against
his debtor, for the collection from the depositor of all
the charges which the depositor has bound himself to
pay.
Lien over the goods does not preclude the WHM to
avail all other remedies
Whether a warehouseman has or has not a lien upon the
goods, he is entitled to all remedies allowed by law to a
creditor against a debtor for the collection from the
depositor of all charges and advances which the depositor
has expressly or impliedly contracted with the
warehouseman to pay (WHR Law, Sec 32).
Enforcement of a Lien
The lien may be enforced against the goods of the
following:
1. Goods belonging to the person who is liable as
debtor; and
2. Goods belonging to others which have been
deposited at any time by the debtor with authority to
make a valid pledge (WHR Law, Sec. 28).
The WHM shall not thereafter be liable for failure to
deliver the goods to the depositor or owner of the goods
or to a holder of the receipt given for the goods when they
were deposited, even if such receipt be negotiable (WHR
Law, Sec. 36).
Manner of conducting the execution sale to satisfy the
warehouseman’s lien
1. Notice of the sale
a. published once a week for two consecutive
weeks in a newspaper published in the place
where such sale is to be held; or
b. If there is no newspaper published in such place,
the advertisement shall be posted at least ten
days before such sale in not less than six
conspicuous places therein.
NOTE: The notice shall indicate the following:
1. Description of the goods to be sold;
2. Name of the owner or person on whose
account the goods are held; and
3. Time and place of the sale
2. Sale shall be held not less than fifteen days from the
time of the first publication.
3. In the place where the lien was acquired.
NOTE: The balance, if any, of the proceeds of the
execution sale shall be held by the WHM and delivered on
demand to the person to whom he would have been
bound to deliver or justified in delivering goods (WHR
Law, Sec.31).
Effect of the non-publication of the notice of sale
Where the sale was made without the publication
required and before the time provided by law, such sale is
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
20
void and the purchases of the goods acquires no title to
them.
A person claiming right over the property may stop
the execution sale of the goods
At any time before the goods are so sold, any person
claiming a right of property or possession therein may
pay the WHM the amount necessary to satisfy his lien and
to pay the reasonable expenses and liabilities incurred
inserving notices and advertising and preparing for the
sale up to the time of such payment (WHR Law, Sec.33).
Instances when a warehouseman may lose his lien
1. By surrendering possession thereof, or
2. By refusing to deliver the goods when a demand is
made with which he is bound to comply (WHR Law
Sec. 29).
NOTE: Where a negotiable receipt is issued, with the
exception of the charges for the storage or preservation of
goods for which a negotiable receipt has been issued, the
lien exists only for other charges expressly enumerated
inthe receipt so far as they are written although the
amount of the said charge is not stated.
Reasons which a warehouseman may invoke to
legally refuse to effect delivery of the goods:
1. That the holder of the receipt does not satisfy the
conditions prescribed in Section 8 of the WHR Law.
2. That the warehouseman has legal title in himself on
the goods, such title or right being derived directly or
indirectly from a transfer made by the depositor at
the time of or subsequent to the deposit for storage,
or from the warehouseman’s lien (WHR Law, Sec. 16).
3. That the warehouseman has legally set up the title or
right of third persons as lawful defense for non-
delivery of the goods as follows:
a. Where the warehouseman has been requested,
by or on behalf of the person lawfully entitled to
a right of property of or possession in the goods,
not to make such delivery (WHR Law, Sec. 10), in
which case, the warehouseman may, either as a
defense to an action brought against him for
non-delivery of the goods, or as an original suit,
whichever is appropriate, require all known
claimants to interplead (WHR Law, Sec. 17);
b. Where the warehouseman had information that
the delivery about to be made was to one not
lawfully entitled to the possession of the goods
(WHR Law, Sec. 10), in which case, the
warehouseman shall be excused from liability
for refusing to deliver the goods, either to the
depositor or person claiming under him or to
the adverse claimant, until the warehouseman
has had a reasonable time to ascertain the
validity of the adverse claims or to bring legal
proceedings to compel all claimants to
interplead (WHR Law, Sec. 18); and
c. Where the goods have already been lawfully
sold to third persons to satisfy a
warehouseman’s lien, or have been lawfully sold
or disposed of because of their perishable or
hazardous nature (WHR Law, Sec. 36).
 WAREHOUSE RECEIPTS LAW

4. That the warehouseman having a lien valid against

the person demanding the goods refuses to deliver
the goods to him until the lien is satisfied (WHR Law,
Sec. 31).

5. That the failure was not due to any fault on the part
of the warehouseman, as by showing that, prior to
demand for delivery and refusal, the goods were
stolen or destroyed by fire, flood, etc., without any
negligence on his part, unless he has contracted so as
to be liable in such case, or that the goods have been
taken by the mistake of a third person without the
knowledge or implied assent of the warehouseman,
or some other justifiable ground for non-
delivery(Philippine National Bank, vs. Hon. Marcelino
L. Sayo, JR., in his capacity as Presiding Judge of the
Regional Trial Court of Manila (Branch 45), et al., G.R.
No. 129918, July 9, 1998).

When Warehouseman fees and charges cease to

accrue

The warehouseman fees and charges cease to accrue from

the date of rejection by the warehouseman to heed the
lawful demand by the endorsee of the quedan for the
release of the goods (PNB v. Sayo, Jr., Supra)

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21 FACULTY OF CIVIL LAW
 MERCANTILE LAW

NEGOTIABLE INSTRUMENTS LAW fault of the creditor they have been impaired (NCC,
Art. 1249).
2. If a check representing demand deposit has been
Negotiable Instrument cleared and credited to the account of the creditor,
such shall be equivalent to delivery to the creditor
It is a written contract for the payment of money which is of cash (NCBA, Sec. 60).
intended as a substitute for money and passes from one
person to another as money, in such a manner as to give a Q: Negotiable instruments are used as substitutes for
holder in due course the right to hold the instrument free money, which means - (2012 Bar)
from defenses available to prior parties (Sundiang Sr. &
A: When negotiated, negotiable instruments can be used
Aquino, 2011).
to pay indebtedness.
Laws governing Negotiable Instruments
FORMS AND INTERPRETATION
1. NIL -For instruments which meet the requisites of
Rules governing the use of phrases in the Negotiable
negotiability.
Instruments
2. New Civil Code (NCC) – Applies suppletorily in cases
of assignment and demand for payment of an NIL.
1. As to promissory note
3. Code of Commerce (CC) – Applies suppletorily to NIL
a. The word “promise” need not be used. Any
in cases of crossed checks.
expression equivalent to a promise is sufficient.
b. Mere acknowledgment of a debt is not a
Characteristics or features of a negotiable instrument
promissory note.
c. Language used must indicate a written
1. Negotiability – The note may pass from hand to hand
undertaking to pay
similar to money so as to give the holder in due
course (HIDC) the right to hold the instrument and
2. As to bill of exchange
collect the sum payable for himself free from any
a. It must contain an order for payment as
infirmity in the instrument or defect in the title of any
distinguished from a mere request.
of the prior parties or defenses available to them
b. The order is not invalidated because it contains
among themselves.
words of civility. Thus, insertion of polite words
2. Accumulation of secondary contracts– A
like “please” does not alter the character of the
characteristic of a negotiable instrument where
instrument; as long as the language expresses
additional parties become involved as they are
the drawer’s will that the money be paid.
transferred from one person to another. Once an
instrument is issued, additional parties can become
Rules of construction in case of ambiguities in a
involved (De Leon, 2010).
Negotiable Instrument
Incidents in the life of a negotiable instrument
1. Words prevail over figures
2. If date from which interest is to run is unspecified,
1. Issue
interest runs from the date of the instrument; if
2. Negotiation
undated, from the issue thereof
3. Presentment for acceptance (in certain kinds of
3. If undated, instrument is considered dated as of the
BOE’s)
time it was issued
4. Acceptance
4. Written provisions prevail over printed
5. Dishonor by non-acceptance
5. If there is doubt whether it is a bill or note, the holder
6. Presentment for payment
may treat it as either at his election
7. Dishonor by non-payment
6. When not clear in what capacity it was signed,
8. Notice of dishonor
deemed signed as an indorser
9. Protest in case of foreign bill
7. When two or more persons signed a negotiable
10. Discharge
instrument stating "I promise to pay,"in case of
liability, they shall be deemed to be jointly and
Negotiable Instruments are not legal tender
severally liable (NIL, Sec. 17).
Negotiable instruments are neither money nor legal
tender; they are mere substitutes for money (NCBA, Sec. REQUISITES OF NEGOTIABILITY
60).
Factors to determine the negotiability (FRI)
GR: The delivery of a negotiable instrument does not by
itself produce the effect of payment (Roman Catholic 1. Words that appear on the Face of negotiable
Bishop of Malolos vs. Intermediate Appellate Court, G.R. No. instrument
72110, November 16, 1990). 2. Requirements enumerated in Section 1 of NIL
3. Intention of the parties by considering the whole of
XPNs: Negotiable instruments shall produce the effect of the instrument.
payment when:

1. When they have been cashed, or when through the

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2016 GOLDEN NOTES
22
 NEGOTIABLE INSTRUMENTS LAW
Negotiable Instrument vs. Non-negotiable Instrument determined from the writing on the face of the instrument
itself (De Leon, 2010).
NON-
NEGOTIABLE The instrument must be signed by the maker or
Basis NEGOTIABLE
INSTRUMENT drawer
INSTRUMENT
Governing NIL. The Civil Code or
Law pertinent special It is placed at the lower right hand corner of the
laws should apply instrument. Nonetheless, it may appear in any part of the
(GSIS v. CA, instrument whether at the top, middle or bottom or at the
G.R. No. L-40824, margin (De Leon, 2010).
February 23,
1989). However, where a signature is so placed upon the
instrument that it is not clear in what capacity the person
Manner of Can be Can be making the same intended to sign, he is to be deemed an
Transfer transferred by transferred only indorser (NIL, Sec. 17 [f]).
negotiation or by assignment.
by assignment. NOTE: The signature is valid and binding as long as it
appears that a person intended to make the instrument
Status of The transferee The transferee his own. The signature is prima facie evidence of a
Transferee can be a holder can never be a person’s intention to be bound as either maker or drawer.
in due course if holder in due
all the course but Unconditional promise or order to pay
requirements of remains to be an
Section 52 of the assignee. An unqualified order or promise to pay is unconditional
NIL are though coupled with:
complied with. 1. An indication of particular fund out of which
reimbursement is to be made or a particular account
Defenses All defenses to be debited with the amount; or
Available available to prior 2. A statement of the transaction which gave rise to the
parties may be instrument. But an order or promise to pay out of a
raised against the particular fund is conditional (NIL, Sec 3).
last transferee.
(Sundiang Sr. & The word “promise” or “order” need not appear in the
Aquino, 2014). instrument to satisfy the requirements of Section 1(b) of
the NIL (Sundiang Sr. & Aquino, 2014). The promise or
order to pay must not be subject to any condition or
Requisites of Negotiability contingency. An instrument payable upon a contingency
is not negotiable even if the condition thereon has been
An instrument to be negotiable must conform to the fulfilled.
following requirements: (WUPOA)
Certainty as to sum
1. It must be in Writing and signed by the maker or
drawer; The sum payable is a sum certain within the meaning of
2. Must contain an Unconditional promise or order to this Act, although it is to be paid: (ISDEA)
pay a sum certain in money;
3. Must be Payable on demand, or at a fixed or 1. With Interest; or
determinable future time; 2. By Stated installments; or
4. Must be payable to Order or to bearer; and 3. By stated installments, with a provision upon Default
5. Where the instrument is Addressed to a drawee, he in payment of any installment or of interest, the
must be named or otherwise indicated therein with whole shall become due ( acceleration clause);
reasonable certainty (NIL, Sec.1). 4. With Exchange, whether at a fixed rate or at the
current rate; or
NOTE: The requirements stated in Sec. 1 must appear on 5. With cost of collection or an Attorney’s fees, in case
the face of the instrument otherwise the instrument payment shall not be made at maturity (NIL, Sec. 2).
would not be negotiable.
A sum is certain within the contemplation of Section 1(b)
A NI need not follow the exact language of NIL, as long as of the NIL if the amount that is to be unconditionally paid
the terms are sufficient which clearly indicate an by the maker or drawee can be determined on the face of
intention to conform to the requirements of the law (NIL, the instrument even if it requires mathematical
Sec. 10). computation (Sundiang Sr. & Aquino, 2014).

The instrument must be in writing Payment with interest

It must be reduced in writing or in tangible form. The Interest at fixed rate or at increased or reduced rate will
negotiability or non-negotiability of an instrument is not destroy negotiability because the presence of such
interest does not make uncertain the sum payable. In the

UNIVERSITY OF SANTO TOMAS

23 FACULTY OF CIVIL LAW
 MERCANTILE LAW
absence of a date as to which interest is to run, it shall be
from the date of instrument, or in the absence thereof, at
the date of issue. In the absence of interest rate, it shall be
the legal rate.
Payment by installment
Payment by installment is certain if the dates of each
installment are fixed and the amount to be paid for each
installment is stated (NIL, Sec. 2; Sundiang Sr. & Aquino,
2009).
Q: Discuss the negotiability or non-negotiability:
Manila, June 3, 1993
P10,000.00
For value received, I promise to pay Sergio Dee or
order the sum of P10,000.00 in five (5) installments,
with the first installment payable on October 5, 1993
and the other installments on or before the fifth day
of the succeeding month or thereafter.
(Sgd.) Lito Villa (1993 Bar)
A: The instrument is negotiable because it complied with
the requirements provided by section 1 of the NIL. The
fact that it is payable in installments does not make the
instrument non-negotiable as long as the dates of each
installment is fixed or at least determinable and the
amount to be paid for each installment is stated (NIL, Sec.
2[b]).
Payment with an acceleration clause
Acceleration clause is a provision, that upon default in
payment of any installment or interest, the whole shall
become due (NIL, Sec.2[c]).
1. Negotiable – If the option to accelerate the maturity
is on the maker, whether such option is absolute or
conditional.
2. Negotiable – Where acceleration is at the option of
the holder and can only be exercised upon the
happening of the specified event.
3. Not negotiable – Where the holder’s right to
accelerate is unconditional, the time of payment is
rendered uncertain.
Extension Clause
Extension Clauses are provisions extending the time of
payment.
GR: An extension clause does not affect the negotiability
of the instrument.
XPN: Where a note with a fixed maturity provides that the
maker has the option to extend time of payment until the
happening of a contingency, the date is uncertain and the
instrument is non-negotiable.
Sum to be paid with exchange
The exchange is the charge for the expense of providing
funds at the place where the instrument is payable to
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
24
cover such instrument which is issued at another place. It
may be at a fixed rate or at the current rate. It is applicable
only to foreign bills (De Leon, 2010).
Inland BOE vs. Foreign BOE
An inland BOE is one which is, or on its face purports to
be, both drawn and payable within the Philippines and
any other bill is a foreign bill.
Unless the contrary appears on the face of the bill, the
holder may treat it as an inland bill (NIL, Sec. 109).
Sum to be paid with costs of collection and/or
attorney’s fees
It does not affect the certainty of the amount payable at
maturity since the increase in the amount due, even if
uncertain, takes place after maturity when the instrument
ceases to be negotiable in the full commercial sense (De
Leon, 2010).
Payable in Philippine Peso
The “money” referred into may be our legal tender or
foreign currency. An instrument is still negotiable
although the amount to be paid is expressed in currency
that is not legal tender so long as it is expressed in money
(PNB v Zulueta, G.R. No., L-7271, August 30, 1957).
NOTE: An agreement to pay in foreign currency is valid
(RA 8183).
Effect if a bill or note is payable other than in money
GR: The note or bill must be payable in money. If payable
in goods, wares, or merchandise, or in property, the same
is not negotiable.
XPNs: Negotiability is not affected if the note contains an
additional provision which: (SECo Law)
1. Authorizes the sale of collateral Securities in case the
instrument be not paid at maturity; or
2. Gives the holder an Election to require something to
be done in lieu of payment of money; or
3. Authorizes a Confession of judgment if the
instrument be not paid at maturity; or
4. Waives the benefit of any Law intended for the
advantage or protection of the obligor (NIL, Sec. 5).
Payable on demand or at a fixed or determinable
future time
1. Payable on demand – The holder may call for
payment any time, likewise, the maker may also pay
any time and the refusal of the holder to accept
payment shall stop the running of interest should
there be any, but obligation to pay the note subsist.
An instrument is payable on demand:
a. When it is so expressed to be payable on
demand, or at sight, or on presentation; or
b. In which no time for payment is expressed (NIL,
Sec 7).
 NEGOTIABLE INSTRUMENTS LAW
c. Where an instrument is issued, accepted, or the person making it so payable; (e.g. Pay to John Doe
indorsed when overdue, it is, as regards the or order)
person so issuing, accepting, or indorsing it, 4. When the name of the Payee does not purport to be
payable on demand (ibid). the name of any person; (Pay to cash)
5. When the only or the Last indorsement is an
2. At a fixed time – A term or time instrument is payable indorsement in blank (NIL, Sec 9).
only upon the arrival of the time for payment.
3. At a determinable future time-An instrument is Illustration:
payable at a determinable future time which is
expressed to be payable: Back of NI (indorsement)
a. At a fixed period after date or sight; or
b. On or before a fixed or determinable future time Pay to A Sgd. P
specified therein; or
c. On or at a fixed period after the occurrence of a Pay to B Sgd. A
specified event which is certain to happen,
though the time of happening be uncertain (NIL, Sgd. B
Sec. 4).
A promissory note which does not have the words "or
Indication of particular fund for reimbursement vs. order" or "or bearer" will render the promissory note
Indication of particular fund for payment non-negotiable, and therefore the note can still be
assigned and the maker made liable. (2012 Bar)
FUND FOR FUND FOR PAYMENT
REIMBURSEMENT Q:
A. MP bought a used cell phone from JR. JR preferred
1. The drawee pays the There is only one act - the cash but MP is a friend so JR accepted MR‘s
payee from his own drawee pays directly from promissory note for P10,000. JR thought of
funds. the particular fund converting the note into cash by endorsing it to his
2. The drawee pays indicated. brother KR. The promissory note is a piece of paper
himself from the with the following hand-printed notation: ― MP WILL
particular fund PAY JR TEN THOUSAND PESOS IN PAYMENT FOR HIS
indicated. CELLPHONE 1 WEEK FROM TODAY. Below this
Particular fund indicated Particular fund indicated notation MP‘s signature with ―8/1/00 next to it,
is not the direct source of is the direct source of indicating the date of the promissory note. When JR
payment. payment. presented MP‘s note to KR, the latter said it was not a
Instrument is negotiable. Instrument is non- negotiable instrument under the law and so could not
negotiable. The fund be a valid substitute for cash. JR took the opposite
specified is the direct view, insisting on the note‘s negotiability. You are
source of payment; asked to referee. Which of the opposing views is
therefore, it is subject to correct?
the availability of fund,
hence conditional. B. TH is an indorsee of a promissory note that simply
(Sundiang Sr. & Aquino, states: ― PAY TO JUAN TAN OR ORDER 400 PESOS. The
2014). note has no date, no place of payment and no
consideration mentioned. It was signed by MK and
written under his letterhead specifying the address,
Payable to order which happens to be his residence. TH accepted the
promissory note as payment for services rendered to
The instrument is payable to order where it is drawn SH, who in turn received the note from Juan Tan as
payable to the order of a specified person or to him or to payment for a prepaid cell phone card worth 450
his order. It may be drawn payable to the order of: pesos. The payee acknowledged having received the
note on August 1, 2000. A Bar reviewee had told TH,
1. A Payee who is not a maker, drawer, or drawee;
who happens to be your friend, that TH is not a holder
2. The Drawer or maker; or
in due course under Article 52 of the Negotiable
3. The Drawee; or
nstruments Law (Act 2031) and therefore does not
4. Two or more payees Jointly; or
enjoy the rights and protection under the statute. TH
5. One or some of Several payees; or
asks for our advice specifically in connection with the
6. The Holder of an office for the time being (Sec. 8, NIL).
note being undated and not mentioning a place of
payment and any consideration. What would your
Payable to bearer (ENaF PaLa)
advice be? (2000 Bar)
1. When it is Expressed to be so payable; (e.g. I promise
A:
to pay to bearer P10,000.00)
a. The view of KR is correct. The note is payable to a
2. When it is payable to a person Named therein or
specific person hence it is not negotiable. The law
bearer; (e.g. Pay to P or bearer P10,000.00)
provides that for an instrument to be negotiable, it
3. When it is payable to the order of a Fictitious person
must comply with the requirements of section 1 of
or non-existing person, and such fact was known to

UNIVERSITY OF SANTO TOMAS

25 FACULTY OF CIVIL LAW
 MERCANTILE LAW
the NIL pertaining to the part that a note must be
payable to order or bearer. In the given case, there
were no words of negotiability and it is silent as to
whether it is payable to order or bearer. Hence, the
instrument is non-negotiable.
b. The place and date are not essential to the
negotiability of the instrument except in certain
cases when the date is necessary say to determine
when the note is due or the interest is to run when
the payment of interest has been stipulated or
whether the holder is barred by the statute of
limitations from enforcing the note. The fact that
there is no mention of consideration is not essential
because it is presumed.
Difference between having a check payable to a
fictitious payee and payable to a specified payee
If a check is payable to a specified payee, it is an order
instrument, which requires indorsement from the payee
or holder before it may be validly negotiated; but it may
nevertheless be considered as a bearer instrument if it is
payable to the order of a fictitious or non-existing person,
and such fact is known to the person making it so payable.
Thus, checks issued to “Prinsipe Abante” or “Si Malakas at
si Maganda,” who are well-known characters in Philippine
mythology, are bearer instruments because the named
payees are fictitious and non-existent (De Leon, 2010).
Fictitious-Payee rule
The fictitious-payee rule contemplates that the payee is
fictitious or not intended to be true recipient of the
proceeds. The check is considered a bearer instrument
negotiable by delivery alone. The underlying theory is
that the maker of the check knew that the fictitious payee
cannot indorse the instrument so that he must have
intended for it to be negotiated by mere delivery. (PNB v.
Rodriguez, G.R. No. 170325, September 26, 2008)
GR: In case of controversy, the drawer is liable and the
drawee bank is absolved from liability.
XPN: When there is commercial bad faith, whereby the
drawee bank acts dishonestly and is a party to the
fraudulent scheme. The check is deemed payable to order,
and consequently, the drawee bank bears the loss (Ibid).
When drawee must be named with reasonable
certainty
1. In a BOE, the drawee must be named or otherwise
designated with reasonable certainty (NIL, Sec. 1).
2. A bill may be addressed to two or more drawees
jointly, but not to two or more drawees in the
alternative or in succession (NIL, Sec. 127). Eg. An
instrument may be addressed “to A and B” but not “to
A or B”.
3. An instrument payable “to the order of the bearer”
has been held to be an instrument payable to “order”
(10 C.J.S. 575-576).
Q: Indicate and explain whether the promissory note
is negotiable or non-negotiable.
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
26
a. I promise to pay A or bearer Php100,000.00 from
my inheritance which I will get after the death of
my father.
b. I promise to pay A or bearer Php100,000 plus the
interest rate of ninety (90) – day treasury bills.
c. I promise to pay A or bearer the sum of
Php100,000 if A passes the 2012 bar exams.
d. I promise to pay A or bearer the sum of
Php100.000 on or before December 30, 2012.
e. I promise to pay A or bearer the sum of
Php100,000. (2012 Bar)
A:
a. Non-negotiable. It is based on a contingency and not
an unconditional promise or order to pay sum
certain in money. (NIL, Sec. 1 [b])
b. Negotiable. The instrument is negotiable despite the
inclusion of interest since the sum to be paid with
said interest is still certain. (NIL, Sec. 2 [a])
c. Non-negotiable. The instrument is not an
unconditional promise or order to pay a sum certain
in money since payment depends upon the
happening of an event. (NIL, Sec. 1 (b])
d. Negotiable. There is certainty in payment since it is
payable on or before a fixed or determinable future
time specified. (NIL, Sec. 4(b])
e. Negotiable. It is a bearer instrument that is payable
upon demand. (NIL, Sec. 7 [b] and Sec. 9 [b]).
Q: Antonio issued the following instrument:
August 10, 2013
Makati City
P100,000.00
Sixty days after date, I promise to pay Bobby or his
designated representative the sum of ONE HUNDRED
THOUSAND PESOS (P100,000.00) from my BPI Acct.
No. 1234 if, by this due date, the sun still sets in the
west to usher in the evening and rises in the east the
following morning to welcome the day.
(Sgd.) Antonio Reyes
Explain each requirement of negotiability present or
absent in the instrument. (2013 Bar)
A: The instrument contains a promise to pay and was
signed by the maker, Antonio Reyes (NIL, Sec. 1[a]).
The promise to pay is unconditional insofar as the
reference to the setting of the sun in the west in the
evening and its rising in the east in the morning are
concerned. These are certain to happen (NIL, Sec. 4[c). The
promise to pay is conditional, because the money will be
taken from a particular fund, the BPI Account No. 1234.
The instrument contains a promise to pay a sum certain
in money, P100,000.00 . The money is payable at a
determinable future time, sixty days after August 10,
2013. The instrument is not payable to order or to bearer
Provisions that do not affect the negotiability of an
instrument
1. Omission of Date
 NEGOTIABLE INSTRUMENTS LAW
2. Non-specification of Value given or that any value is still considered as certain although it is to be paid
had been given within interest. It does not make the promise
3. Non-specification of place where it is drawn or unconditional
payable c. AFFECTED. An option given to the maker makes the
4. Bears a Seal promise conditional
5. Designation of particular kind of Currency in which d. NOT AFFECTED. An option given to the holder does
payment is to be made. (Sec. 6, NIL.) not make the promise conditional

Q: Which of the following stipulations or features of a
promissory note (PN) affect or do not affect its
negotiability, assuming that the PN is otherwise
negotiable? Indicate your answer by writing the
paragraph number of the stipulation or feature of the
PN as shown below and your corresponding answer,
either ―Affected or ―Not affected. Explain.
Q: B borrowed Php1 million from L and offered to him
his BMW car worth Php 1 Million as collateral. B then
executed a promissory note that reads: “I, B, promise
to pay L or bearer the amount of Php1 Million and to
keep my BMW car (loan collateral) free from any
other encumbrance. Signed, B.” Is this note
negotiable? (2011 Bar)

a. The date of the PN is ―February 30, 2002.
b. The PN bears interest payable on the last day of
each calendar quarter at a rate equal to five
percent (5%) above the then prevailing 91-day
Treasury Bill rate as published at the beginning
of such calendar quarter.
c. The PN gives the maker the option to make
payment either in money or in quantity of palay
or equivalent value.
d. The PN gives the holder the option either to
require payment in money or to require the
maker to serve as the bodyguard or escort of the
holder for 30 days. (2002 Bar)
A:
a. NOT AFFECTED. Date is not one of the requirements
for negotiability therefore it is not essential except
when the date is necessary to determine when the
note is due
b. NOT AFFECTED. An instrument payable with
interest determinable at a fixed time is negotiable.
The law provides under section 2a of the NIL, a sum
A: No, since it contains a promise to do an act in addition
to the payment of money.
NOTE: What will not affect the negotiability of the
instrument is an additional provision which gives an
election to require something to be done in lieu of
payment of money.
Q: A writes a promissory note in favor of his creditor,
B. It says: “Subject to my option, I promise to pay B
Php1 Million or his order or give Php1 Million worth
of cement or to authorize him to sell my house worth
Php1 Million. Signed, A.” Is the note negotiable? (2011
Bar)
A: No, because the exercise of the option to pay lies with
A, the maker and debtor.
Note: In order not to affect the negotiability of the
instrument, the option must be with the holder/creditor.

Q: Distinguish a negotiable document from a negotiable instrument (2005 Bar)

BASIS NEGOTIABLE INSTRUMENT NEGOTIABLE DOCUMENT

A written contract which is intended as a Held to be non-negotiable in the technical sense
Substitute for money substitute for money like promissory notes because they do not have the requisites under
and bill of exchange the NIL
It has various forms such as but not limited to
It may either be a bill of exchange or a
Forms bill of lading, stock certificates, warehouse
promissory note
receipts and pawn tickets.
The subject matter is a sum certain in
Subject Matter Actually stands for the goods it covers
money
Capability of Capable of accumulating secondary
Not capable of accumulating secondary contracts
Accumulating contracts resulting from indorsements
resulting from indorsements at the back thereof.
Secondary Contracts at the back thereof

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 MERCANTILE LAW
KINDS OF NEGOTIABLE INSTRUMENTS date.”
c. Letters of Credit
Kinds of negotiable instruments d. Warehouse Receipts
e. Treasury warrants payable from a specific fund
1. Promissory notes (PN) – An unconditional promise in f. Certificate of Indebtedness
writing made by one person to another, signed by the g. Electronic messages
maker, engaging to pay on demand, or at a fixed or
determinable future time, a sum certain in money to
A:
order or to bearer (NIL, Sec. 184).
a. Postal money order is not a negotiable instrument
2. Bill of exchange (BOE) – An unconditional order in
because, as held in Phil. Education Co. vs Soriano,
writing addressed by one person to another signed
there are many restrictions which make them
by the person giving it, requiring the person to whom
incompatible with concepts of negotiable
it is addressed to pay on demand or at a fixed or
instruments, thereby making the order conditional,
determinable future time a sum certain in money to
in contrast to Sec. 1 of the NIL. Furthermore, such is
order or to bearer (NIL, Sec. 126).
governed by postal rules and regulation and it may
3. Check – A bill of exchange drawn on a bank payable
only be negotiated once.
on demand (NIL, Sec. 185).
b. The certificate of time deposit is a negotiable
Promissory note vs. Bill of exchange
instrument because it is an acknowledgement in
writing by the bank of the amount of deposit with a
PROMISSORY
BILL OF EXCHANGE promise to repay the same to the depositor or bearer
BASIS NOTE
thereof at a specific time (Caltex (Philippines), Inc. vs.
Undertaking Promise to pay Order to pay Court of Appeals and Security Bank and Trust
3 parties (upon Company, G.R. No. 97753, August 10, 1992).
As to number of
2 parties acceptance of the
original parties
drawee)
c. A letter of credit is not negotiable because it is
As to liability of Maker is Drawer is
generally conditional and has limited negotiability
parties primarily liable secondarily liable
because it is issued in favor of a specific person. But
2 presentments the Supreme Court held in Lee vs. Court of Appeals,
Only 1
As to number of (for acceptance that the drafts issued in connection with the letters
presentment (for
presentments and for payment) of credit are negotiable instruments.
payment) is
needed are generally
needed
needed d. A warehouse receipt is not a negotiable instrument
because the obligation of a warehouseman is not to
A bill of exchange itself does not operate as an assignment pay but to deliver the goods under the warehouse
of the funds in the hands of the drawee available for the receipt which fails to comply with the requirements
payment thereof, and the drawee is not liable on the bill set forth under Sec. 1 of the NIL. It is merely
unless and until he accepts the same (NIL, Sec. 127). considered as a negotiable document that does not
result in the accumulation of contracts.
A bill of exchange may be addressed to two or more
drawees jointly, whether partners or not; but not to two e. A treasury warrant require appropriations from the
or more drawees in the alternative or in succession (NIL, national government which means that the
Sec. 128). particular fund may or may not exists which renders
it conditional, thereby non-negotiable.
When a bill of exchange may be treated as promissory
note (2015 Bar) f. Not negotiable. A certificate of indebtedness
merely acknowledges to pay a sum of money to a
1. Where in a bill the drawer and the drawee are the specified persons or entity. Since a certificate of
same person (NIL, Sec. 130) indebtedness which is not payable to order or
2. The drawee is a fictitious person (NIL, Sec. 130) bearer but is payable to a specific person is not
3. The drawee does not have the capacity to contract negotiable, the assignee takes it subject to the defect
(NIL, Sec. 130) in the title of the assignor. Thus, when the person
4. Whether the instrument is so ambiguous that there who signed the deed of assignment was not
is doubt whether it is a bill or a note, the holder may authorized by the board of directors, the assignor
treat it either at his election (NIL, Sec. 17[e]) had no title to convey to the assignee (Traders Royal
Bank vs. Court of Appeals, Filriters Guaranty
Q: State and explain whether the following are Assurance Corporation and Central Bank of the
negotiable instruments under the Negotiable Philippines, G.R. No. 93397, March 3, 1997).
Instruments Law:
g. The electronic messages are not signed by the
a. Postal Money Order
investor-clients as supposed drawers of a bill of
b. A certificate of time deposit which states “This is
exchange; they do not contain an unconditional
to certify that bearer has deposited in this bank
order to pay a sum certain in money as the payment
the sum of FOUR THOUSAND PESOS (P4,000)
is supposed to come from a specific fund or account
only, repayable to the depositor 200 days after
of the investor-clients; and, they are not payable to

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 NEGOTIABLE INSTRUMENTS LAW
order or bearer but to a specifically designated third
party. Thus, the electronic messages are not bills of
exchange (Hongkong & Shanghai Banking
Parties to a negotiable instrument and their liabilities
BASIS PARTIES FUNCTION
One who makes the promise and signs the
Maker
instrument.
PN
The party to whom payment is originally
Payee
payable.
Drawer The person who issues and draws the bill
Drawee The party upon whom the bill is drawn.
BOE
The party to whom payment is originally
Payee
payable.
The acceptor is the drawee who accepts
Acceptor
the bill
Referee in case of need a.
b.
Referee in case of need is the person named by the drawer
or indorser in the NI as the one to whom the holder may
resort in case the BOE is dishonored by non-acceptance or
non-payment. It is the option of the holder to refer to the
referee in case of need or not as he may see fit (NIL, Sec.
131). A:
a.
Acceptance of the bill of exchange by the drawee is not
an important requisite for the instrument’s
negotiability
The acceptance of a BOE is not important in the
determination of its negotiability. The nature of
acceptance is important only in the determination of the
kind of liabilities of the parties involved (Philippine Bank
of Commerce v. Aruego, G.R. Nos. L-25836-37, Jan. 31,
1981).
COMPLETION AND DELIVERY
Steps in the issuance of a negotiable instrument b.
1. The mechanical act of writing the instrument
completely and in accordance with Sec. 1 of NIL.
2. Delivery - The transfer of possession, actual or
constructive, from one person to another (NIL, Sec.
191), with the intent to transfer title to payee and
recognize him as holder thereof.
Q: Jun was about to leave for a business trip. As his Various situations involving negotiable instruments
usual practice, he signed several blank checks. He
instructed Ruth, his secretary, to fill them as 1.
payment for his obligations. Ruth filled one check
with her name as payee, placed P30,000.00 thereon,
endorsed and delivered it to Marie. She accepted the
check in good faith as payment for goods she
delivered to Ruth. Eventually, Ruth regretted what
she did and apologized to Jun. Immediately he
directed the drawee bank to dishonor the check.
When Marie encashed the check it was dishonored. 2.
29
Corporation v. CIR, G.R. Nos. 166018 & 167728, 04
June 2014).
LIABILITY
Primarily liable; cannot limit his liability
Secondarily liable, except when drawee
refused to accept; can limit his liability by
putting “without recourse”
Not liable until he becomes acceptor
The party to whom payment is originally
payable.
Primarily liable
Is Jun liable to Marie?
Supposing the check was stolen while in Ruth's
possession and a thief filled the blank check,
endorsed and delivered it to Marie in payment
for the goods he purchased from her, is Jun liable
to Marie if the check is dishonored? (2006 Bar)
Yes. When a delivered instrument is wanting in any
material particular (NIL, Sec. 14), the person in
possession thereof has prima facie authority to
complete it by filling up the blanks. But if it was not
filled up strictly in accordance with the authority
given, it cannot be enforced against any person who
became party thereto prior to its completion.
However, if it is negotiated to a holder in due course,
then it is valid and effective for all purpose in his
hands because the defense of not filling it up in
accordance with the authority given is only a
personal defense that cannot be raised against a
holder in due course. Based on the foregoing, Jun is
liable to Marie, being a holder in due course, for the
incomplete instrument whichhe delivered to Ruth.
No. The check is an incomplete instrument not
delivered in contemplation of law. An incomplete
instrument not delivered is not a valid contract in the
hands of any holder as against any person whose
signature was placed thereon before delivery. As
such, Jun is not liable to Marie since he does not
assume any responsibility whatsoever upon the said
check (NIL, Sec. 15)
Incomplete instrument
a. Delivered
i. With forgery and alteration
ii. Without forgery and alteration
b. Not delivered
i. With forgery and alteration
ii. Without forgery and alteration
Complete instrument
a. Delivered
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
i. With forgery and alteration
ii. Without forgery and alteration
b. Not delivered
i. With forgery and alteration
ii. Without forgery and alteration
NOTE: If an instrument is complete and delivered without
forgery and alteration, all parties are bound.
INSERTION OF DATE
GR: The date is not essential to the negotiability of the
instrument (not one of the requirements under Sec. 1).
XPNs: Date is important to determine maturity:
1. Where the instrument is payable within a specified
period after date, or after sight.
2. When the instrument is payable on demand, date is
necessary to determine whether the instrument was
presented within a reasonable time from issue, or
from the last negotiation.
3. When the instrument is an interest-bearing one, to
determine when the interest starts to run.
Insertion of a wrong date
The insertion of a wrong date does not avoid the
instrument in the hands of a subsequent holder in due
course, but as to a HIDC, the date so inserted is to be
regarded as the true date (ibid.).
With respect to the person who inserted the wrong date,
however, the instrument is avoided (Bank of Houston v.
Day, 145 Mo. Appl. 410, 122 SW 756).
Ante-dating or post-dating an instrument
If the instrument is ante-dated or post-dated, the
instrument is not invalid by that fact alone, provided it is
not done for illegal or fraudulent purpose (NIL, Sec. 12).
Q: Can a bill of exchange or a promissory note qualify
as a negotiable instrument if:
a. it is not dated;
b. or the day and the month, but not the year of its
maturity, is given; or
c. it is payable to ―cash
d. it names two alternative drawees (1997 Bar)
A:
a. Yes. Date is not an essential requirement for the
negotiability of an instrument as provided for in
section 1 of the NIL.
b. No. Since the year is not determined, the time for
payment is not determinable
c. Yes. When the name of the payee does not purport to
be the name of any person, the law provides in
section 9d of the NIL that the maker or drawer
intends the same to be payable to bearer, hence the
instrument qualifies as a negotiable instrument
d. No. When the bill is addressed to two or more payees
in the alternative, the law provides in section 128 of
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the NIL that it is conditional and therefore non-
negotiable.
Holder may insert the date in an instrument in the
following instances
1. Where an instrument expressed to be payable at a
fixed period after date is issued undated; or
2. Where the acceptance of an instrument payable at a
fixed period after sight is undated (NIL, Sec. 13).
COMPLETION OF BLANKS
Meaning of a material particular
It is any particular proper to be inserted in a negotiable
instrument to make it complete.
Prima facie authority to fill up the blanks
A signature on a blank paper delivered by the person
making the signature in order that the paper may be
converted into a negotiable instrument operates as a
prima facie authority to fill it up as such for any amount.
In order, however, that any such instrument when
completed may be enforced against any person who
became a party thereto prior to its completion, it must be
filled up strictly in accordance with the authority given
and within a reasonable time (NIL, Sec. 14).
NOTE: While under the law, the one in possession had
a prima facie authority to complete the check,
such prima facie authority does not extend to its use (i.e.,
subsequent transfer or negotiation) once the check is
completed (Patrimonio v. Gutierrez, G.R. No. 187769, June
4, 2014).
Q: To secure certain advances from the bank, X and Y
executed several promissory notes. When the
obligation became due, X and Y failed to pay the same
despite repeated demands. To evade their liability,
they claimed that they signed the promissory notes in
blank and they had not received the value of said
notes. Is their defense tenable?
A: NO. It is no defense that the promissory notes were
signed in blank as Section 14 of the Negotiable
Instruments Law concedes the prima facie authority of
the person in possession of negotiable instruments to fill
in the blanks (Quirino Gonzales Logging Concessionaire vs.
Court of Appeals, G.R. No. 126568, April 30, 2003).
Effect if a completed instrument was negotiated to a
holder in due course
After completion, the completed instrument which was
subsequently negotiated to an HIDC, is valid and effectual
for all purposes in his hands, and he may enforce it as if it
had been filled up strictly in accordance with the
authority given and within a reasonable time (ibid).
NOTE: Hence, the defense that the blanks were filled up
beyond the authority given and/ or beyond the
reasonable time, is not available as against a HIDC. This
defense is merely a personal one.
 NEGOTIABLE INSTRUMENTS LAW
INCOMPLETE BUT DELIVERED INSTRUMENTS (NIL,
Sec. 14)
Where the instrument is wanting in any material
particular, the person in possession thereof has a prima
facie authority to complete it by filling up the blanks
therein. And a signature on a blank paper delivered by the
person making the signature in order that the paper may
be converted into a negotiable instrument operates as a
prima facie authority to fill it up as such for any amount
(NIL, Sec. 14).
Enforcement of an incomplete but delivered
instrument
In order that any such instrument when completed may
be enforced against any person who became a party
thereto prior to its completion, it must be filled up strictly
in accordance with the authority given and within
reasonable time.
If such instrument, after completion, is negotiated to a
holder in due course, it is valid and effectual for all
purposes in his hands, and he may enforce it as if it had
been filled up strictly in accordance with the authority
given and within reasonable time (Ibid).
Non-delivery of complete instrument is a personal
defense.
Q: Lorenzo signed several blank checks instructing
Nicky, his secretary, to fill them as payment for his
obligations. Nicky filled one check with her name as
payee, placed P30,000.00 thereon, endorsed and
delivered it to Evelyn as payment for goods the latter
delivered to the former. When Lorenzo found out
about the transaction, he directed the drawee bank to
dishonor the check. When Evelyn encashed the check,
it was dishonored. Is Lorenzo liable to Evelyn? (2006
Bar)
A: Yes. This covers the delivery of an incomplete
instrument, under Section 14 of the Negotiable
Instruments Law, which provides that there was prima
facie authority on the part of Nicky to fill-up any of the
material particulars thereof. Having done so, and when it
is first completed before it is negotiated to an HIDC like
Evelyn, it is valid for all purposes, and she may enforce it
within a reasonable time, as if it had been filled up strictly
in accordance with the authority given.
Q: AX, a businessman, was preparing for a business
trip abroad. As he usually did in the past, he signed
several checks in blank and entrusted them to his
secretary with instruction to safeguard them and fill
them out only when required to pay accounts during
his absence. OB, his secretary, filled out one of the
checks by placing her name as the payee. She filled out
the amount, endorsed and delivered the check to KC,
who accepted it in good faith for payment of gems that
KC sold to OB. Later, OB told AX of what she did with
regrets. AX timely directed the bank to dishonor the
check. Could AX be held liable to KC? Answer and
reason briefly. (2004 Bar)
31
A: Yes. AX could be held liable to KC. This is a case of an
incomplete check, which has been delivered. Under
Section 14 of the NIL, KC, as a holder in due course, can
enforce payment of the check as if it had been filled up
strictly in accordance with the authority given by AX to OB
and within a reasonable time.
INCOMPLETE AND UNDELIVERED INSTRUMENTS
(NIL, SEC. 15)
Where an incomplete instrument has not been delivered,
it will not, if completed and negotiated without authority,
be a valid contract in the hands of any holder, as against
any person whose signature was placed thereon before
delivery (NIL, Sec. 15).
Non-delivery of an incomplete instrument is a real defense
which may be set up even against a holder in due course.
Enforcement of the instrument against the party
whose signature was placed after delivery
The instrument can be validly enforced against the party
whose signature was placed after delivery like an
indorser because the indorser warrants the instrument to
be genuine and in all respect what it purports to be.
Q:
A. PN makes a promissory note for P5,000.00, but
leaves the name of the payee in blank because he
wanted to verify its correct spelling first. He
mindlessly left the note on top of his desk at the
end of the workday. When he returned the
following morning, the note was missing. It
turned up later when X presented it to PN for
payment. Before X, T who turned out to have
filched the note from PN’s office, had endorsed
the note after inserting his own name in the blank
space as the payee. PN dishonored the note,
contending that he did not authorize its
completion and delivery. But X said he had no
participation in, or knowledge about the
pilferage and alteration of the note and therefore
he enjoys the rights of a holder in due course
under the Negotiable Instruments Law. Who is
correct and why?
B. Can the payee in a promissory note be a “holder
in due course” within the meaning of the
Negotiable Instruments Law (Act 2031)? Explain
your answer (2000 Bar)
A:
A. Since the negotiable instrument is still incomplete
and has not yet been delivered, PN is correct in
dishonoring the said instrument. Sec. 15 of Act 2031
provides that where an incomplete instrument has
not been delivered, it will not, if completed and
negotiated without authority, be a valid contract in
the hands of any holder, as against any person whose
signature was placed thereon before delivery. Thus,
under this section, it is a real defense that can even
be interposed against a holder in due course.
B. A payee in a promissory note cannot be a “holder in
due course” within the meaning of the NIL, because a
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
payee is an immediate party in relation to the maker.
The payee is subject to whatever defenses, real or
personal, available to the maker of the promissory
note.
COMPLETE BUT UNDELIVERED INSTRUMENTS
(SEC. 16)
It is incomplete and revocable until delivery of the
instrument for the purpose of giving it effect (NIL, Sec. 16).
Delivery is essential to the validity of any negotiable
instrument (Sundiang Sr. & Aquino, 2009).
Where a debtor who drew two checks payable to his
creditor never delivered the checks to his creditor and a
third party was able to collect the proceeds of the checks
by forging the endorsement of the creditor as payee, the
creditor has no cause of action against anyone on the basis
of the checks, since the payee acquires no interest in the
check until its delivery to him (Development Bank of Rizal
v. Sim Wei, G.R. No. 85419, March 9, 1993).
However, in another case, the Court held that the payee of
a check can sue a collecting bank to whom the check was
deposited with a forged endorsement even if the check
was never delivered to the payee, to avoid a circuity of
suits (Westmont Bank v. Ong, G.R 132560, January 30,
2002).
NOTE: The defense of want of delivery of a complete
instrument is only a personal defense which means that it
is only available against a holder NOT in due course.
Issuance of an instrument
The instrument is deemed issued upon the first delivery
of the instrument, complete in form, to a person who takes
it as holder (NIL, Sec. 191).
Conditional delivery or delivery for a special purpose
The delivery is made conditional or for a special purpose
if it was made not for the purpose of transferring the
property (title) to the instrument. In such case, if the
instrument lands in the hands of an HIDC (one who does
not know of the conditional delivery or of its special
purpose), the instrument is treated as if there is no
condition if such delivery was made to a holder not in due
course, prior parties are not bound by the instrument
(NIL, Sec. 16).
NOTE: The law contemplates that the condition is orally
or verbally conveyed to the holder upon delivery, because
of the rule that the negotiability is determined only upon
the face of the instrument.
Presumption as to delivery
If the instrument is in the possession of an HIDC, valid
delivery is conclusively presumed.
If the instrument is in the possession of a party other than
an HIDC, possession of such party constitutes only prima
facie presumption of delivery.
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Immediate Parties
Immediate parties are persons having knowledge of the
conditions or limitations placed upon the delivery of an
instrument. It means privity, and not proximity.
Remote Parties
Persons without knowledge as to the conditions or
limitations placed upon the delivery of an instrument,
even if he is the next party physically.
SIGNATURE
Validity of signature in a negotiable instrument
A party may use his full name, surname, initials or even
any mark in signing a negotiable instrument to indicate
his intention to bind himself.
A signature may be made in any manner as long as the
person signing has the intention to be bound.
Persons liable on an instrument
GR: Only persons whose signatures appear on an
instrument are liable thereon (NIL, Sec. 18).
XPNs: Notwithstanding the absence of their signatures in
their own names, the following persons are deemed
liable: (TraP FAP)
1. Person who signs in Trade or assumed name (NIL,
Sec. 18) – Party who signed must have intended to be
bound by his signature.
2. Principal who signs through a duly authorized agent
and such agent discloses the name of his principal
and adding words to show he is merely signing in a
representative capacity (NIL, Sec. 19, 20).
3. Forger (NIL, Sec. 23)
4. Acceptor, who makes his acceptance of a bill on a
separate paper (NIL, Sec. 134)
5. Person, who makes a written Promise to accept the
bill before it is drawn (NIL, Sec. 135)
Where a signature is so placed upon the instrument that
it is not clear in what capacity the person signed, he is
deemed to be an indorser (NIL, Sec. 17[f]), not a maker or
drawer.
Q: Juan borrowed P10,000.00 from Joe as evidenced
by a promissory note. All other requisites of
negotiability are present except that Juan did not affix
his usual signature thereon as he was ailing at that
time and was only able to put “X” in the blank space
meant for the signature of the maker. Is the requisite
that the instrument must be signed by the maker
complied with?
A: Yes. The letter “X” is sufficient to comply with the
requirement. It appears from the problem that such letter
was adopted by Juan with the intent to authenticate the
instrument. It is not necessary that the signature is the
usual signature of the maker.
 NEGOTIABLE INSTRUMENTS LAW
SIGNING IN TRADE NAME
As a general rule, only persons whose signatures appear
on an instrument are liable thereon. But one who signs in
a trade or assumed name is liable as if he signed his own
name (NIL, Sec. 18). It is necessary, however, that the
party who signed intended to be bound by his signature.
SIGNATURE OF AGENT
Requisites for an agent to be exempt from liability
1. He is duly Authorized
2. He adds Words to his signature indicating that he
signs as an agent/representative and
3. He Discloses the name of his principal (NIL, Sec. 20).
Legal effects of an agent’s signature
The agent’s signature, provided that the above requisites
are complied with, will bind his principal and he will be
exempt from personal liability.
Procuration
It is the act by which a principal gives power to another to
act in his place as he could himself (Fink v. Scott, 143 S.E.
305).
It operates as notice or a warning that the agent has but a
limited authority to sign and the principal is bound only
in case the agent in so signing acted within the actual
limits of his authority (NIL, Sec. 21).
INDORSEMENT BY MINOR OR CORPORATION
Indorsement made by an infant or a corporation
1. Minor – A contract entered into by a minor is
voidable, at the option of the minor. It is a real
defense that can be invoked only by the minor.
While a minor is not bound by his indorsement for
lack of capacity, he is however not incapacitated to
transfer his rights.
Where a minor committed actual fraud by
specifically stating that he is of legal age, a minor can
be bound by his signature in an instrument (PNB v.
CA, G.R. No. L-34404, June 25, 1980).
2. Incapacitated person – An incapacitated person may
also use as a real defense his incapacity to enter into
a contract. Contract entered into by the incapacitated
are voidable. Incapacitated persons include: a)
insane or demented persons and b) deaf and blind
who does not know how to write.
3. Corporation- Issuance or indorsement of an
instrument by a corporation acting beyond its
powers (ultra vires) is a REAL defense.
Q: A executed a promissory note in favor of M which
reads:
I promise to pay P (16 years old) or order P10,000.
Sgd. M
33
P indorsed it to A.
a. May A collect from M notwithstanding that P, the
indorser is a minor?
b. In case that A cannot collect from M, can he collect
from P?
A:
a. Yes. A can collect from M. Notwithstanding the fact
that A is a minor, the indorsement of P (the minor)
passes title to A (the holder). M cannot invoke the
defense of minority because such defense would only
be available to P.
b. No. A cannot collect from P, as he has a real defense
of minority on his part.
FORGERY
It is the counterfeit making or fraudulent alteration of any
writing. It happens when a signature is affixed by one who
does not claim to act as an agent and who has no authority
to bind the person whose signature he has forged (NIL,
Sec. 23).
Burden of proof in proving forgery
Forgery, as any other mechanism of fraud must be proven
clearly and convincingly, and the burden of proof lies on
the party alleging forgery (Chiang Yia Min v. CA, G.R. No.
137932, Mar. 28, 2001).
Illustration
Pay to P or order P10,000 30 days after sight.
(Sgd)D, (forged by P)
To X
P presented the instrument for acceptance. X accepted the
instrument without detecting the forgery. P then indorses
the bill to A, A to B, B to C, the present holder. In this case,
if after 30 days the holder presented the instrument to X
for payment the latter is liable despite the forgery,
because by preclusion, the acceptor admits the
genuineness of the drawer’s signature (NIL, Sec. 62)
A payee may sue the collecting bank for the amount of
the checks it paid under a forged indorsement even
when the instrument has not been delivered to him.
The collecting bank is liable to the payee and must bear
the loss because it is its legal duty to ascertain that the
payee’s indorsement (signature), its customer, was
genuine before cashing the check. That there was no
delivery yet and therefore he never became the owner of
the check is immaterial since the payee merely used one
action to reach, by desirable shortcut, the person who
ought in any event to be ultimately liable as among the
innocent persons. The payee is allowed to directly recover
from the collecting bank to simplify proceedings
(Westmont Bank v. Ong, supra).
Effects of forgery
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
GR: It does not avoid the instrument but only the forged
signature. The signature is wholly inoperative. In other
words, rights may still exist and be enforced by virtue of
such instrument as to those signatures thereto are found
to be genuine.
XPNs:
1. If the party against whom it is sought to enforce such
right is precluded from setting up forgery or want of
authority (NIL, Sec. 23).
2. Where the forged signature is not necessary to the
holder’s title, in which case, the forgery may be
disregarded (NIL, Sec. 48)
. forgery because the proximate cause of the loss is his
Persons precluded from setting up the defense of
forgery (2010 Bar)
1. Those who admit/warrant the genuineness of the
signature such as indorsers, persons negotiating by
delivery and acceptor; (NIL, Sec 56).
2. Those who by their acts, silence, or negligence, are
estopped from claiming forgery;
3. A holder of a bearer instrument who subsequently
negotiates such instrument with a prior forged
indorsement (forged indorsement is not necessary to
his title it being a bearer instrument).
Cut-off Principle
In order instruments, parties prior to forgery are relieved
or cut-off of liability. They cannot be held liable by any
holder, including a holder in due course.
Liabilities of the parties to a negotiable instrument
where an indorsement is forged
Illustration
a. If the instrument is payable to order and the
indorsement of one of the indorsers is forged, C can
enforce the note against X and B but not against M, P or A,
because were it not for the forgery of X the instrument will
not reach the possession of C.
b. If the instrument is payable to bearer, the indorsement
of X is not necessary to vest title to C because negotiation
on bearer instrument requires only delivery.
Legal consequences when a bank honors a forged
check
1. When drawer's signature is forged
GR: Drawee bank is liable because the bank is bound
to know the signature of its customers and if it pays
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
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a forged check, it must be considered as making the
payment out of its own funds and cannot ordinarily
charge the amount so paid to the account of the
depositor whose name was forged. It is also in a
superior position to detect the forgery because it has
a specimen of the signature of the maker. Lastly, by
accepting the instrument, it becomes an acceptor
who admits the genuineness of the drawer’s
signature (Pre-Week Reviewer in Commercial Law,
Dimaampao and Escalante).
XPN: When the drawer is guilty of negligence, he
should bear the loss. He is precluded from setting up
own negligence (Ibid).
2. When the payee’s signature is forged
GR: Drawee bank is liable because it owes to the
drawer-depositor an absolute and contractual duty
to pay the check only to the person to whom it is
made payable. Drawee bank, in such case, should
credit back and restore to drawer’s account the value
of the check wrongfully encashed (Ibid).
XPN: When the drawer is guilty of negligence, he
should bear the loss. He is precluded from setting up
forgery because the proximate cause of the loss is his
own negligence (Ibid).
3. When the indorser’s signature is forged
GR: Drawee bank bears the loss as it is under strict
liability to pay the check to the order of the payee.
Payment under forged indorsement is not to the
drawer’s order. Ensuingly, if the drawee bank pays a
check bearing forged signature of indorser, it does so
at its own peril.
However, the drawee bank may pass the liability to
the collecting bank who cannot interpose the defense
of forgery. The collecting bank is an indorser who
warrants that the instrument is genuine and in all
respect what it purports to be (NIL, Sec. 16). The
collecting bank had no right to be paid by the drawee
bank since the forged indorsement is inoperative.
The collecting bank my ultimately recover from the
forger (Pre-Week Reviewer in Commercial Law,
Dimaampao and Escalante).
XPN: When the drawee bank is guilty of negligence,
he must bear the loss (Ibid).
Q: X Corporation opened an account with Y Bank with
its President and Secretary/Treasurer as signatories.
While they are abroad, several checks bearing their
signatures were presented to and approved by the
bank. The amount of these checks were then debited
against the account of corporation. Upon noticing the
deductions in their account, they requested the bank
to credit back the same amount, claiming that the
deductions were unauthorized and fraudulently
made. The bank refused to restore the amount. Who
should bear the loss?
 NEGOTIABLE INSTRUMENTS LAW
A: As between a bank and its depositor, where the bank’s
negligence is the proximate cause of the loss and the
depositor is guilty of contributory negligence, the greater
proportion of the loss shall be borne by the bank. The
bank was negligent because it did not properly verify the
genuineness of the signatures in the applications for
manager’s checks while the depositor was negligent
because it clothed its accountant/bookkeeper with
apparent authority to transact business with the Bank and
it did not examine its monthly statement of account and
report the discrepancy to the Bank (Philippine National
Bank vs. FF Cruz and Company, G.R. No. 173259, July 25,
2011).
Q: X fraudulently obtained possession of the check
and forged P’s signature and then indorsed and
deposited the check with XYZ bank which honored
the check and placed the amount thereof to his credit.
Thereafter, XYZ Bank indorsed the check to the
drawee bank-ABC bank which paid it and charged the
account of the drawer.
Illustrate the liability of a drawer and a drawee-bank
in an 1) instrument payable to order and in an 2)
instrument payable to bearer in case of a forgery on
payee’s signature.
Pay to P or order P10,000.
(Sgd)D
To: ABC Bank
A:
1. If the instrument is payable to order:
a. The drawee bank is liable to the drawer for the
amount of the check and his account cannot be
charged because the indorsement of the payee is
a forgery. Hence, it is wholly inoperative and
therefore, ABC Bank has no right to ask the
drawer for its payment.
b. XYZ Bank is however, liable to the drawee bank
because of his warranty as an indorser. (NIL, Sec.
66)
c. D, the drawer, is not liable on the check because
its order is to pay P or his order and not to any
other person.
2. If the instrument is payable to bearer:
a. ABC Bank, the drawee-bank, may charge the
amount thereof to the account of the drawer
because the forged indorsement did not prevent
the transfer of title. The remedy of the drawer is
against the forger.
b. Drawer has no cause of action against collecting
bank, since the duty of collecting bank is only to
the payee (Manila Lighter Transportation, Inc. v.
CA, G.R. No. L-50373 February 15, 1990). The
drawee-bank can recover from the collecting
bank because even if the indorsement on the
check deposited by the bank's client is forged,
collecting bank is bound by its warranties as an
indorser and cannot set up defense of forgery as
35
against drawee bank (Associated Bank v. CA,
supra).
Q: P sold to M 10 grams of shabu worth Php5,000.00.
As he had no money at the time of the sale, M wrote a
promissory note promising to pay P or his order
Php5,000.00. P then indorsed the note to X (who did
not know about the shabu), and X to Y. Unable to
collect from P, Y then sued X on the note. X set up the
defense of illegality of consideration. Is he correct?
(2011 Bar)
A: No, since X, a general indorser, warrants that the note
is valid and subsisting.
Q: X entrusted his check books, credit cards,
passbooks, bank statements and cancelled checks to
his secretary. He also introduced the secretary to the
bank for purposes of reconciliation of his accounts.
Subsequently, X’s secretary forged his signature on
the checks and was able to withdraw his money. Is the
drawee bank liable for the amounts withdrawn by the
secretary?
A: No, he is precluded from setting up the forgery due to
his own negligence in entrusting to his secretary his credit
cards and check book including the verification of his
statements of account (Ilusorio v. CA, G.R. No. 139130,
November 27, 2002).
Q: The drawer’s signature was forged. There is,
however, a provision in the monthly bank statement
that if the drawer’s signature was forged, the drawer
should report it within 10 days from receipt of the
statement to the drawee. The drawer, however, failed
to do so. What will be its effect insofar as the drawer’s
right is concerned?
A: The failure of the drawer to report the forgery within
ten days from receipt of the monthly bank statement from
the drawee bank does not preclude the drawer from
questioning the mistake of the drawee bank despite the
provision (BPI v. CASA Montessori Internationale, supra).
Q: If forgery was committed by an employee of the
drawer whose signature was forged, does the
relationship amount to estoppel such that the drawer
is precluded in recovering from the drawee bank?
A: The bare fact that the forgery was committed by an
employee of the party whose signature was forged can not
necessarily imply that such party’s negligence was the
cause of the forgery in the absence of some circumstances
raising estoppel against the drawer (Samsung
Construction Co. v. Far East Bank and Trust Company, G.R.
No. 129015, August 13, 2004).
CONSIDERATION
Consideration
It is an inducement to a contract that is the cause, price or
impelling influence, which induces a party to enter into a
contract.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
NOTE: Every negotiable instrument is deemed prima
facie to have been issued for a valuable consideration
(NIL, Sec. 24).
A check constitutes an evidence of indebtedness and is a
veritable proof of an obligation. Thus, based on Sec. 24 of
the NIL, checks complete and delivered to a person by
another are sufficient by themselves to prove the
existence of the loan obligation obtained by the latter
from the former. (Ting Ting Pua v. Spouses Tiong and
Caroline Teng, G.R. No. 198660, October 23, 2013, in Divina,
2014)
Q: Lorenzo drew a bill of exchange in the amount of
P100,000.00 payable to Barbara or order, with his
wife, Diana, as drawee. At the time the bill was drawn,
Diana was unaware that Barbara is Lorenzo’s
paramour. Barbara then negotiated the bill to her
sister, Elena, who paid for it for value, and who did not
know who Lorenzo was. On due date, Elena presented
the bill to Diana for payment, but the latter promptly
dishonored the instrument because, by then, Diana
had already learned of her husband’s dalliance. Does
the illicit cause or consideration adversely affect the
negotiability of the bill? Explain. (2009 Bar)
A: No, the bill of exchange is negotiable notwithstanding
the illegality of consideration, provided all the
requiresites under Sec. 1 of NIL are complied with. The
fact that Barbara, the paee, was the paramour of Lorenzo
does not militate against negotiability. The requisites of
negotiability are not concerned with the validity of
consideration. Validity is an issue distinct and separate
from the question of negotiability. The negotiability of the
bill of exchange is determined by ascertaining wheter the
requisites of Sec. 1 of NIL appear on the face of the
instrument (Dimaampao and Escalante, 2014).
Q: R issued a check for P1M which he used to pay S for
killing his political enemy. Can the check be
considered a negotiable instrument? (2007 Bar)
A: Yes. The check can be considered as a negotiable
instrument since it complied with the requirements of
negotiability under Sec. 1 of the Negotiable Instruments
law. The unlawful consideration for the issuance of the
check is of no moment and will not affect the negotiability
of the check as it merely constitutes a defect of title under
Sec. 55 of the NIL.
Q: Virginia, the General Manager of North Star, in
accommodation and upon the instruction of its client,
Engr. Cayanan, sent the amount of US$60,000 to View
Sea Ventures Ltd., in Nigeria from her personal
account in Citibank Makati. Virginia again sent
US$40,000 to View Sea Ventures by telegraphic
transfer, with US$15,000 coming from Engr. Cayanan.
To cover payment of the foregoing obligations, Engr.
Cayanan issued five checks to North Star. When
presented for payment, two of the checks were
dishonored for insufficiency of funds while the other
three checks were dishonored because of a stop
payment order from Engr. Cayanan. North Star
demanded payment, but Engr. Cayanan failed to settle
his obligations. Hence, North Star instituted a
criminal case, charging Engr. Cayanan with violation
UNIVERSITY OF SANTO TOMAS
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of the Bouncing Checks Law. Engr. Cayanan insists
that the US$85,000 sent to View Sea Ventures was not
sent for the account of North Star but for the account
of Virginia as her investment. Engr. Cayanan claims
that North Star did not give any valuable
consideration for the checks since the US$85,000 was
taken from the personal dollar account of Virginia
and not the corporate funds of North Star.
A: Upon issuance of a negotiable check, in the absence of
evidence to the contrary, it is presumed that the same was
issued for valuable consideration which may consist
either in some right, interest, profit or benefit accruing to
the party who makes the contract, or some forbearance,
detriment, loss or some responsibility, to act, or labor, or
service given, suffered or undertaken by the other side.
Under the Negotiable Instruments Law, it is presumed
that every party to an instrument acquires the same for a
consideration or for value. As Engr. Cayanan alleged that
there was no consideration for the issuance of the subject
checks, it devolved upon him to present convincing
evidence to overthrow the presumption and prove that
the checks were in fact issued without valuable
consideration. Engr. Cayanan, however, has not presented
any credible evidence to rebut the presumption, as well as
North Star’s assertion, that the checks were issued as
payment for the US$85,000 Engr. Cayanan owed to the
corporation and not to the manager who facilitate the
fund transfer. (Engr. Cayanan v. North Star International
Travel Inc., G.R. No. 172954, October 5, 2011).
Holder for value
A holder for value is one who has given a valuable
consideration for the instrument. A holder for value is
deemed as such not only as regards the party to whom the
value has been given to by him but also in respect to all
those who became parties prior to the time when value
was given.
NOTE: Where the holder has a lien on the instrument
arising either from contract or by implication of law, he is
deemed a holder for value to the extent of his lien (NIL,
Sec. 27).
Value
It is any consideration sufficient to support a simple
contract. An antecedent or pre-existing debt constitutes
value and is deemed such whether the instrument is
payable on demand or at a future time (NIL, Sec. 25).
Want or absence of consideration vs. Failure of
consideration (1996, 2007 Bar)
WANT OR ABSENCE OF FAILURE OF
CONSIDERATION CONSIDERATION
Total lack of any valid Failure or refusal of one of
consideration for the the parties to do, perform or
contract comply with the
consideration agreed upon
 NEGOTIABLE INSTRUMENTS LAW
Effect of want of consideration
It becomes a matter of defense as against any person not
a holder in due course, thus, a PERSONAL defense (NIL,
Sec. 28).
Partial failure of consideration
Partial failure of consideration is a defense pro tanto,
whether the failure is an ascertained and liquidated
amount or otherwise (ibid.).
Inadequacy of consideration
GR: Inadequacy of consideration does not invalidate the
instrument.
XPN: There has been fraud, mistake or undue influence
(NCC, Art. 1355).
NOTE: However, knowledge of inadequacy of
consideration would render the holder not HIDC liable
(NIL, Sec. 53).
Q: X borrowed money from Y in the amount of Php
1Million and as payment, issued a check. Y then
indorsed the check to his sister Z for no consideration.
When Z deposited the check to her account, the check
was dishonored for insufficiency of funds. Is Z a
holder in due course? Explain your answer (2012
Bar)
A: No, Z is not an HIDC. Under Sec. 52 (c), NIL, it is
expressly provided that the instrument must be acquired
in good faith and for value to consider him a HIDC.
ACCOMMODATION PARTY
Accommodation party
An accommodation party is one who has signed the
instrument as maker, drawer, acceptor, or indorser,
without receiving value therefor, and for the purpose of
lending his name to some other person (NIL, Sec. 29).
Requisites to be an accommodation party
1. Accommodation party must sign as maker, drawer,
acceptor or indorser;
2. No value is received by the accommodation party
from the accommodated party; and
3. The purpose is to lend the name.
NOTE: It does not mean, however, that one cannot be an
accommodation party merely because he has received
some consideration for the use of his name. The phrase
“without receiving value therefor” only means that no
value has been received “for the instrument” and not “for
lending his name.”
Q: Susan Kawada borrowed P500,000 from XYZ Bank
which required her, together with Rose Reyes who
did not receive any amount from the bank, to execute
a promissory note payable to the bank, or its order on
stated maturities. The note was executed as so
37
agreed. What kind of liability was incurred by Rose,
that of an accommodation party or that of a solidary
debtor? Explain. (2003 Bar)
A: Rose incurs the liability of an accommodation party
since she executed the promissory without receiving
value therefor and for the purpose of lending his name to
Susan Kawada, the accommodated party. Nonetheless, as
an accommodation maker, Rose is primarily and
unconditionally liable on the promissory note to a holder
for value, regardless of whether she stands as a surety or
solidary co-debtor since such distinction would be
entirely immaterial and inconsequential as far as a holder
for value is concerned.
Q: Juan Sy purchased from “A” Appliance Center one
generator set on installment with chattel mortgage in
favor of the vendor. After getting hold of the
generator set, Juan Sy immediately sold it without
consent of the vendor. Juan Sy was criminally charged
with estafa. To settle the case extra judicially, Juan Sy
paid the sum of P20,000 and for the balance of
P5,000.00 he executed a promissory note for said
amount with Ben Lopez as an accommodation party.
Juan Sy failed to pay the balance.
a. What is the liability of Ben Lopez as an
accommodation party? Explain.
b. What is the liability of Juan Sy? (2003 Bar)
A:
a. Section 29 of the Negotiable Instruments Law
provides that an accommodation party is liable on
the instrument to a holder for value, notwithstanding
that such holder at the time of taking the instrument
knew him to be only an accommodation party. As an
accommodation party, Ben Lopez is primarily and
unconditionally liable on the promissory note to a
holder for value as if the contract was not for
accommodation.
b. Under Section 14 of the NIL, Juan Sy is primarily
liable to the extent of P5,000 in the hands of a holder
in due course. However, if Ben Lopez paid the note,
Juan Sy has the obligation to reimburse the former to
the extent of the amount paid.
Q: Dagul has a business arrangement with Facundo.
The latter would lend money to another, through
Dagul, whose name would appear in the promissory
note as the lender. Dagul would then immediately
indorse the note to Facundo. Is Dagul an
accommodation party? Explain. (2005 Bar)
A: No. An accommodation note is one to which the
accommodation party has put his name, without
consideration, for the purpose of accommodating some
other party who is to use it and is expected to pay it. The
accommodation is not one to the person who takes the
note — that is, the payee or indorsee, but one to the maker
or indorser of the note. In this case, the indorser, Dagul, in
making the indorsement to the lender, Facundo, was
merely acting as agent for the latter or, as a mere vehicle
for the transference of the naked title from the borrower
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
or maker of the note and was not acting as an
accommodation party.
Accommodation party vs. Regular party
ACCOMMODATION PARTY REGULAR PARTY
Signs an instrument
Signs the instrument for
without receiving value
value (NIL, Sec. 24)
therefor (NIL, Sec. 29)
Purpose of signing is to
lend his name to another Not for that purpose
person (NIL, Sec. 29)
May always show, by parol
Cannot disclaim personal
evidence, that he is only
liability by parol evidence
such
Cannot avail of the defense
of absence/failure of
May avail of such defense
consideration against a
holder not in due course
May sue reimbursement
after paying the May not sue
holder/subsequent party
Q: PCIB granted a credit line to Gonzales through the
execution of the COHLA. Gonzales drew from said
credit line through the issuance of check. Gonzales
issued a check in favor of Rene Unson, drawn against
the credit line. However, upon presentment for
payment by Unson of said check, it was dishonored by
PCIB due to the termination by PCIB of the credit line
under COHLA for the unpaid periodic interest dues
from the loans of Gonzales and the spouses Panlilio.
Gonzales, through counsel, wrote PCIB insisting that
the check he issued had been fully funded, and
demanded the return of the proceeds of his FCD as
well as damages for the unjust dishonor of the check.
Was it proper for PCIB to dishonor the check issued
by Gonzales against the credit line under the COHLA?
A: No. While a maker who signed a promissory note for
the benefit of his co-maker (who received the loan
proceeds) is considered as an accommodation party, he is,
nevertheless, entitled to a written notice on the default
and the outstanding obligation of the party
accommodated. There being no such written notice, the
Bank is grossly negligent in terminating the credit line of
the accommondation party for the unpaid interest dues
from the loans of the party accommodated and in
dishonoring a checkdrawn against such credit line
(Eusebio Gonzales v. Philippine Commercial and
International Bank, Edna Ocampo, and Roberto Noceda,
G.R. No. 180257, February 23, 2011).
Extent of liability of an accommodation party
1. Right to revoke accommodation – before the
instrument has been negotiated for value.
2. Right to reimbursement from the accommodated
party – the accommodated party is the real debtor.
UNIVERSITY OF SANTO TOMAS
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Hence, the cause of action is not on the instrument
but on an implied contract of reimbursement.
3. Right to contribution from other solidary
accommodation maker (Sadaya v. Sevilla, G.R. No. L-
17845, April 27, 1967).
Accommodation party cannot raise the defense of
absence or want of consideration
An accommodation party who lends his name to enable
the accommodated party to obtain credit or raise money
is liable on the instrument to a holder for value even if he
receives no part of the consideration. He assumes the
obligation to the other party and binds himself to pay the
note on its due date. By signing the note, the
accommodation party thus became liable for the debt
even if he had no direct personal interest in the obligation
or did not receive any benefit therefrom (Dela Rama v.
Admiral United Savings Bank, G.R. No. 154740, April 16,
2008).
Holder for value may recover from an
accommodation party notwithstanding his
knowledge of such fact
This is so because an accommodation party is liable on the
instrument to a holder for value, notwithstanding that
such holder at the time of taking the instrument knew him
to be only an accommodation party. The accommodation
party is liable to a holder for value as if the contract was
not for accommodation. It is not a valid defense that the
accommodation party did not receive any valuable
consideration when he executed the instrument. Nor is it
correct to say that the holder for value is not a holder in
due course merely because at the time he acquired the
instrument, he knew that the indorser was only an
accommodation party (Ang Tiong v. Ting, G.R. No. L-26767,
February 22, 1968).
Q: To accommodate Carmen, maker of a promissory
note, Jorge signed as indorser thereon, and the
instrument was negotiated to Raffy, a holder for
value. At the time Raffy took the instrument, he knew
Jorge to be an accommodation party only. When the
promissory note was not paid, and Raffy discovered
that Carmen had no funds, he sued Jorge. Jorge pleads
in defense the fact that he had endorsed the
instrument without receiving value therefor, and the
further fact that Raffy knew that at the time he took
the instrument Jorge had not received any value or
consideration of any kind for his indorsement. Is
Jorge liable? Discuss. (1990, 1996 Bar)
A: Yes, Jorge is liable. By the clear mandate of section 29
of the Negotiable Instruments Law, an accommodation
party is "liable on the instrument to a holder for value,
notwithstanding that such holder at the time of taking the
instrument knew him to be only an accommodation
party." It is not a valid defense that the accommodation
party did not receive any valuable consideration when he
executed the instrument (Ang Tiong vs Ting, supra).
Q: For the purpose of lending his name without
receiving value therefor, Pedro makes a note for
P20,000 payable to the order of X, who in turn
 NEGOTIABLE INSTRUMENTS LAW
negotiates it to Y, the latter knowing that Pedro is not
a party for value.
a. May Y recover from Pedro if the latter interposes
the absence of consideration?
b. Supposing under the same facts, Pedro pays the
said Php20,000.00 may he recover the same
amount from X? (1998 Bar)
A:
a. Yes, Y may recover from Pedro. Section 29 of the NIL
provides that a person who has signed the
instrument as maker, drawer, acceptor, or indorser,
without receiving value therefor, and for the purpose
of lending his name to some other person is liable on
the instrument to a holder for value, notwithstanding
the fact that such holder at the time of taking the
instrument knew him to be only an accommodation
party. Pedro, being an accommodation maker of a
note, may thus be held primarily and unconditionally
liable therefor.
b. Yes, Pedro may recover from X. When the
accommodation party makes payment to the holder
of the note, he has the right to sue the accommodated
party for reimbursement, since the relation between
them is in effect that of principal and surety, the
accommodation party being the surety. Thus, after
paying the holder, Pedro may seek reimbursement
from X, the accommodated party.
Q: On June 1, 1990, A obtained a loan of ₱100,000
from B, payable not later than December 20, 1990. B
required A to issue him a check for that amount to be
dated December 20, 1990. Since he does not have any
checking account, A, with the knowledge of B,
requested his friend, C, President of Saad Banking
Corporation (Saad) to accommodate him. C agreed,
he signed a check for the aforesaid amount dated
December 20, 1990, drawn against Saad’s account
with the ABC Commercial Banking Co. The By-laws of
Saad requires that checks issued by it must be signed
by the President and the Treasurer or the Vice-
President. Since the Treasurer was absent, C
requested the Vice-President to co-sign the check,
which the latter reluctantly did. The check was
delivered to B. The check was dishonoured upon
presentment on due date for insufficiency of funds.
a. Is Saad liable on the check as an accommodation
party?
b. If it is not, who then, under the above facts, is/are
liable? (1991 Bar)
A:
a. No, Saad is not liable as an accommodation party.
This is because the issue or indorsement of
negotiable paper by a corporation without
consideration and for the accommodation of another
is ultra vires. Hence, one who has taken the
instrument with knowledge of the accommodation
nature thereof cannot recover against a corporation
where it is only an accommodation party. While it
may be legally possible for a corporation whose
business is to provide financial accommodations in
the ordinary course of business, such as one given by
39
a financing company, to be an accommodation party,
this situation, however, is not the case at bar.
b. Considering that both the President and the Vice-
President were signatories to the accommodation,
they themselves can be subject to the liabilities of
accommodation parties to the instrument in their
personal capacity (Crisologo-Jose v. CA, G.R. No.
80499, September 15, 1989).
Q: As a rule under the NIL, a subsequent party may
hold a prior party liable but not vice-versa. Give 2
instances where a prior party may hold a subsequent
party liable. (2008 Bar)
A: A party may hold a subsequent party liable in the
following instances: (1) in case of an accommodated
party; and (2) in case of an acceptor for honor. An
accommodation party may hold the party accommodated
liable to him, even if the party accommodated is a
subsequent party. The relation between them is that of
principal and surety. For the same reason, an acceptor for
honor may hold the party for whose honor he accepted a
bill of exchange liable to him. A payer for honor is
subrogated to the rights of the holder as regards the party
for whose honor he paid and all parties liable to the latter.
Accommodation made by a corporation
The issue or indorsement of a negotiable paper by a
corporation without consideration and for the
accommodation of another is ultra vires. Hence, one who
has taken the instrument with knowledge of the
accommodation nature thereof cannot recover against a
corporation where it is only an accommodation party
(Crisologo-Jose v. CA, G.R. No. 80599, September 15, 1989).
NEGOTIATION
Negotiation
Negotiation is the transfer of an instrument from one
person to another so as to constitute the transferee the
holder thereof (NIL, Sec. 30).
NOTE: A holder is the payee or indorsee of a bill or note,
who is in possession of it, or the bearer thereof (NIL, Sec.
191).
Methods of transferring an instrument
1. Issuance – first delivery of the instrument complete
in form to a person who takes it as a holder.
2. Negotiation
3. Assignment – transfer of the title to the instrument,
with the assignee generally taking only such title as
his assignor has, subject to all defenses available
against the assignor.
DISTINGUISHED FROM ASSIGNMENT
NEGOTIATION ASSIGNMENT
Only a negotiable Non-negotiable
instrument may be instrument may be
negotiated. assigned absent any
prohibition against
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW

assignment written on its and thereafter, and expressly stated that the person who
face. signed for and received the stocks of rice was Cañada.

The transferee can have It bears stressing that the accused, to be guilty of estafa as
The transferee, if he is a
no better right than his charged, must have used the check in order to defraud the
HIDC may acquire better
transferor; he merely complainant. What the law punishes is the fraud or deceit,
rights than his
steps into the shoes of the not the mere issuance of the worthless check. Wagas
transferor.
assignor could not be held guilty of estafa simply because he had
issued the check used to defraud Ligaray. The proof of
The holder can hold the guilt must still clearly show that it had been Wagas as the
The transferee has no
drawer and the indorsers drawer who had defrauded Ligaray by means of the check
right of recourse for
liable if the party (People v. Gilbert Wagas, G.R. No. 157943, September 4,
payment against
primarily liable does not 2013).
immediate parties.
pay.
Delivery of negotiable instrument

MODES OF NEGOTIATION Delivery means transfer of possession, actual or

Modes of negotiation
1. If payable to bearer- it is negotiated by mere delivery
2. If payable to order- it is negotiated by the
indorsement of the holder completed by delivery
(NIL, Sec. 30).
Q: Ligaray charged Wagas with estafa, alleging that
Wagas placed an order of 200 bags of rice over the
telephone with a post-dated check payable to cash as
payment. The seller Ligaray delivered the rice to
Cañada, brother-in-law of Wagas. In turn Ligaray
received a post-dated check issued by Wagas, which
was later on dishonored due to insufficiency of funds.
During trial, Wagas averred that he issued the check
to Cañada, and that it was the latter who had
transacted with Ligaray. While admitting that he
signed a letter acknowledging his debt to Ligaray,
Wagas insisted that he signed the same just to
accommodate the please of his sister and her husband
Cañada.
Is Wagas guilty of estafa?
A: No. In order to constitute estafa under Article 315,
paragraph 2(d) of the RPC, as amended, the act of
postdating or issuing a check in payment of an obligation
must be the efficient cause of the defraudation. This
means that the offender must be able to obtain money or
property from the offended party by reason of the
issuance of the check, whether dated or postdated. In
other words, the Prosecution must show that the person
to whom the check was delivered would not have parted
with his money or property were it not for the issuance of
the check by the offender.
Under the NIL (Sec. 9 and Sec. 30), a check made payable
to cash is payable to the bearer and could be negotiated
by mere delivery without the need of indorsement.
This rendered it highly probable that Wagas had issued
the check not to Ligaray, but to somebody else like
Cañada, his brother-in-law, who then negotiated it to
Ligaray. Relevantly, Ligaray confirmed that he did not
himself see or meet Wagas at the time of the transaction
constructive, from one person or another (NIL, Sec. 191).
NOTE: Where the instrument is no longer in the
possession of the party whose signature appears thereon,
there is a prima facie presumption of a valid and
intentional delivery by him (NIL, Sec. 16).
Bearer instrument is negotiated by indorsement and
delivery
A bearer instrument, even when indorsed specially, may
nevertheless be further negotiated by delivery, but the
person indorsing specially is liable as indorser to only
such holders who acquired title through his indorsement
(NIL, Sec. 40). This spawns the rule that A BEARER
INSTRUMENT IS ALWAYS A BEARER INSTRUMENT.
Q: A makes a promissory note payable to bearer and
delivers the same to B. B, however, endorses it to C in
this manner:
"Payable to C. Signed: B."
Later, C, without indorsing the promissory note,
transfers and delivers the same to D. The note is
subsequently dishonored by A. May D proceed against
A for the note? (1998 Bar)
A: Yes. D may collect from A. The note made by A is a
bearer instrument. Where an instrument, payable to
bearer, is indorsed, it may nevertheless be further
negotiated by delivery. Despite the special indorsement
made by B, the note remained a bearer instrument and
can be negotiated by mere delivery. When C delivered
and transferred the note to D, the latter became a holder
thereof. As such, D can proceed against A.
Q: X executed a promissory note with a face value of
Php50,000.00, payable to the order of Y. Y indorsed
the note to Z, to whom Y owed Php30,000.00. If X has
no defense at all against Y, for how much may Z collect
from X? (2011 Bar)
A: Php 50,000.00, but with the obligation to hold
Php20,000.00 for Y's benefit.

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 NEGOTIABLE INSTRUMENTS LAW
Assignment of a negotiable instrument
The transferee does not become a holder and he merely
steps into the shoes of the transferor. Any defense
available against the transferor is available against the
transferee (Salas v. CA, G.R. No. 76788, January 22, 1990).
Delivery of an order instrument without indorsement
If an order instrument is not indorsed, the negotiation is
incomplete and the instrument is in effect merely
assigned. The transferee acquires the right to have the
indorsement of the transferor. It is only at the time of
indorsement that negotiation takes effect and the
transferee acquires the rights of a holder (NIL, Sec. 49).
Negotiation by a prior party
Where an instrument is negotiated back to a prior party,
such party may reissue and further negotiate the same.
But, he is not entitled to enforce payment thereof against
any intervening party to whom he was personally liable
(NIL, Sec. 50). However, he may strike out the intervening
indorsements because they are not necessary for his title
and he is liable to them because of his initial indorsement
(NIL, Sec. 48).
e.g. “A” payee indorsed the instrument to B, then B
indorsed it to C, C to D, then D to B. B can further negotiate
the instrument. He may also strike out the indorsement of
C and D (Sundiang Sr. & Aquino, 2014).
Limitations on re-negotiation
In the following cases, a prior party cannot further
negotiate the instrument:
1. Where it is payable to the order of a third person, and
it has been paid by the drawer (NIL, Sec. 121[a]).
2. Where it was made or accepted for accommodation
and has been paid by the party accommodated (NIL,
Sec. 121[b]).
3. In other cases, where the instrument is discharged
when acquired by a prior party (NIL, Sec. 119[e]).
KINDS OF INDORSEMENTS
Indorsement
It is the signing of the name of the indorser on the
instrument with the intent to transfer title to the same.
GR: Indorsement must be of the entire instrument (NIL,
Sec. 32).
XPN: When the instrument has been paid in part.
Indorsement to two or more indorsees severally does NOT
operate as a negotiation of the instrument.
Indorsement should be placed:
1. On the instrument itself; or
2. On a separate piece of paper attached to the
instrument called “allonge” (NIL, Sec. 31)
41
Kinds of indorsement
1. Special (NIL, Sec. 34) – Specifies the person to whom
or to whose order the instrument is to be payable. It
is also known as specific indorsement, or
indorsement in full.
An instrument payable to bearer indorsed specially
may nevertheless be negotiated by delivery (once a
bearer always a bearer) (NIL, Sec. 40).
2. Blank (NIL, Sec. 34) –Specifies no indorsee.
a. Instrument is payable to bearer and may be
negotiated by delivery;
b. May be converted to special indorsement by
writing over the signature of the indorser in
blank any contract consistent with the
character of indorsement (NIL, Sec. 35).
3. Restrictive (NIL, Sec. 36)–When the instrument:
a. Prohibits further negotiation of the instrument
(it destroys the negotiability of the instrument);
b. Constitutes the indorsee the agent of the
indorser;
c. Vests the title in the indorsee in trust for or to
the use of some persons.
But mere absence of words implying power to
negotiate does not make an instrument restrictive.
4. Qualified (NIL, Sec. 38) – Constitutes the indorser a
mere assignor of the title to the instrument made by
adding to the indorser’s signature words like,
without recourse, sans recourse or at the indorsee’s
own risk (this serves as an ordinary equitable
assignment).
5. Absolute–The indorser binds himself to pay:
a. Upon no other condition than failure of prior
parties to do so;
b. Upon due notice to him of such failure
6. Conditional (NIL, Sec. 39)–Right of the indorsee is
made to depend on the happening of a contingent
event. The party required to pay may disregard the
conditions.
NOTE: The condition refers to the indorsement not
on the instrument itself.
7. Joint (NIL, Sec. 41) – Indorsement made payable to 2
or more persons who are not partners.
All of them must indorse unless the one indorsing has
authority to indorse for the others.
8. Irregular (NIL, Sec. 64) – A person who, not otherwise
a party to an instrument, places thereon his signature
in blank before delivery.
9. Facultative –Indorser waives presentment and
notice of dishonor, enlarging his liability and his
indorsement.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
10. Successive – Indorsement to two persons or more in Indorsing an instrument as cashier or other officers
succession. of a corporation

Any of them can indorse to effect negotiation of the The negotiable instrument is deemed prima facie payable
instrument. to the corporation of which said person is such an officer.
It may be negotiated further by either indorsement of the
Restrictive Indorsement corporation or indorsement of the officer (NIL, Sec. 42).

Indorsee has the following rights in a restrictive Date of indorsement

indorsement:
GR: Every negotiation is deemed prima facie to have been
1. To receive payment of the instrument; effected before the instrument was overdue.
2. To bring any action thereon that the indorser could
bring; and XPN: Except where an indorsement bears date after the
3. To transfer his rights as such indorsee, where the maturity of the instrument (NIL, Sec. 45).
form of the indorsement authorizes him to do so
(NIL, Sec. 37,). Striking out of an indorsement

All subsequent indorsees acquire only the title of the 1 st
indorsee under the restrictive indorsement (NIL, Sec. 37).
An instrument negotiable in origin is always negotiable
until paid, which is still true even if the NI was dishonored
or is already overdue, unless the instrument has been
restrictively indorsed or when discharged by payment or
otherwise (NIL, Sec. 47)
Qualified indorsement
A qualified indorsement does NOT destroy the
negotiability of the instrument. It only means that the
qualified indorser is NOT liable when the maker is
insolvent. A qualified indorser is liable only if the
instrument is dishonored by non-acceptance or non-
payment due to:
The holder may, at any time, strike out any indorsement
which is not necessary to his title. Indorser whose
indorsement is struck out, and all indorsers subsequent to
him are relieved from liability on the instrument (NIL, Sec.
48).
RIGHTS OF THE HOLDER
Holder
The payee or indorsee of a bill or note who is in
possession of it or the bearer thereof (NIL, Sec. 191).
In general, a holder has the right to sue and to receive
payment (NIL, Sec. 51).
Classes of holders

1. Forgery; 1. Holders in general (Simple Holders) (NIL, Sec. 51).

2. Lack of good title on the part of the indorser; 2. Holders for value (NIL, Sec. 26).
3. Lack of capacity to indorse on the part of the prior 3. Holders in due course (NIL, Secs. 52, 57).
parties; or
4. The fact that at the time of the indorsement, the HOLDER IN DUE COURSE (HIDC)
instrument was valueless or not valid at the time of
the indorsement which fact was known to him. To be considered as a HIDC, the requisites under Sec. 52
of the NIL must be complied with: (COFI)
Instances when the indorsement is considered only as 1. That is Complete and regular upon its face;
equitable assignment 2. Became the holder before it was Overdue, and
without notice that it has been previously
1. Indorsement of only a part of the amount of the dishonored, if such was the fact;
instrument (NIL, Sec. 32) 3. Took it in good Faith and for value;
2. In cases of qualified indorsement (NIL, Sec. 38) 4. At the time it was negotiated to him, he had no notice
3. Transfer of an instrument payable to order by mere of any Infirmity in the instrument or defect in the title
delivery (NIL, Sec. 49). of the person negotiating it. (NIL, Sec. 52)
Joint indorsement An instrument is complete when it is not wanting in any
material particular and regular when there is no
GR: All must indorse in order for the transaction to alteration apparent on the face of the instrument.
operate as a negotiation (NIL, Sec. 41).
If the instrument is payable on demand, the date of
XPN: Only one of them may indorse in case the: maturity is determined by the date of presentment, which
must be made within a reasonable time after its issue, if it
1. Payees or indorsees are partners; and is a note, or after the last negotiation thereof, if it is a bill
2. Payee or indorsee indorsing has authority to indorse of exchange (NIL, Secs. 71 and 143[a])
for the others.

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 NEGOTIABLE INSTRUMENTS LAW
Where the transferee receives notice of any infirmity in note against Larry the same way as Devi could
the instrument or defect in the title of the person enforce it.
negotiating the same before he had paid the full amount
agreed to be paid, he will be deemed a holder in due Q: X borrowed money from Y in the amount of Php 1
course only to the extent of the amount paid by him (NIL, Million and as payment, issued a check. Y then
Sec. 54). indorsed the check to his sister Z for no consideration.
When Z deposited the check to her account, the check
Q: R issued a check for P1M which he used to pay S for was dishonored for insufficiency of funds. Is Z a
killing his political enemy. holder in due course? Explain your answer. (2012
Bar)
a. Does S have a cause of action against R in case of
dishonor by the drawee bank?
A: No. A holder in due course is a holder who has taken
b. If S negotiated the check to T, who accepted it in
the instrument under the following conditions: (a)That it
good faith and for value, may R be held
is complete and regular upon its face; (b) That he became
secondarily liable by T? (2007 Bar)
the holder of it before it was overdue, and without notice
that it had been previously dishonored, if such was the
A:
fact; (c) That he took it in good faith and for value; (d) That
a. No. S does not have a cause of action against R in case
at the time it was negotiated to him he had no notice of
of dishonor by the drawee bank. S is not a holder in
any infirmity in the instrument or defect in the title of the
due course, thus, R can raise the defense that the
person negotiating it. All of the four conditions must
check was issued for an illegal consideration. concur in order for a holder to qualify as a holder in due
course. In the case at hand, Z did not acquire the
b. Yes. R may be held liable by T since T is a holder in
instrument for value. As such she cannot be considered as
due course of the instrument. The unlawful
a holder in due course.
consideration of the check is only a personal defense
that cannot be interposed to a holder in due course
A holder is presumed to be an HIDC (1993, 2007 Bar)
who receives the check free from the defect of title of
S.
GR: Every holder is deemed prima facie to be an HIDC.
Q: Larry issued a negotiable promissory note to
XPN: When it is shown that the title of any person who
Evelyn and authorized the latter to fill up the amount
has negotiated the instrument was defective. But this is
in blank with his loan account in the sum of P1,000.
only as regards a party who became such after the
However, Evelyn inserted P5,000 in violation of the
acquisition of the defective title (NIL, Sec.59).
instruction. She negotiated the note to Julie who had
no knowledge of the infirmity. Julie in turn negotiated
Payment in due course
said note to Devi for value and who had no knowledge
of the infirmity.
In order for payment to constitute payment in due course,
it must be made:
a. Can Devi enforce the note against Larry and if she
can, for how much? Explain.
1. At or after the maturity of the instrument
b. Supposing Devi endorses the note to Baby for
2. To the holder thereof, in good faith and without
value but who has knowledge of the infirmity, can
notice that his title is defective (NIL, Sec. 88).
the latter enforce the note against Larry? (1993
Bar)
Shelter principle or Holder in Due Course by
Subrogration
A:
a. Devi can enforce the note against Larry since she is a
Under the "shelter principle," the HIDC, by negotiating the
holder in due course. Since the document delivered
instrument, to a party not an HIDC, transfers all his rights
to Evelyn is in blank and she was authorized to fill up
as such holder to the latter and acquires the right to
the amount in the promissory note, Devi can enforce
enforce the instrument as if he was an HIDC. The principle
against Larry the amount of P5,000.00 as this case
applies to a "sheltered" holder who is not a party to any
falls squarely under Sec 14 of the Negotiable
fraud or illegality impairing the validity of the instrument.
Instruments Law. As against a holder in due course,
the instrument is always valid and enforceable to the
Specifically, a holder is entitled to the following rights:
full extent. The defense of filing-up contrary to
(1998, 2007, 2009 Bar)
authorization is a mere personal or equitable defense
(Villanueva, 2009).
1. Hold the instrument free from defenses available to
b. Baby cannot enforce the note against Larry since she
parties among themselves;
is not a holder in due course because Larry could
2. Hold the instrument free from any defect of title of
interpose the real and personal defenses to defeat
prior parties;
the claim of Baby. However, because of the shelter
3. Receive payment;
principle in Negotiable Instruments Law, Baby could
4. Enforce payment of the instrument for the full
be elevated to a status of a holder in due course since
amount thereof against all parties liable; and
a person not holder in due course steps in the shoes
5. Sue
of the prior party. Therefore, Baby could enforce the

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43 FACULTY OF CIVIL LAW
 MERCANTILE LAW
That he became the holder before it was overdue
An overdue instrument is still negotiable although it is
subject to defenses existing at the time of transfer. A
negotiable instrument in circulation past its maturity date
carries strong indication that it has been dishonored. An
overdue instrument puts all person on notice that it might
not have been paid because of a valid defense to such
payment (De Leon, 2010).
Without notice that it has been previously
dishonored, if such was the fact
An instrument may be dishonored either by:
1. Non-acceptance (refers to a bill of exchange) or
2. Non-payment
That he took it in good faith and for value
Good faith is the holder’s well founded or honest belief
that the person from whom he received the instrument
was the owner thereof, with the right to transfer it (Duran
v IAC, G.R. No. L-64159, September 10, 1985).
Value may be some right, interest, profit or benefit to the
party who makes the contract or some forbearance,
detriment, loan, responsibility, etc. to the other (BPI v.
Roxas, G.R. No. 157833, October 15, 2007).
2. In the negotiation – When he negotiates it in breach
of faith, or under such circumstances as amount to a
fraud (NIL, Sec. 55).
Q: A drawer issued a check for the payment of a car,
which check was delivered to the agent of the owner
of the car for safekeeping. The check was then used by
the agent to pay the medical bills of his wife in a clinic.
The projected purchase did not materialize. Is the
clinic considered a holder in due course?
A: No, the rule that a possessor of the instrument is prima
facie a HIDC does not apply to the clinic because it cannot
be said to have acquired the negotiable instrument in
good faith for there was a defect in the title of the holder
(agent), since the instrument was not payable “to the
agent or to bearer;” also the drawer had no account with
the clinic, the agent did not show or tell the payee why he
had the check in his possession and why he was using it
for the payment of his own account.
As the holder’s title was defective or suspicious, it cannot
be stated that the payee acquired the check without
knowledge of said defect in holder’s title, the presumption
that the clinic is a HIDC does not exist (De Ocampo & Co. v.
Gatchalian, G.R. No. L-15126, November 30, 1961).
Possession of a negotiable instrument after
presentment and dishonor

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 The person to whom it is
negotiated must have had actual knowledge of such facts
or knowledge of other facts that his action in taking the
instrument amounted to bad faith (NIL, Sec. 56).
Presence or absence of defect or infirmity must be
determined at the time the instrument was negotiated to
the holder.
It does not make the possessor a holder for value within
the meaning of the law. It gives rise to no liability on the
part of the maker or drawer or indorsers (STELCO
Marketing Corp. vs. CA, G.R. No. 96160, June 17, 1992).
Q: Is a corporation to which four crossed checks were
indorsed by the payee corporation a holder in due
course and hence entitled to recover the amount of
the checks when the same had been dishonored for
the reason of “payment stopped”?

Infirmity vs. Defect
INFIRMITY DEFECT
Refers to those that Refers to how he
vitiate the instrument obtained the instrument
itself or the signature thereto,
as by fraud, duress, or
force and fear, or other
unlawful means, or for an
illegal consideration or
when he negotiates it in
breach of faith, or under
any other circumstances
as amount to a fraud.
(NIL, Sec. 55)
A: No. The checks were crossed checks and specifically
indorsed for deposit to payee’s account only. From the
beginning, the corporation was aware of the fact that the
checks were all for deposit only to payee’s account.
Clearly then, it could not be considered an HIDC (Atrium
Management Corp. v. CA, G.R. No. 109491, February 28,
2001).
Payee as holder in due course
There can be no doubt that a proper interpretation of NIL
as a whole leads to the conclusion that a payee may be a
holder in due course under the circumstances in which he
meets the requirements of Sec. 52 (De Ocampo v.
Gatchalian, supra).

Instances when the title of a transferor is defective Drawee as holder in due course

1. In its acquisition – When he obtained the instrument,
or any signature thereto, by fraud, duress, or force
and fear, or other unlawful means, or for an illegal
consideration.
A drawee does not become a HIDC by simply paying a bill.
A holder refers to one who has taken the instrument as it
passes along in the course of negotiation; whereas a
drawee, upon acceptance and payment, strips the
instrument of negotiability and reduces it to a mere
voucher or proof of payment.

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 NEGOTIABLE INSTRUMENTS LAW
Person is deemed not a holder in due course
1. A holder who acquires the instrument after its date
of maturity.
2. Where an instrument payable on demand is
negotiated for an unreasonable length of time after
its issue (NIL, Sec. 53).
NOTE: A note payable on demand is due when
payment is demanded. A check becomes overdue
when it is not presented for payment within a
reasonable time, usually 6 months from date the
thereof, afterwards, it becomes a stale check.
3. Where the instrument contains an acceleration
clause, knowledge of the holder at the time of
acquisition thereof that one installment or interest,
or both, is unpaid is a notice that it is overdue.
Rights of a holder who is not a holder in due course
The rights of a holder not an HIDC are similar to an
assignee. The other rights are:
Real defenses available against a holder vs. Personal defenses
REAL DEFENSES
(IM In Ultra. AFForD PODIF)
1. Incomplete and undelivered instrument
2. Minority (available only to the minor)
3. Incapacity as far as incapacitated persons are concerned
4. Ultra –vires acts of a corporation
5. Want of Authority, apparent and real
6. Fraudulent alteration
7. Forgery
8. Duress amounting to Forgery
9. Prescription
10. Other infirmities appearing on the face of the
instrument
11. Discharge in insolvency
12. Illegal Contract
13. Fraud in Factum or Esse Contractus
NOTE: Fraud in factum exists in those cases in which a
person, without negligence, has signed an instrument, but
was deceived as to the character of the instrument and
without knowledge of it, as where a note was signed by one
under the belief that he was signing as a witness to a deed.
This kind of fraud is a real defense because there is no
contract, since the person did not know what he was signing
(De Leon, 2010).
Q: Eva issued to Imelda a check in the amount of
P50,000 post-dated Sept. 30, 1995, as security for a
diamond ring to be sold on commission. On Sept. 15,
1995, Imelda negotiated the check to MT investment
which paid the amount of P40,000 to her.
Eva failed to sell the ring, so she returned it to Imelda
on Sept. 19, 1995. Unable to retrieve her check, Eva
45
1. He may receive payment and if the payment is in due
course, the instrument is discharged;
2. He is entitled to the instrument but holds it subject to
the same defenses as if it were non-negotiable;
3. He may sue on the instrument in his own name (NIL,
Sec. 51).
DEFENSES AGAINST THE HOLDER
Defenses against the holder
The defenses available against the holder are classified as
follows:
1. Real or Absolute Defenses – those that are attached to
the instrument itself and are available against all
parties, both immediate and remote, including
holders in due course.
2. Personal or Equitable Defenses –defenses which are
only available against a holder not in due course.
Those which grow out of the agreement or conduct
of a particular person which renders it inequitable
for him, though holding the legal title, to enforce it
against the party sought to be made liable.
PERSONAL DEFENSES
(InnocentS2 ADD FUn In Fraud)
1. Innocent alteration or spoliation
2. Discharge of party Secondarily liable by discharge of
prior party.
3. Set-off between immediate parties
4. Filling up of blanks not in accordance with the Authority
given
5. Acquisition of instrument by Duress or force and fear;
unlawful means or for an illegal consideration
6. Discharge by payment or renunciation or release before
maturity
7. Failure or absence of consideration.
8. Undelivered complete instrument
9. Insertion of a wrong date
10. Fraud in inducement or simple fraud
NOTE: Fraud in inducement relates to the quality,
quantity, value or character of the consideration of the
instrument. Here, deceit is not in the character of the
instrument but in its amount or terms. This exists when a
person is induced to sign a note for the price of a worthless
stock which was fraudulently represented by the payee as
to its value. Such type of fraud is only a personal defense
because it does not prevent a contract (De Leon, 2010).
withdrew her funds from the drawee bank. Thus,
when MT Investment presented the check for
payment, the drawee bank dishonored it. Later on,
when MT Investment sued her, Eva raised the defense
of absence of consideration, the check having been
issued merely as security for the ring that she could
not sell. Does Eva have a valid defense? Explain. (1996
Bar)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
What defense or defenses can Señorita Isobel set up
A: No, Eva does not have a valid defense. First, MT against Pete? Explain. (2005 Bar)
Investment is a holder in due course and, as such, holds
the post-dated check free from any defect of title of prior A: Señorita Isobel may set up the defenses of:
parties and from defenses available to prior parties a. Incomplete but delivered instrument. The authority
among themselves. Eva can invoke the defense of absence she gave Brad was to fill up the note for P10,000.00
of consideration against MT only if the latter was a privy only and not P100,000.00. This is a personal defense
to the purpose for which the checks were issued and, that may be raised against Pete who is clearly not a
therefore, not a holder in due course. Second, it is not a holder in due course.
ground for the discharge of the post-dated check as b. Force and intimidation. Señorita Isobel was forced
against a holder in due course that it was issued merely as and intimidated into writing and issuing the note as
security. The only grounds for the discharge of negotiable she was threatened that Pete would kill Brad, her
instruments Law and none of those grounds are available cousin if the debt is not paid.
to Eva. The latter may not unilaterally discharge herself
from her liability by mere expediency of withdrawing her LIABILITIES OF PARTIES
funds from the drawee bank.
Parties primarily liable
Q: X makes a promissory note for P10,000 payable to
A, a minor, to help him buy school books. A endorses 1. Maker – of a promissory note;
the note to B for value, who in turn endorses the note 2. Acceptor – of a bill of exchange; and
to C. C knows A is a minor. If C sues X on the note, can 3. Certifier of a check
X set up the defenses of minority and lack of
consideration? (1998 Bar) Parties secondarily liable
A: X cannot set-up the defense of minority to defeat the
claim of C since only A, the minor could invoke minority 1. Drawer of a bill; and
as a defense. X cannot set up the defense against C. Lack of 2. Indorser of a note or a bill
consideration is a personal defense which is only
available between immediate parties who are not holders Negotiable instrument should be presented for payment
in due course. C’s knowledge that A is a minor does not to the party primarily liable (NIL, Sec. 72[d]):
prevent C from being a holder of due course. C took the
promissory from a holder for value B. PRIMARILY LIABLE SECONDARILY LIABLE
Unconditionally bound Conditionally bound
Q: A bill of exchange has T for its drawee, U as drawer, Undertakes to pay only
and F as holder. When F went to T for presentment, F after the ff. conditions
learned that T is only 15 years old. F wants to recover have been fulfilled:
from U but the latter insists that a notice of dishonor 1. Due presentment for
must first be made, the instrument being a bill of payment or acceptance to
exchange. Is he correct? (2011 Bar) Absolutely required to
primary party (NIL, Sec.
pay the instrument
143);
A: No, since F can treat U as maker due to the minority of upon maturity
2. Dishonor by such party
T, the drawee. (NIL, Sec.70);
3. Taking of proceedings
Q: Brad was in desperate need of money to pay his required by law (NIL,
debt to Pete, a loan shark. Pete threatened to take Sec.152)
Brad’s life if he failed to pay. Brad and Pete went to
see Señorita Isobel, Brad’s rich cousin, and asked her
if she could sign a promissory note in his favor in the The drawee is notliable for payment of a bill of
amount of P10,000.00 to pay Pete. Fearing that Pete exchange
would kill Brad, Señorita Isobel acceded to the
request. She affixed her signature on a piece of paper The mere issuance of a bill does not operate as an
with the assurance of Brad that he will just fill it up assignment of the funds in the hands of a drawee. The
later. Brad then filled up the blank paper, making a drawee must accept the instrument (thus, becomes an
promissory note for the amount of P100,000.00. He acceptor) in order that he may be primarily liable for the
then indorsed and delivered the same to Pete who payment of a BOE.
accepted the note as payment of the debt.

Warranties and liabilities of parties who are secondarily liable

ABSOLUTE LIABILITY LIMITED LIABILITY

Drawer of a BOE Qualified Indorser
Warrants: Warrants that the:
a. The existence of payee and his then capacity to a. Instrument is genuine;
indorse; b. He has good title to it;
c. Capacity to contract of all prior parties; and;

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 NEGOTIABLE INSTRUMENTS LAW
b. That the instrument will be accepted or paid upon
due presentment by the party primarily liable
according to its tenor; and
c. That if dishonored, he will pay the party entitled to
be paid. (NIL, Sec. 61.)
General indorser
a. Warrants that:
i. Instrument is genuine
ii. He had good title to it
iii. All prior parties had capacity to contract
iv. Instrument, at the time of indorse- ment, was valid
and subsisting;
b. On due presentment, it shall be accepted or paid, or
both according to its tenor
c. If the instrument is dishonored and the ne- cessary
proceedings on dishonor be duly taken, he will pay the
holder. (NIL, Sec. 66.)
Irregular indorser
a. In an order instrument, liable to the payee and all
subsequent parties
b. If bearer instrument or payable to order of maker or
drawer, liable to all parties subsequent to the maker or
drawer
c. If he signs for accommodation of the payee, liable to all
parties subsequent to payee. (NIL, Sec. 64.)
MAKER
Maker
The maker of a negotiable instrument, by making such
instrument:
1. Engages that he will pay it according to its tenor, and
2. Admits the existence of the payee and his then
capacity to indorse (NIL, Sec. 60; 1995, 2001 Bar).
The maker is liable the moment he makes the NI. His
liability is primary and unconditional.
Q: A issued a promissory note payable to B or bearer.
A delivered the note to B. B indorsed the note to C. C
placed the note in his drawer, which was stolen by the
janitor X. X indorsed the note to D by forging C's
signature. D indorsed the note to E who in turn
delivered the note to F, a holder in due course,
without indorsement. Discuss the individual
liabilities to F of A, B and C. (2001, 1997 Bar)
A: A is primarily and unconditionally liable to F as the
maker of the promissory note. Section 60 provides that,
by making the instrument, the maker obliges himself to
pay according to the tenor of the instrument. He is liable
to both payee and subsequent holder in due course.
Despite the presence of the special indorsements on the
note, these do not detract from the fact that a bearer
instrument, like the promissory note in question, is
always negotiable by mere delivery, until it is indorsed
restrictively “For Deposit Only”
B as a general indorser is secondarily liable to F. By
placing his signature on the bearer instrument, he
47
d. No knowledge of any fact which would impair the
validity of the instrument. (NIL, Sec.65)
NOTE: He is liable to all parties who derive their title
through his indorsement.
Person negotiating by delivery
Same warranties as a qualified indorser. But unlike a
qualified indor- ser, a person negotiating by mere delivery
is liable only to his immediate transferee. (NIL, par. 2, Sec.
65)
NOTE: Person negotia- ting by mere delivery and a qualified
indorser’s secondary liability is limited, namely, to their
warranties
warrants that the instrument is genuine and in all
respects what it purports to be; that he has good title to it;
that all prior parties had capacity to contract; that he has
no knowledge of any fact which would impair the validity
of the instrument or render it valueless; that at the time of
indorsement, the instrument is valid and subsisting; and
that on due presentment, it shall be accepted or paid, or
both, according to its tenor, and that if it be dishonored
and the necessary proceedings on dishonor be duly taken,
he will pay the amount thereof to the holder, or to any
subsequent indorser who may be compelled to pay.
C, however, cannot be held liable because the signature
purporting to be his is a product of forgery. C can raise the
defense of forgery since it his signature that was forged.
Q: On the right bottom margin of a PN appeared the
signature of the corporation’s president and
treasurer above their printed names with the phrase
“and in his personal capacity.” The corporation failed
to pay its obligation. Are the officers liable?
A: Yes, persons who sign their names on the face of
promissory notes are makers and liable as such. The
officers are co-makers and as such, they cannot escape
liability arising therefrom (Republic Planters Bank v. CA,
G.R. No. 93073, December 21, 1992).
Q: Richard Clinton makes a promissory note payable
to bearer and delivers the same to Aurora Page.
Aurora Page, however, endorses it to X in this
manner: "Payable to X. Signed: Aurora Page."
Later, X, without endorsing the promissory note,
transfers and delivers the same to Napoleon. The note
is subsequently dishonored by Richard Clinton. May
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Napoleon proceed against Richard Clinton for the
note? (1998 Bar)
A: Yes, Richard Clinton is liable for the promissory note.
Under Section 60 of the NIL, the maker of a negotiable
instrument, by making the same, engages that he will pay
according to its tenor, and admits the existence of the
payee and his then capacity to indorse. The liability of the
maker is primary which means he is absolutely and
unconditionally required to pay. He engages to pay the
instrument according to its terms without any condition.
He is not only liable to the payee but also to the
subsequent holder in due course. Since the instrument is
a bearer instrument (which nature was not changed even
if it was specially indorsed by Aurora), Napoleon became
a legal holder thereof by mere delivery from X to him.
Thus, as a legal holder of the promissory note, he is
entitled to proceed against the maker thereof, Richard
Clinton.
DRAWER
Drawer
The drawer, by drawing the instrument:
1. Admits the existence of the payee and his then
capacity to indorse; and
2. Engages that on due presentment the instrument will
be accepted or dishonored; and
3. That if the necessary proceedings on dishonor be
duly taken, he will pay the amount thereof to the
holder, or to any subsequent indorser who may be
compelled to pay it (Sec. 61, NIL; 1991 Bar).
The drawer is secondarily liable to the holder or to any
subsequent indorser who may be compelled to pay. But
the drawer may insert in the NI an express stipulation
negativing or limiting his own liability to the holder (NIL,
Sec. 61).
Q: A delivers a bearer instrument to B. B then
specially indorses it to C and C later indorses it in
blank to D. E steals the instrument from D and, forging
the instrument of D, succeeds in "negotiating" it to F
who acquires the instrument in good faith and for
value.
a. If for any reason, the drawee bank refuses to
honor the check, can F enforce the instrument
against the drawer?
b. In case of the dishonor of the check by both the
drawee and the drawer, can F hold any of B, C and
D liable secondarily on the instrument? (1997
Bar)
A:
a. Yes, F can proceed against the drawer, A, in case of
dishonor by the drawee bank. Section 61 of the NIL
provides that by drawing the instrument, the drawer
engages that the instrument will be accepted or paid
or both according to its tenor. Not only is the drawer
obliged to pay the amount of the instrument to the
holder, but he shall likewise be liable to the
subsequent indorser who was compelled to pay it.
The forged signature is unnecessary to presume the
juridical relation between or among the parties prior
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48
to the forgery and the parties after the forgery.
Moreover, the only party who can raise the defense
of forgery against a holder in due course is the person
whose signature is forged.
b. Only B and C can be held liable by F. According to
Section 67, when a person puts his signature on a
bearer instrument as a form of indorsement, he
becomes subject to all liabilities of an indorser. D
cannot be held liable as an indorser because his
signature is forged by E--hence, there was no consent
from D. The forged signature is deemed inoperative
and no right can arise out of it. However, the effect of
being inoperative affects only the signature which is
the product of forgery. It will not deem to affect other
signatures subscribed with knowledge and
voluntariness. Therefore, B and C are liable as
indorsers.
Q: D draws a bill of exchange that states: “One month
from date, pay to B or his order Php100,000.00.
Signed, D.” The drawee named in the bill is E. B
negotiated the bill to M, M to N, N to O, and O to P. Due
to non-acceptance and after proceedings for dishonor
were made, P asked O to pay, which O did. From whom
may O recover? (2011 Bar)
A: D, being the drawer.
ACCEPTOR
Acceptor
The acceptor, by accepting the instrument:
1. Engages that he will pay the NI according to the tenor
of his acceptance; and
2. Admits the existence of the drawer, the genuineness
of his signature and his capacity and authority to
draw the instrument;
3. Admits the existence of the payee and his then
capacity to indorse (NIL, Sec. 62, 1992; 1998 Bar).
Party who can accept the bill of exchange
GR: Only the drawee may accept. A stranger or volunteer
is not bound by acceptance.
XPN: In case of a bill which is accepted for honor supra
protest (NIL, Sec. 161).
Drawee does not become liable until he accepts the
instrument in which case he becomes an acceptor. An
acceptor engages to pay according to the tenor of his
acceptance, which may not be the same as the tenor of the
bill itself because the acceptance may be qualified.
Difference between the liability of an acceptor or
drawee-acceptor and a maker
While both are primarily liable, the acceptor engages to
pay the negotiable instrument according to the tenor of
his acceptance. On the other hand, the maker engages to
pay the negotiable instrument according to the tenor of
the bill itself.
 NEGOTIABLE INSTRUMENTS LAW
Q: X draws a check against his current account with
Bonifacio Bank in favor of B. Although X does not have
sufficient funds, the bank honors the check when it is
presented for payment. Apparently, X has conspired
with the bank's bookkeeper so that his ledger card
would show that he still has sufficient funds.The bank
files an action for recovery of the amount paid to B
because the check presented has no sufficient funds.
Decide the case (1998 Bar).
A: The bank cannot recover the amount paid to B for the
check. When the bank honored the check, it became an
acceptor. As acceptor, the bank became primarily and
directly liable to the payee/holder B.
The recourse of the bank should be against X and its
bookkeeper who conspired to make X's ledger show that
he has sufficient funds.
INDORSER
Indorser
A person placing his signature upon an instrument
otherwise than as maker or acceptor is deemed to be an
indorser, unless he clearly indicates by appropriate words
his intention to be bound in some other capacity (NIL, Sec.
63).
NOTE: A person who places his indorsement on a bearer
instrument incurs all liabilities of an indorser (NIL, Sec.
67).
General indorser vs. Irregular indorser (2005 Bar)
(NIL, Secs. 64, 66; De Leon, supra)
NOTE: The holder or subsequent indorser who tries to
claim under the instrument which had been dishonored
for "irregular indorsement" must not be the irregular
indorser himself who gave cause for the dishonor.
(Gonzales v. Rizal Commercial Banking Corporation, G.R.
No. 156294, Novembber 29, 2006)
Qualified indorser
A qualified indorser is a person who indorses without
recourse (NIL, Sec. 65).
Drawer vs. Indorser
DRAWER INDORSER
Party only to a bill Party either a bill or note
Makes admission as to No such admission
the existence of the payee
and his capacity to
indorse
Makes no warranties, but Has warranties
engages to pay after
certain conditions are
complied with
49
GENERAL INDORSER IRREGULAR
INDORSER
Makes either a blank or Always makes a blank
special indorsement indorsement
Indorses the instrument Indorses before its
after its delivery to the delivery to the payee
payee
Liable only to parties Liable to the payee and
subsequent to him subsequent parties
unless he signs for the
accommodation of the
payee in which case he
is liable only to all
parties subsequent to
the payee
Order of liability among the indorsers
1. Among themselves – Liable prima facie in the order in
which they indorse (NIL, Sec. 68)
2. To the holder – In any order
Every indorser is liable prima facie to all indorsers
subsequent to him, but not those indorsers prior to him
(NIL, Sec. 68)
Liability of an agent or broker who negotiates an
instrument without indorsement
He incurs all the liabilities prescribed to a general
indorser unless he discloses the name of his principal and
the fact that he is acting only as an agent (NIL, Sec. 69)
NOTE: Parol evidence is NOT admissible to relieve an
agent or broker whose endorsement brings him within
the above liability.
Q: Can a collecting bank debit the account of the
depositor when the checks indorsed to it (bank) were
forged?
A: Yes, because the depositor of a check as indorser
warrants that it is genuine and in all respects what it
purports to be. Thus, when the checks deposited had
forged indorsements and the collecting bank, as a
consequence of such forgery, was made to pay the drawee
bank, the collecting bank can debit the account of the
depositor for his breach of warranty (Jai-Alai Corporation
of The Philippines v. BPI, G.R. No. L-29432, August 6, 1975).
Q: Phebean, the drawer issued a check to James.
James, subsequently indorsed it to Trude. When
Trude is about to encash the check, the drawee Union
Bank refused to encash it due to insufficiency of
funds. Trude sued James for payment of money. James
alleged that the suit should be dismissed because
Phebean is an indispensable party. Does James’
argument hold water?
A: No, there is no privity between the drawer and the
holder. The drawer is merely secondarily liable. As
indorser, the buyer warranted that upon due
presentment, the checks were to be accepted or paid, or
both, according to their tenor, and that in case they were
dishonored, she would pay the corresponding amount.
After an instrument is dishonored by non-payment,
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
indorsers cease to be merely secondarily liable; they
become principal debtors whose liability becomes
identical to that of the original obligor (Tuazon v. Heirs of
Bartolome Ramos, G.R. No. 156262, July 14, 2005).
Q: X is the holder of an instrument payable to him (X)
or his order, with Y as maker. X then indorsed it as
follows: “Subject to no recourse, pay to Z. Signed, X.”
When Z went to collect from Y, it turned out that Y's
signature was forged. Z now sues X for collection. Will
it prosper? (2011 Bar)
A: Yes, because X, as a qualified indorser, warrants that
the note is genuine.
WARRANTIES
The following are the warranties a person provides in
negotiating an instrument:
1. That the instrument is genuine and in all respects
what it purports to be;
2. That he has good title to it;
3. That all prior parties had capacity to contract;
4. That he has no knowledge of any fact which would
impair the validity of the instrument or render it
useless.
NOTE: Indorser’s liability as warrantor is distinct from
his liability to pay the instrument. Even a qualified
indorser may incur liability for breach of implied
warranties. As warrantor, his liability is unconditional.
Q: Distinguish an irregular indorser from a general
indorser (2005 Bar)
A: Irregular Indorser is not a party to the instrument but
he places his signature in blank before delivery. He is not
a party but he becomes one because of his signature in the
instrument. Because his signature he is considered an
indorser and he is liable to the parties in the instrument.
A General Indorser warrants that the instrument is
genuine, that he has a good title to it, that all prior parties
had capacity to contract; that the instrument at the time
of the indorsement is valid and subsisting; and that on due
presentment, the instrument will be accepted or paid or
both accepted and paid according to its tenor, and that if
it is dishonored, he will pay if the necessary proceedings
for dishonor are made.
PRESENTMENT FOR PAYMENT
It is the presentation of an instrument to the person
primarily liable for the purpose of demanding and
receiving payment.
Manner of presentment
GR: Instrument must be exhibited to the person from
whom payment is demanded; when paid, it must be
delivered to the person paying it (NIL, Sec. 74).
XPNs: When exhibition is excused:
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1. Debtor does not demand to see the instrument and
refuses payment on some other grounds; or
2. Instrument is lost or destroyed.
The bank remains liable to the holder if it paid the
certificate of deposit payable to bearer without requiring
its surrender (Far East Bank & Trust Company v. Querimit,
G.R. No. 148582, January 16, 2002).
Payee cannot claim payment for a promissory note which
was stolen and as such is not in his possession. To make
presentment for payment, it is necessary to exhibit the
instrument, which he cannot do because he is not in
possession thereof.
Q: AB issued a promissory note for P1,000 payable to
CD or his order on September 15, 2002. CD indorsed
the note in blank and delivered the same to EF. GH
stole the note from EF and on September 14, 2002
presented it to AB for payment. When asked by AB, GH
said CD gave him the note in payment for two cavans
of rice. AB therefore paid GH P1,000 on the same date.
On September 15, 2002, EF discovered that the note
of AB was not in his possession and he went to AB. It
was then that EF found out that AB had already made
payment on the note.
a. Can EF still claim payment from AB? Why?
b. As a sequel to the same facts narrated above, EF,
out of pity for AB who had already paid P1,000 to
GH, decided to forgive AB and instead go after CD
who indorsed the note in blank to him. Is CD still
liable to EF by virtue of the indorsement in blank?
Why? (2002 Bar)
A:
a. Since the instrument became a bearer instrument, EF
could no longer claim payment from AB. EF is not a
holder of the promissory note. To make the
presentment for payment, it is necessary to exhibit
the instrument, which EF cannot do because he is not
in possession thereof.
b. No, because CD negotiated the instrument by
delivery.
NECESSITY OF PRESENTMENT FOR PAYMENT
Presentment for payment is not necessary in order to
charge the person primarily liable on the instrument. It is
only necessary to charge persons secondarily liable—
drawer and indorsers (NIL, Sec. 70).
1. As to drawer, where he has no right to expect or
require that the drawee or acceptor will pay the
instrument (Sec. 79, NIL).
2. As to indorser where the instrument was made or
accepted for his accommodation and he has no
reason to expect that the instrument will be paid if
presented (NIL, Sec. 80).
3. When dispensed with under Sec. 82, NIL such as:
a. Where, after the exercise of reasonable
diligence, presentment cannot be made;
b. Where the drawee is a fictitious person;
c. By waiver of presentment, express or implied
 NEGOTIABLE INSTRUMENTS LAW
Requisites for a sufficient presentment for payment
(1994, 2002 Bar) Delay in making presentment is excused

Presentment for payment, to be sufficient, must be made: 1. When caused by circumstances beyond the control of
1. By the holder, or his agent authorized to receive the holder; and
payment on his behalf; 2. Not imputable to his default, misconduct, or
2. At a reasonable hour on a business day; negligence (NIL, Sec. 81).
3. At a proper place;
4. To the person primarily liable, or if he is absent or Only the delay in presentment is excused and not the
inaccessible, to any person found at the place where presentment itself. Hence, as soon as the cause of delay
the presentment is made (NIL, Sec. 72). ceases to operate, presentment must be made with
reasonable diligence (ibid.).
If the instrument is, by its terms, payable at a special place,
and the person primarily liable is able and willing to pay Q: Is the bank liable to the payee for depositing and
it there at maturity, such ability and willingness are encashing the crossed checks to an unauthorized
equivalent to a tender of payment upon his part (Sec. 70, person?
NIL).
A: Yes, the effects of crossing a check relate to the mode
Time for presentment for payment of its presentment for payment. Under Sec. 72 of the NIL,
presentment for payment, to be sufficient, must be made
INSTRUMENT TIME FOR PRESENTMENT by the holder or by some person authorized to receive on
GR: On the day it falls due (NIL, Sec. his behalf. The checks here had been crossed and issued
85) “for payee’s account only.” This only signifies that the
drawer had intended the same for deposit only by the
XPN: If the due date falls on a person indicated (Associated Bank v. CA, G.R. No. 89802,
Payable at a May 7, 1992).
Saturday, presentment must be
fixed or
made on the next Monday.
determinable Order of preference with regard to the place of
future time presentment
NOTE: If presentment for payment is
made before maturity, it will not
result to a discharge of the 1. Specified place in the instrument
instrument (NIL, Sec. 50). 2. Address of the person to make the payment if given
Promissory note in the instrument
Within a reasonable time after its
payable on 3. Usual place of business or residence of the person to
issue.
demand make the payment
Within a reasonable time after the 4. Wherever he can be found; or
last negotiation thereof (NIL, Sec. 71). 5. At his Last known place of business or residence
(NIL, Sec. 73).
NOTE: “Last negotiation” means the
last transfer for value. Subsequent Instrument is payable at a bank
transfers between banks for
Bill of exchange
purposes of collection are not When the instrument is payabale at bank, presentment
payable on
negotiations within Sec. 71. must be made during banking hours, unless the person to
demand
make payment has no funds there to meet it at any time
“Reasonable time” means not more during the day, in which case presentment at any hour
than 6 months from the date of issue. before the bank is closed on that day is sufficient (NIL, Sec.
Beyond said period, the check 75).
becomes stale and valueless and
thus, should not be paid. Requisites of payment in due course

NOTE: Every NI is payable at the time fixed therein Payment is made in due course when (MHG)
without grace.
1. It is made at or after the date of Maturity;
Rules on presentment for payment when maturity 2. To the Holder thereof;
date is fixed 3. In Good faith and without notice that holder’s title is
defective (NIL, Sec. 88).
TIME OF MATURITY OF WHEN TO PRESENT FOR
INSTRUMENT PAYMENT The term “in good faith” refers to the maker or acceptor
On a Sunday or holiday On the next succeeding and not to the holder.
business day
On a Saturday On the next succeeding PARTIES TO WHOM PRESENTMENT
business day FOR PAYMENT SHOULD BE MADE
If instrument which falls Before 12:00 noon on
due on a Saturday is Saturday, or on Monday, at GR: Presentment for payment must be made to the:
payable on demand the option of the holder

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51 FACULTY OF CIVIL LAW
 MERCANTILE LAW
1. The maker in case of a promissory note, or
2. The acceptor in case of an accepted bill. If the bill of
exchange or check is payable on demand, the
presentment must be made to the drawee although
he is not automatically liable on the bill.
XPNs: Where the person/s primarily liable is/are:
1. Dead – payment must be made to his personal
representative (NIL, Sec. 76).
2. Liable as partners and no place of payment specified –
payment may be made to any of them though there
has been dissolution of the firm (NIL, Sec. 77).
3. Several persons, not partners, and no place of payment
is specified – payment must be made to all of them
(NIL, Sec. 78).
4. If the person primarily liable is absent or inaccessible,
then presentment must be made to any person of
sufficient discretion at the proper place of
presentment (NIL, Sec. 72[d]).
DISPENSATION WITH
PRESENTMENT OF PAYMENT
GR: Drawer and the indorsers are discharged from their
secondary liability when presentment is not made.
XPNs:
1. Presentment for payment is not required to charge
drawer and indorser when:
a. Drawer- when he has no right to expect or
require that the drawee or acceptor will pay the
instrument (NIL, Sec. 79).
b. Indorser – When the NI was made or accepted
for his accommodation and he has no reason to
expect that the instrument will be paid if
presented (NIL, Sec. 80).
2. When presentment for payment is dispensed with
under Sec. 82, NIL
3. When the BOE has been dishonored by non-
acceptance, since no PP for is necessary (NIL, Sec.
151).
Q: Gemma drew a check on September 13, 2010. The
holder presented the check to the drawee bank only
on March 5, 2012. The bank dishonored the check on
the same date. After dishonor by the drawee bank, the
holder gave a formal notice of dishonor.
a. What is meant by reasonable time as applied to
presentment?
b. Is Gemma still liable to the holder?
A:
a. Reasonable time is relative. Regard is to be had to the
facts of each case, usage of business and trade, and
the nature of the instrument. With respect to checks,
current banking practice dictates that the check
becomes stale if it is not presented for payment
within 6 months from issuance.
b. No. Gemma is discharged from secondary liability
under the check because presentment and notice of
dishonor were made after an unreasonable length of
time. The check was already stale at the time of
presentment.
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52
DISHONOR BY NON-PAYMENT
Subject to the provisions of the law, when the instrument
is dishonored by non-payment, an immediate right of
recourse to all parties secondarily liable thereon accrues
to the holder (NIL, Sec. 84).
Instances when an instrument is dishonored by non-
payment
NON-PAYMENT UPON NON-PAYMENT W/OUT
DUE PRESENTATION PRESENTATION
The instrument is duly Presentment is excused
presented for payment to and the instrument is
party primarily liable and overdue and unpaid
it is either refused or
cannot be obtained
(NIL, Sec. 83).
NOTICE OF DISHONOR
It is a notice given by the holder to the parties secondarily
liable, drawer and each indorser, that the instrument was
dishonored by non-payment or non-acceptance by the
drawee/maker.
Persons primarily liable need not be given notice of
dishonor because they are the ones who dishonored the
instrument.
Purposes for requiring notice of dishonor
1. To inform parties secondarily liable that the maker
or acceptor has failed to meet his engagement; and
2. To advise them that they are required to make
payment.
Q: Notice of dishonor is not required to be made in all
cases. One instance where such notice is not
necessary is when the indorser is the one to whom the
instrument is supposed to be presented for payment.
The rationale here is that the indorser (2011 Bar)
A: Already knows of the dishonor and it makes no sense
to notify him of it.
Time and place of giving the notice of dishonor
1. GR: As soon as instrument was dishonored (NIL, Sec.
10.)–Party is allowed one entire day for the purpose
of giving notice.
XPN: Delay is excused (NIL, Sec. 113,).
An instrument cannot be dishonored by non-
payment until after the maturity.
2. Parties reside in the same place
a. Place of business – Before close of business hours
on the day following
b. Residence – Before the usual hours of rest on the
day following
c. By mail – Deposited in the post office in time to
reach him in the usual course on the day
following (NIL, Sec. 103)
3. Parties reside in different places
 NEGOTIABLE INSTRUMENTS LAW
a. By mail – Deposited in the post office in time to
go by mail (actual departure in the course of
mail from the post office in which the notice was
deposited) the day following the day of
dishonor.
b. If no mail – At a convenient hour (of the sender)
on that day, by the next mail thereafter
c. Other than by post office (e.g. personal
messenger) – Within the time that notice would
have been received in due course of mail, if it has
been deposited in the post office within the time
specified in (a) (NIL, Sec. 104).
4. Time of notice to antecedent parties – Same time for
giving notice that the holder has after the dishonor
(NIL, Sec. 107).
NOTE: Actual receipt of the party within the time
specified by law is sufficient though not sent in the places
specified above (NIL, Sec. 108).
Instances when a negotiable instrument is considered
dishonored
For BOE:
1. If not accepted when presented for acceptance; or
2. If presentment for acceptance is excused and the bill
is not accepted (NIL, Sec. 149).
For PN,
1. Not paid (that is, payment is refused or not obtained)
when presented for payment at maturity; or
2. Where presentment is excused or waived and the
instrument is overdue and unpaid (NIL, Sec. 83).
Liability of a person secondarily liable when the
instrument is dishonored
After the necessary proceedings for dishonor had been
duly taken, an immediate right of recourse to all parties
secondarily liable thereon accrues to the holder (NIL, Sec.
84).
PARTIES TO BE NOTIFIED
Parties to whom notice must be given
Notice of dishonor should be given to:
1. The drawer; or
2. Indorser; or
3. His agent (NIL, Sec. 97)
4. Where party is dead – to a personal representative or
sent to the last residence or last place of business of
the deceased (NIL, Sec. 98)
5. When the parties to be notified are partners – notice
to any one partner though there has been a
dissolution (NIL, Sec. 99)
6. Notice to joint parties who are not partners must be
given to each of them (NIL, Sec. 100)
7. Where a party has been adjudged a bankrupt – to the
party himself or to his trustee or assignee (NIL, Sec.
101)
53
In case the instrument was dishonored in the hands of the
agent, notice of dishonor should be given:
1. To the parties secondarily liable – Within the time
fixed by Secs. 102-104, and 107, otherwise, they are
discharged.
2. To his principal – The principal must give notice to
parties secondarily liable as if his agent were an
independent holder (NIL, Sec. 94).
A party who receives notice of dishonor is entitled to give
notice of such dishonor to prior parties within the same
period of time that the holder has after the dishonor, as if
he were the said holder (NIL, Sec. 107).
PARTIES WHO MAY GIVE
NOTICE OF DISHONOR
The parties who may give notice of dishonor are
1. Holder;
2. Another in behalf of the holder
3. Any party to the instrument, who may be compelled
to pay and who, upon taking it up, would have a right
to reimbursement from the party to whom notice is
given (NIL, Sec. 90).
EFFECT OF NOTICE
Notice of dishonor, if given by or on behalf of the holder,
inures to the benefit of:
1. All holders subsequent to the holder who has given
notice; and
2. All parties prior to the holder but subsequent to the
party to whom notice has been given and against
whom they may have a right of recourse (NIL, Sec. 92)
Notice of dishonor if given by party entitled thereto,
inures to the benefit of:
1. The holder; and
2. All parties subsequent to the party to whom notice is
given (NIL, Sec. 93).
FORM OF NOTICE
Form and contents of a notice of dishonor
1. Oral; or
2. In writing;
3. It may be given by personal delivery, or by mail (NIL,
Sec. 96)
4. Must contain the following:
a. Description of the instrument;
b. Statement that it has been presented for
payment or for acceptance and that it has been
dishonored (If protest is necessary, notice must
also contain a statement that it has been
protested); and
c. Statement that the party giving the notice
intends to look for the party addressed for
payment.
NOTE: A written notice need not be signed, and an
insufficient notice may be supplemented or validated by
verbal communication. A misdescription of the
instrument does not vitiate the notice unless the party to
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
whom the notice is given is in fact misled thereby (NIL, NOTE: The holder of two checks which were dishonored
Sec. 95). because the drawer withdrew her funds from the bank
can hold the drawer liable even if no notice of dishonor
WAIVER was given to the drawer, since the drawer had no right to
expect that the drawee bank would honor the checks.
It is the willingness on the part of the drawer or indorser (State Investment House, Inc. vs. Court of Appeals, G.R. No.
to be bound as such even without due notice of dishonor. 101163, January 11, 1993)
Waiver of notice maybe given:
Q: P authorized A to sign a negotiable instrument in
1. Before the time of giving notice has arrived; or his (P’s) name. It reads: “Pay to B or order the sum of
2. After the omission to give due notice (NIL, Sec. 109). Php1 million. Signed, A (for and in behalf of P).” The
instrument shows that it was drawn on P. B then
Ways to give a waiver of notice indorsed to C, C to D, and D to E. E then treated it as a
bill of exchange. Is presentment for acceptance
1. Express; or necessary in this case? (2011 Bar)
2. Implied (e.g. Payment by an indorser after he learns
of the default of the maker; admission of liability A: No, since the drawer and drawee are the same person.
after dishonor) (NIL, Sec. 109).
Q: Juben issued to Y two post-dated checks as security
Parties affected by the waiver of notice for pieces of jewelry to be sold. Y negotiated the check
to S. When Juben failed to sell the jewelry, he
1. All parties (if embodied on the face of the withdrew all his funds from the drawee bank. After
instrument); or dishonor, Juben contends that the holder failed to
2. Particular indorser (if written above the signature of give him a notice of dishonor. Is notice of dishonor
such indorser) (NIL, Sec. 110). necessary?

Waiver of protest
It is the waiver of the formal instrument executed usually
by a notary public certifying that the legal steps necessary
to fix the liability of the drawee and the indorsers have
been taken. Thus, it is deemed to be a waiver not only of a
formal protest but also of presentment and notice of
dishonor (NIL, Sec. 111).
DISPENSATION WITH NOTICE
Instances when notice of dishonor is not necessary
1. Waiver of notice (NIL, Sec. 109)
2. Waiver of protest (NIL, Sec. 111)
3. When notice is dispensed with when after exercise of
reasonable diligence, notice cannot be given or does
not reach the parties sought to be charged (NIL, Sec.
112)
4. Drawer in cases under Sec. 114, NIL.
5. Indorser in cases under Sec. 115, NIL.; and
6. Where due notice of dishonor by non-acceptance has
been given (notice of dishonor by non-payment not
necessary). (NIL, Sec. 116.)
A: No, Juben was responsible for the dishonor of his
checks, hence, there was no need to serve him notice of
dishonor (State Investment House, Inc. v. CA, supra.).
Instances when it is not necessary to give a notice of
dishonor to the indorser
1. Drawee is fictitious or has no capacity to contract,
and indorser was aware of these facts at the time he
indorsed the instrument;
2. Indorser is person to whom the instrument is
presented for payment; or
3. Instrument was made or accepted for his
accommodation (NIL, Sec. 115).
EFFECT OF FAILURE TO GIVE NOTICE
Effect of the omission of a previous holder to give
notice of dishonor by non-acceptance
It does not prejudice the rights of a holder in due course
subsequent to the omission to present the instrument to
the drawee for acceptance and notify the drawer and
indorsers if acceptance is refused (NIL, Sec. 117).

Instances when a notice of dishonor to the drawer Effect of failure to give notice of dishonor
may be dispensed with
GR: Any person to whom such notice is not given is
1. When drawer and drawee is the same person discharged, but he will still be liable for breach of
2. Drawee is fictitious or does not have the capacity to warranties pertaining to the instrument.
contract
3. Drawer is the person to whom the instrument is XPNs:
presented for payment (he is the one who dishonored
the instrument) 1. Waiver (NIL, Sec. 109)
4. Drawer has no right to expect or require that the 2. Notice is dispensed with (NIL, Sec. 112)
drawee or acceptor will honor the instrument. 3. Notice not necessary to drawer (NIL, Sec. 114)
5. Drawer has countermanded the payment (e.g. stop 4. Notice not necessary to indorser (NIL, Sec. 115)
payment order) (NIL, Sec. 114.)

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 NEGOTIABLE INSTRUMENTS LAW
NOTE: Holder is not required to notify all indorsers, he
may select to hold only one or more indorsers. Indorsers
who are discharged from liability by reason that no notice
of dishonor was given to them is still liable for breach of
warranties as to the NI.
Effect of lack of notice of dishonor on the instrument
which is payable in installments
1. No acceleration clause – Failure to give notice of
dishonor on a previous installment does not
discharge drawers and indorsers as to succeeding
installments.
2. With acceleration clause – It depends upon whether
the clause is automatic or optional.
a. Automatic – failure to give notice of dishonor as
to a previous installment will discharge the
persons secondarily liable as to the succeeding
installments;
b. Optional – if not exercised, the rule would be the
same as if there is no acceleration clause. If
exercised, the rule would be the same as if the
installment contains an automatic acceleration
clause (Town Savings Bank v. CA, G.R. No. 106011,
June 17, 1993).
DISCHARGE OF NEGOTIABLE INSTRUMENT
It is the release of all parties, whether primary or
secondary, from the obligations arising thereunder. It
renders the instrument without force and effect, and
consequently, it can no longer be negotiated.
Methods for discharge of instrument
1. Payment by principal debtor:
a. By or on behalf of principal debtor
b. At or after its maturity
c. To the holder thereof
d. In good faith and without notice that the
holder’s title is defective
2. Payment by accommodated party
3. Intentional cancellation of instrument by the holder
(by expressly stating it in the instrument or when the
instrument is torn up, burned or destroyed)
4. Any act which discharges a simple contract for the
payment of money under Art. 1231 of the NCC
specifically remission, novation, and merger.
NOTE: Loss of the negotiable instrument will not
extinguish liability; compensation is not available so long
as an obligation is evidenced by a negotiable instrument
(Villanueva, 2009).
5. Reacquisition by principal debtor in his own right.
Reacquisition must be:
a. By the principal debtor
b. In his own right
c. At or after date of maturity (instrument is
discharged; if made before, it may be
renegotiated) (NIL, Sec. 119).
Q: Salazar with Calleja and Kallos procured from J. Y.
Bros. 300 cavans of rice. As payment, Salazar
negotiated and indorsed to J.Y. Bros. Prudential Bank
55
Check issued by Timario with the assurance that the
check is good as cash. On that assurance, J.Y. Bros.
parted with 300 cavans of rice to Salazar. However,
upon presentment, the check was dishonored due to
"closed account." Calleja, Kallos and Salazar delivered
to J.Y. Bros. a replacement cross Solid Bank Check
again issued which bounced due to insufficient funds.
Despite demands, Salazar failed to settle the amount
due. J.Y. Bros., charged Salazar and Timario with the
estafa.
Salazar contends that the issuance of the Solid Bank
check and the acceptance thereof by J.Y. Bros, in
replacement of the dishonored Prudential Bank
check, amounted to novation that discharged the
latter check; that respondent's acceptance of the Solid
Bank check, notwithstanding its eventual dishonor by
the drawee bank, had the effect of erasing whatever
criminal responsibility, under Article 315 of the RPC,
the drawer or indorser of the Prudential Bank check
would have incurred in the issuance thereof; and that
a check is a contract which is susceptible to a novation
just like any other contract. Is Salazar correct?
A: No. While Section 119 of the NIL in relation to Article
1231 of the Civil Code provides that one of the modes of
discharging a negotiable instrument is by any other act
which will discharge a simple contract for the payment of
money, such as novation, the acceptance by the holder of
another check which replaced the dishonored bank check
did not result to novation.
There are only two ways which indicate the presence of
novation and thereby produce the effect of extinguishing
an obligation by another which substitutes the same.
First, novation must be explicitly stated and declared in
unequivocal terms as novation is never presumed.
Secondly, the old and the new obligations must be
incompatible on every point.
In this case, J.Y. Bros.’s acceptance of the Solid Bank check,
which replaced the dishonored Prudential Bank check,
did not result to novation as there was no express
agreement to establish that Salazar was already
discharged from his liability. Neither was there any
incompatibility, since both checks were given to
terminate a single obligation arising from the same
transaction (Anamer Salazar v. J.Y. Brothers Marketing
Corporation, G.R. No. 171998, October 20, 2010, in Divina
2014).
DISCHARGE OF PARTIES SECONDARILY LIABLE
Methods of discharge of secondary parties (ACS TReE)
1. Any Act which discharges the instrument;
2. Intentional Cancellation of his signature by the
holder
3. Discharge of prior party which may be made when
signature is Stricken out
4. Valid Tender of payment by a prior party;
5. Release of the principal debtor, unless holder
expressly reserves his right of recourse against the
said subsequent parties
6. Extension of time of payment, unless:
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
a. Extension is consented to by such party
b. Holder expressly reserves his right of recourse
against such party (NIL, Sec. 120)
Q: The rule is that the intentional cancellation of a
person secondarily liable results in the discharge of
the latter. With respect to an indorser, the holder's
right to cancel his signature is: (2011 Bar)
A: Limited to the case where the indorsement is not
necessary to his title.
Effects of payment by persons secondarily liable
1. Instrument is not discharged
2. It only cancels his own liability and that of the parties
subsequent to him
3. GR: Instrument may be renegotiated
XPNs:
a. Where it is payable to the order of a third
person, and has been paid by the drawer; and
b. Where it is paid by the accommodated party
NOTE: (a) and (b) has the same effect as payment by the
party primarily liable.
4. Person paying is remitted to his former rights (as
regards prior parties) and he may strike out his own
and all subsequent indorsements (NIL, Sec. 121).
RIGHTS OF A PARTY WHO DISCHARGED
THE INSTRUMENT
GR: The party so discharging the instrument is remitted
to his former rights as regards all prior parties, and he
may strike out his own and all subsequent indorsements,
and again negotiate the instrument.
XPNs:
1. Where it is payable to the order of a third person, and
has been paid by the drawee; and
2. It was made or accepted for accommodation, and has
been paid by the party accommodated.
RENUNCIATION BY HOLDER
Renunciation
It is the act of surrendering a claim or right with or
without recompense (a PERSONAL defense).
Manner of making renunciation by the holder
1. Must be written
2. If oral, the instrument must be surrendered to the
person primarily liable (NIL, Sec. 122).
Effects of renunciation
1. Made in favor of principal debtor made at or after the
maturity (made absolutely and unconditionally) of the
instrument – discharges the instrument (NIL, Sec.
122).
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
56
2. Made in favor of a secondary party may be made by the
holder before, at or after maturity – discharges only
the secondary parties and all subsequent to him (NIL,
Sec. 122).
3. Renunciation does not affect the rights of a holder in
due course without notice (NIL, Sec. 120).
Rule regarding the cancellation of an instrument
It is presumed intentional. It is inoperative if
unintentional, or under a mistake or without the authority
of the holder. But where an instrument or any signature
appears to have been cancelled, the burden of proof lies
on the party alleging that the cancellation was made
unintentionally, or under a mistake or without authority
(NIL, Sec. 123).
MATERIAL ALTERATION
CONCEPT
Material alteration
It is any change in the instrument which affects or changes
the liability of the parties in any way. It means an
unauthorized change in an instrument that purports to
modify in any respect the obligation of a party or an
unauthorized addition of words or numbers or other
change to an incomplete instrument relating to the
obligation of a party.
Instances that constitute material alteration
Any alteration which changes:
1. Date
2. Sum payable, either for principal or interest
3. The time or place of payment
4. Number or the relations of the parties
5. Currency in which payment is to be made
6. Adds a place of payment where no place is specified
7. Any other change or addition which alters the effect
of the instrument (NIL, Sec. 125.)
The change in the date of indorsement is not material
where the date is not necessary to fix the maturity of the
instrument.
There is no material alteration when the serial number of
a check had been altered. The alteration of the serial
number of a check did not change the relations between
the parties nor the effect of the instrument. Hence, the
alteration on the serial number of a check is not a material
alteration (International Corporate Bank v. CA, G.R. No.
141968, February 12, 2001).
Spoliation
It refers to material alteration of an instrument done by a
stranger. It has the same effect as alteration.
 NEGOTIABLE INSTRUMENTS LAW
EFFECT OF MATERIAL ALTERATION
Material alteration of a negotiable instrument, without
the assent of all parties liable thereon, has the following
effects:
1. Avoids the instrument except against:
a. A party who has made the alteration;
b. A party who authorized or assented to the
alteration; or
c. The indorsers who indorsed subsequent to the
alteration (because of their warranties).
2. If negotiated to an HIDC, he may enforce the payment
thereof according to its original tenor against the
person not a party to the alteration. He may also
enforce payment thereof against the party
responsible for the alteration for the altered amount.
3. If negotiated to a holder not an HIDC, he cannot
enforce payment against the person not a party prior
to the alteration. He may, however enforce payment
according to the altered tenor from the person who
caused the alteration and from the indorsers (NIL,
Sec. 12).
A drawee who accepts a materially altered check cannot
recover from the holder and the drawer (2011 Bar).
A material alteration of an instrument without the assent
of all parties liable thereon results in its avoidance, except
against a party who has made, authorized or assented to
the alteration and subsequent indorser. (2011 Bar)
ACCEPTANCE
DEFINITION
Acceptance of a bill
It is a signification by the drawee of his assent to the order
of the drawer (NIL, Sec. 132).
Requisites for acceptance
1. In writing, except constructive acceptance and to a
foreign bill payable in another state (unless the other
state requires for written acceptance);
2. Signed by the drawee (without it, he is not liable);
3. Must express a promise to pay money (not goods);
4. Delivered to the holder (before delivery or
notification, acceptor may revoke or cancel his
acceptance).
Upon acceptance, the bill, in effect becomes a note. The
drawee who thereby becomes an acceptor assumes the
liability of the maker (who has primary liability) and the
drawer, that of the first indorser.
Q: A bill of exchange states on its face: “One (1) month
after sight, pay to the order of Mr. R the amount of
Php50,000.00, chargeable to the account of Mr. S.
Signed, Mr. T.” Mr. S, the drawee, accepted the bill
upon presentment by writing on it the words “I shall
pay Php30,000.00 three (3) months after sight.” May
he accept under such terms, which varies the
command in the bill of exchange? (2011 Bar)
57
A: Yes, since a drawee is allowed to effect a qualified
acceptance in which case he shall be liable according to
the tenor of his acceptance.
Q: X, drawee of a bill of exchange, wrote the words:
“Accepted, with promise to make payment within two
days. Signed, X.” The drawer questioned the
acceptance as invalid. Is the acceptance valid?
A: Yes, because the acceptance is in reality a clear assent
to the order of the drawer to pay. Qualified acceptance as
to time is allowed (NIL, Sec. 141 [d]).
MANNER
Manner of making an acceptance
Acceptance may be made
1. On the bill itself,
2. On a separate paper; and if on a separate paper
a. It may be acceptance as to an existing bill; or
b. It may be acceptance as to a non-existing bill.
If the bill is non-existent, the acceptance on a separate
paper must comply with following requirements:
1. The contemplated drawee shall describe the bill to be
drawn and promise to accept it;
2. Bill shall be drawn within a reasonable time after
such promise is written; and
3. The holder shall take the bill upon the credit of the
promise.
Kinds of acceptance
1. General Acceptance -It assents without qualification
to the order of the drawer (NIL, Sec. 139).
2. Qualified Acceptance - An acceptance which in
express terms varies the effect of the bill as drawn
(ibid.).
NOTE: A holder may refuse to accept a qualified
acceptance and if he does not obtain an unqualified
acceptance, he may treat the bill as dishonored by non-
acceptance (NIL, Sec. 142).
Kinds of qualified acceptance
1. Conditional – makes payment by the acceptor
dependent on the fulfillment of a condition therein
stated.
2. Partial – an acceptance to pay part only of the
amount for which the bill is drawn.
3. Local – an acceptance to pay only at a particular
place.
4. Qualified as to time– a bill is accepted to be paid on or
after a specified date.
5. As to drawee - acceptance of some one or more of the
drawees but not of all (NIL, Sec. 141).
Other kinds of acceptance
1. Constructive/implied (NIL, Sec. 137).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
a. Drawee to whom the bill is delivered for
acceptance destroys it; or
b. Drawee refuses, within 24 hours after such
delivery, or within such time as is given him, to
return the bill accepted or non-accepted
2. Extrinsic– the acceptance is written on a paper other
than the bill itself. To be binding upon the acceptor:
a. Acceptance must be shown to the person to
whom the instrument is negotiated; and
b. Such person must take the bill for value on the
faith of such acceptance (NIL, Sec. 134).
Effect of the certification by the drawee bank
Certification implies that the check is drawn upon
sufficient funds in the hands of the drawee, that they have
been set apart for its satisfaction and that they shall be so
applied whenever the check is presented for payment.
Where a check is certified by the bank on which it is
drawn, the certification is equivalent to acceptance (NIL,
Secs. 187, 189; New Pacific Timber v. Seneris, G.R. No. L-
41764, December. 19, 1980).
PRESENTMENT FOR ACCEPTANCE

3. Virtual Presentment for acceptance

a. Unconditional promise in writing to accept a bill
b. Promise made before it is drawn It is the production or exhibition of a bill of exchange to
c. Any person who, upon faith thereof, receives the the drawee for his acceptance or payment (also includes
bill for value (NIL, Sec. 135). presentment for payment).

TIME FOR ACCEPTANCE
The drawer has 24 hours after presentment to decide
whether or not he will accept the bill. The acceptance, if
given, dates as of the day of presentation (NIL, Sec. 136).
Drawee bank is not entitled to 24 hours to decide whether
or not to pay a check since a check is presented for
payment, not acceptance.
RULES GOVERNING ACCEPTANCE
Effect of accepting an instrument with a qualified
acceptance
GR: When the holder takes a qualified acceptance the
drawer and indorsers are discharged from liability on the
bill.
The holder may refuse to take a qualified acceptance and
if he does not obtain an unqualified acceptance, he may
treat the bill as dishonored by non-acceptance (Sundiang
Sr. & Aquino, 2014).
GR: Acceptance is not necessary to render any party to the
bill liable (NIL, Sec. 143, par. 2).
XPNs:
1. Where bill is payable after sight, or when it is
necessary in order to fix the maturity of the
instrument;
2. When bill expressly stipulates that it shall be
presented for acceptance; or
3. Where the bill is drawn payable elsewhere than at
the residence or place of business of the drawee (NIL,
Sec. 143, par. 1).
The holder must either present it for acceptance or
negotiate it within a reasonable time, otherwise, the
drawer and all indorsers are discharged (NIL, Sec. 144).
TIME/PLACE/MANNER OF PRESENTMENT
Proper presentment for acceptance
It must be made:

XPNs: 1. By or on behalf of the holder

1. When they have expressly or impliedly authorized 2. At a reasonable hour on a business day
the holder to take a qualified acceptance; or 3. Before the bill is overdue; and
2. Subsequently assent thereto; 4. To the drawee or some person authorized to accept
3. Implied assent (when they did not express their or refuse to accept on his behalf (NIL, Sec. 145).
dissent to the holder within a reasonable time when
they received a notice of qualified acceptance) (NIL, WHEN PRESENTMENT MUST BE
Sec. 142). MADE TO
Bill addressed to 2 or All of them unless one has
When the drawer or indorser receives notice of a qualified
more drawees who authority to accept or refuse
acceptance, he must, within a reasonable time, express his
are not partners acceptance for all, in which
dissent to the holder or he will be deemed to have
case presentment may be
assented thereto (Sundiang Sr. & Aquino, 2014).
made to him only (NIL, Sec.
145, [a]).
Acceptance of an incomplete bill
Drawee is dead Drawee's personal represen-
Acceptance may be made before the bill has been signed
tative (NIL, Sec. 145, [b]).
by the drawer or while otherwise incomplete, or after it is
overdue, or even after it has been dishonored by non-
NOTE: Presentment is merely
acceptance or non-payment (NIL, Sec. 138).
permissive since it is excused
by (NIL, Sec.148 [a]).

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2016 GOLDEN NOTES
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 NEGOTIABLE INSTRUMENTS LAW
Drawee is adjudged a To drawee or his trustee/
bankrupt or insolvent assignee (NIL, Sec 145, [c]).
or has made an
assignment for the
benefit of creditors
PRESENTMENT FOR ACCEPTANCE
Failure to make such presentment will discharge the
drawer from liability or to the extent of the loss caused by
the delay (NIL, Sec. 186; Republic of the Philippines vs. PNB,
G.R. No. L-16106, December 30, 1961).
However, delay in presentment may be excused where
the holder of a bill drawn payable elsewhere than at the
place of business or the residence of the drawee has no
time with the exercise of reasonable diligence, to present
the bill for acceptance before presenting it for payment on
the day that it falls due (NIL, Sec. 147).
Instances when presentment is excused
1. Where the drawee is dead, or has absconded, or is a
fictitious person not having capacity to contract by
bill;
2. Where, after exercise of reasonable diligence,
presentment cannot be made; or
3. Where, although presentment has been irregular,
acceptance has been refused on some other ground
(NIL, Sec. 148).
DISHONOR BY NON-ACCEPTENCE
Instances when a bill is dishonored by non-
acceptance
1. When it is duly presented for acceptance and such an
acceptance is refused or cannot be obtained; or
2. When presentment for acceptance is excused, and
the bill is not accepted (NIL, Sec. 149).
It is not sufficient that presentment for acceptance is
excused, it is also necessary that the bill remains not
accepted.
Duty of the holder where bill is not accepted
If within 24 hours after due presentment, the bill is not
accepted, the person presenting it must treat the bill as
dishonored by non-acceptance otherwise he will lose the
right of recourse against the drawer and indorsers (NIL,
Sec. 150).
Rules when a bill is dishonored by non-acceptance
1. Right of recourse against all secondary party accrues
to the holder.
2. No presentment for payment is necessary since
dishonor of the instrument by non-payment is to be
expected.
3. If the instrument is accepted after it has been
dishonored by non-acceptance, presentment for
payment is necessary upon maturity.
59
4. In case of non-payment, holder must give the
corresponding notice of dishonor; otherwise,
secondary parties are discharged.
Rights of a holder when bill is not accepted
When a bill is dishonored by non-acceptance, an
immediate right of recourse against the drawer and
indorsers accrues to the holder, and no presentment for
payment is necessary (NIL, Sec. 151).
Acceptance for honor
It is an undertaking by a stranger to a bill after protest for
the benefit of any party liable thereon or for the honor of
the person for whose account the bill is drawn which
acceptance inures to the benefit of all parties subsequent
to the person for whose honor it is accepted, and
conditioned to pay the bill when it becomes due if the
original drawee does not pay it (NIL, Sec. 161).
Requisites of acceptance for honor (WIS)
1. Must be in Writing
2. Must Indicate that it is an acceptance for honor;
3. Must be Signed by the acceptor for honor (NIL, Sec.
162)
PROMISSORY NOTES
Promissory note
An unconditional promise in writing made by one person
to another, signed by the maker, engaging to pay on
demand, or at a fixed or determinable future time, a sum
certain in money to order or to bearer (NIL, Sec. 184).
Special types of promissory notes
1. Certificate of deposit – a written acknowledgment by
a bank of the receipt of money on deposit on which
the bank promises to pay to the depositor or to him
or his order or to some other person or to him or his
order, or to a specified person or bearer, on demand
or on a fixed date, often with interest.
2. Bonds – an evidence of indebtedness issued by a
public or private corporation which constitutes a
promise, under seal, to pay money. It runs for a
longer period of time than a PN.
3. Registered Bond – one payable only to the person
whose name appears on the face of the certificate.
4. Coupon Bond – one to which are attached coupons
which entitle the holder to interest when due.
5. Bank Note – instrument issued by a bank for
circulation as money payable to bearer on demand.
6. Due Bill - PN which shows on its face that one person
acknowledges his indebtedness to another. The word
“due” is commonly used.
7. Mortgage Note – an instrument secured by either a
real (REM) or personal property (Chattel).
8. Title-Retaining Note – an instrument used to secure
the purchase price of goods. It ordinarily provides
that title to the goods shall remain in payee’s name
until the note is paid in full.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
9. Collateral Note – it is used when the maker pledges
securities to the payee to secure the payment of the
amount of the note.
10. Judgment Note – this is a note to which a power of
attorney is added enabling the payee to take
judgment against the maker without the formality of
a trial if the note is not paid on its due date (De Leon,
supra).
Q: Prudential Bank received from the CIR a Final
Assessment Notice and a Demand Letter for
deficiency Documentary Stamp Tax for the taxable
year 1995 on its Repurchase Agreement with the BSP,
Purchase of Treasury Bills from the BSP, and on its
SAP product. Prudential Bank protested the
assessment on the ground that the documents subject
matter of the assessment are not subject to DST. It
contends that its SAP is not subject to DST because it
is not included in the list of documents under Section
180 of the old NIRC, as amended. Prudential Bank
insists that unlike a time deposit, its SAP is evidenced
by a passbook and not by a deposit certificate. In
addition, its SAP is payable on demand and not on a
fixed determinable future. To support its position,
petitioner relies on the legislative intent of the law
prior to Republic Act (RA) No. 9243 and the historical
background of the taxability of certificates of deposit.
Prudential Bank further contends that even assuming
that its SAP is subject to DST, the CTA En Banc
nonetheless erred in denying Prudential Bank’s
withdrawal of its petition considering that it has paid
under the IVAP, which it claims is 100% of the basic
tax of the original assessment BIR. Prudential Bank
insists that the payment it made should be deemed
substantial compliance considering the refusal of the
CIR to issue the letter of termination and authority to
cancel assessment. Is Prudential Bank’s contention
tenable?
A: No. A certificate of deposit is defined as a written
acknowledgment by a bank or banker of the receipt of a
sum of money on deposit which the bank or banker
promises to pay to the depositor, to the order of the
depositor, or to some other person or his order, whereby
the relation of debtor and creditor between the bank and
the depositor is created. A document to be considered a
certificate of deposit need not be in a specific form. Thus,
a passbook issued by a bank qualifies as a certificate of
deposit drawing interest because it is considered a
written acknowledgement by a bank that it has accepted
a deposit of a sum of money from a depositor. Thus, it is
subject to documentary stamp tax (Prudential Bank v.
Commissioner of Internal Revenue, G.R. No. 180390, July 27,
2011, in Divina, 2014).
Check vs. Bill of exchange
BASIS CHECKS
Drawee Always drawn on a bank or banker against a
previous deposit of funds
Payability Always payable on demand
Function Ordinarily intended for immediate payment
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
60
Instances when a bill of exchange may be treated as a
promissory note (2015 Bar)
1. The drawer and the drawee are the same person;
2. The drawee is a fictitious person;
3. The drawee has no capacity to contract;
4. The instrument is so ambiguous that there is doubt
whether it is a bill or a note (Sundiang Sr. & Aquino,
2014, citing NIL, Secs. 17[e] and 130).
CHECKS
DEFINITION
It is a bill of exchange drawn on a bank and payable on
demand (NIL, Sec. 185).
A check must be presented for payment within a
reasonable time after its issue or the drawer will be
discharged from liability thereon to the extent of the loss
caused by the delay.
Essential characteristics of checks
1. They are drawn on a bank; and
2. Payable instantly on demand.
Q: Tan maintained a current and savings account with
PCIB, now EPCIB, with a balance of P35,147.59. He
issued a post-dated PCIB check in favor of SLI in the
amount of P34,588.72. After clearing, the amount of
the check was immediately debited by EPCIB from
Tan’s account thereby leaving him with a balance of
only P558.87. He thereafter issued three (3) checks
payable to ASELCO, ANECO, and the other payable in
cash. When the latter were presented for payment,
the three (3) checks were dishonored for being drawn
against insufficient funds. As a result, the electric
power supply for the two mini-sawmills owned and
operated by Tan, was cut off and it was restored only
after sometime. After trial, the RTC ruled in favor of
EPCIB and dismissed the complaint. On appeal the CA
reversed the decision of the RTC. Is EPCIB liable due
to its premature debiting of the post-dated check,
thereby affecting Tan’s business operations?
A: Yes. The premature debiting of the postdated check by
the bank which resulted to insufficiency of funds that
brought about the dishonor of two checks causing the
electric supply to be cut-off and affected business
operations indicates the negligence of the bank. For its
failure to exercise extra-ordinary diligence, it should be
made liable in the case (Equitable PCI Bank v. Arcelito B.
Tan, G.R. No. 165339, August 23, 2010, in Divina, 2014).
BOE
May or may not be drawn on a bank and need
not be drawn against a deposit
Either payable on demand or at a fixed or
determinable future time (NIL, Sec.4)
Intended for circulation as instrument of credit
 NEGOTIABLE INSTRUMENTS LAW
Presentment for Must be presented for payment within a
Payment reasonable time after its issue(NIL, Sec.186)
Discharge of When a check is accepted or certified, the
Liability drawer & indorsers are discharged from
liability thereon (NIL, Sec. 188)
Effect of the Death of Death of the drawer of a check with the
the Drawer knowledge of the bank revokes the authority
of the bank to pay.
Presentment Need not be presented for acceptance (NIL,
for Acceptance Sec. 185)
Q: A check was dishonored due to material alteration.
The creditor then filed an action against drawee bank
for the amount. Will the action prosper?
A: No. If a bank refuses to pay a check (notwithstanding
the sufficiency of funds), the payee-holder cannot, as
provided under Sections 185 and 189 of the NIL, sue the
bank. The payee should instead sue the drawer who might
in turn sue the bank. This is so because no privity of
contract exists between the drawee-bank and the payee
(Villanueva v. Nite, G.R. No. 148211, July 25, 2006).
NOTE: A check of itself does not operate as an assignment
of any part of the funds to the credit of the drawer with
the bank, and the bank is not liable to the holder, unless
and until it accepts or certifies the check (NIL, Sec. 189).
Stopping payment
The drawer has the right to order the drawee to stop
payment of a check and this right flows from the rule that
the issuance of a check by itself is not an assignment of
funds by the drawee. If a bank pays a check after it has
been notified to stop payment, it pays in its own
responsibility and will not be permitted to charge the
account. The drawer may countermand payment if he has
a valid defense against the holder of the check. Thus,
countermanding of a check is proper where the payee
failed to deliver the goods that he was supposed to deliver
(Sundian Sr. & Aquino, 2014, citing Bataan Cigar and
Cigarette Factory v. CA, GR. No. 93048, March 3, 1994).
Effect of erasure or alteration on checks
Pursuant to Philippine Clearing House Corporation
Memorandum Circular No. 15-460A effective January 4,
2016, the following shall no longer be eligible or
acceptable for clearing:
a. Any check that shows or indicates on its face erasure
or alteration regardless of any signature or initials
that appear to indicate authorization of the alteration
or erasure; or
b. Does not indicate the date, payee, amount payable in
figures, amount payable in words, or signature of the
drawer
KINDS
Special types of checks
1. Cashier’s Check – a BOE drawn by the bank upon itself
and is accepted at its issuance. It is usually signed by
the cashier of the bank.
61
Must be presented for payment within a
reasonable time after its last negotiation
(NIL, Sec. 171)
They remain liable despite acceptance
(NIL, Sec. 84)
Death of the drawer of an ordinary bill does not
revoke the authority of the drawee to pay.
Must be presented for acceptance in certain
cases (NIL, Sec. 143)
2. Manager’s Check – a BOE drawn by the bank upon
itself and is accepted at its issuance and signed by a
manager on behalf of a bank.
A manager’s check is as good as cash. It is a check
drawn by the bank against itself. It is deemed pre-
accepted by the bank from the moment of issuance.
The check becomes the primary obligation of the
bank which issues it and constitutes its written
promise to pay. By issuing it, the bank in effect
commits its total resources, integrity and honor
behind the check (Metrobank and Trust Company vs
Chiok, GR No. 172652, November 26, 2014). (2015
Bar)
3. Certified Check – Drawn by a depositor upon funds to
his credit in a bank which an officer of a bank certifies
will be paid on presentation.
4. Crossed Check – Done by writing 2 parallel lines on
the left top portion of the check. The marking
signifies that the bank should pay only with the
intervention of the company only.
5. Memorandum Check – A check with “Memorandum”
written on its face. The writing signifies that the
drawer engages to pay the bona fide holder
absolutely, without any condition concerning its
presentment.
6. Traveler’s Checks – Instruments purchased from
banks or express companies which can be used like
cash upon the second signature by the purchaser (De
Leon, supra).
Crossed check
A crossed check is a check with two (2) parallel lines,
written diagonally on the upper right corner thereof. It is
a warning to the drawee bank that payment must be made
to the right party; otherwise the bank has no authority to
use the drawer's funds deposited with the bank.
The purpose is to insure payment to the payee. It can only
be deposited but may not be converted into cash by the
drawer. Crossing a check does not destroy its
negotiability but the check may be negotiated only once –
to one who has an account with the bank (De Ocampo v.
Gatchalian, G.R. No. L-15126, November 30, 1961).
The effects of crossing a check are:
1. That the check may not be encashed but only
deposited in the bank;
2. That the check may be negotiated only once- to one
who has an account with a bank;
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
3. That the act of crossing the check serves as a warning
to the holder that the check has been issued for
definite purpose so that he must inquire if he has
received the check pursuant to the purpose.
Otherwise, he is not an HIDC (State Investment House
v. IAC, G.R. No. 72764, July 13, 1989).
Q: Po Press issued in favor of Jose a postdated crossed
check, in payment of newsprint which Jose promised
to deliver. Jose sold and negotiated the check to Excel
Inc. at a discount. Excel did not ask Jose the purpose
of crossing the check. Since Jose failed to deliver the
newsprint, Po ordered the drawee bank to stop
payment on the check. Efforts of Excel to collect from
Po failed. Excel wants to know from you as counsel:
a. Whether as second indorser and holder of the
crossed check, is it a holder in due course?
b. Whether Po’s defense of lack of consideration as
against Jose is also available as against Excel?
(1994, 1995, 2005 Bar)
A:
a. Excel Inc. is not a holder in due course. The act of
crossing the check imposes upon the holder thereof
the duty to ascertain the indorser’s, title to the check
or the nature of his possession or the purpose for
which it was issued. Excel is guilty of gross
negligence amounting to legal absence of good faith
for its failure to inquire from Jose the purpose for
which the three checks were crossed despite the
warning of the crossing, hence, it is not deemed a
holder in due course.
b. Yes, the defense of lack of consideration as against
Jose is also available as against Excel. For not being a
holder in due course, Excel is subject to personal
defenses as if the check were non-negotiable, such as
lack of consideration between Po Press and Jose. In
this case, Jose’s failure to deliver the newsprint
resulted in the absence of consideration for the
issuance of the check. Consequently, Po Press cannot
be made liable to pay the face value of the check.
Q: PCIB filed an action against Balmaceda, it alleging
that between 1991 and 1993, by taking advantage of
his position as branch manager, he fraudulently
obtained and encashed 31 Managers checks in the
P10,782,150.00. PCIB moved to be allowed to file an
amended complaint to implead Rolando Ramos as
one of the recipients of a portion of the proceeds from
Balmacedas alleged fraud. Since Balmaceda did not
file an Answer, he was declared in default. On the
other hand, Ramos filed an Answer denying any
knowledge of Balmacedas scheme. The RTC issued a
decision in favor of PCIB. On appeal, the CA dismissed
the complaint against Ramos. According to the CA, the
mere fact that Balmaceda made Ramos the payee in
some of the Managers checks does not suffice to prove
that Ramos was complicit in Balmacedas fraudulent
scheme. Is PCIB itself at fault as employer?
A: Yes. While its manager forged the signature of the
authorized signatories of clients in the application for
manager’s checks and forged the signatures of the payees
thereof, the drawee bank also failed to exercise the
UNIVERSITY OF SANTO TOMAS
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62
highest degree of diligence required of banks in the case
at bar. It allowed its manager to encash the Manager’s
checks that were plainly crossed checks. A crossed check
is one where two parallel lines are drawn across its face
or across its corner. Based on jurisprudence, the crossing
of a check has the following effects: (a) the check may not
be encashed but only deposited in the bank; (b) the check
may be negotiated only once — to the one who has an
account with the bank; and (c) the act of crossing the
check serves as a warning to the holder that the check has
been issued for a definite purpose and he must inquire if
he received the check pursuant to this purpose;
otherwise, he is not a holder in due course. In other words,
the crossing of a check is a warning that the check should
be deposited only in the account of the payee. When a
check is crossed, it is the duty of the collecting bank to
ascertain that the check is only deposited to the payee’s
account. In complete dis-regard of this duty, PCIB’s
systems allowed Balmaceda to encash 26 Manager’s
checks which were all crossed checks, or checks payable
to the “payee’s account only.” (PCIB v. Balmaceda and
Ramos, G.R. No. 158143 September 21, 2011, in DIvina,
2014).
Crossed check with notation “Account Payee Only”
A crossed check with the notation account payee only can
only be deposited in the named payees account. It is gross
negligence for a bank to ignore this rule solely on the basis
of a third partys’ oral representations of having a good
title thereto.
The fact that a person, other than the named payee of the
crossed check, was presenting it for deposit should have
put the bank on guard. It should have verified if the payee
authorized the holder to present the same in its behalf or
indorsed it to him. The bank’s reliance on the holder’s
assurance that he had good title to the three checks
constitutes gross negligence even though the holder was
related to the majority stockholder of the payee. While the
check was not delivered to the payee, the suite may still
propser because the payee did not assert a right based on
the undelivered check but on quasi-delict (Equitable
Banking Corporation v. Special Steel Products, G.R. No.
175350, June 13, 2012, in Divina, 2014).
Q: Distinguish clearly crossed checks from cancelled
checks (2004 Bar)
A: A crossed check is one with two parallel lines drawn
diagonally on the left portion of the check. On the other
hand, a cancelled check is one marked or stamped "paid"
and/or "cancelled" by or on behalf of a drawee bank to
indicate payment thereof.
Q: On Oct 12, 1993, Chelsea Straights, a corporation
engaged in the manufacture of cigarettes, ordered
from Moises 2,000 bales of tobacco. Chelsea issued to
Moises two crossed checks postdated 15 Mar 94 and
15 Apr 94 in full payment therefor. On 19 Jan 94
Moises sold to Dragon Investment House at a discount
the two checks drawn by Chelsea in his favor. Moises
failed to deliver the bales of tobacco as agreed despite
Chelsea’s demand. Consequently, on 1 Mar 94 Chelsea
issued a “stop payment” order on the 2 checks issued
 NEGOTIABLE INSTRUMENTS LAW
to Moises. Dragon, claiming to be a holder in due
course, filed a complaint for collection against
Chelsea for the value of the checks. Rule on the
complaint of Dragon. Give your legal basis. (1995 Bar)
A: The complaint should be dismissed. The act of crossing
the check imposes upon the holder thereof the duty to
ascertain the indorser’s, in this case Moises’ title to the
check or the nature of his possession. Failing in this
respect, Dragon cannot be deemed a holder in due course
and as such, Moises is subject to personal defenses as if
the check were non-negotiable, such as lack of
consideration between Chelsea and Moises for Moises’
failure to deliver the bales of tobacco. There being no
consideration for the issuance of the check, Chelsea
cannot thus be made liable to pay the face value of the
check and this constitutes a defense not only against
Moises but even against Dragon who is not a holder in due
course.
Q: On March 1, 1996, Pentium Company ordered a
computer from CD Bytes, and issued a crossed check
in the amount of P30,000 post-dated Mar 31, 1996.
Upon receipt of the check, CD Bytes discounted the
check with Fund House. On April 1, 1996, Pentium
stopped payment of the check for failure of CD Bytes
to deliver the computer. Thus, when Fund House
deposited the check, the drawee bank dishonored it.
If Fund House files a complaint against Pentium and
CD Bytes for the payment of the dishonored check,
will the complaint prosper? Explain (1996 Bar)
A: The case will prosper as against the CD Bytes, the
immediate indorser but not as against Pentium Company.
The effect of crossing a check relates to the mode of its
presentment for payment which must be made by the
holder, or by some person authorized to receive payment
on his behalf. Thus, in the absence of due presentment, as
in this case where the check was not presented by the
payee (CD Bytes) or the proper party authorized to make
presentment of the checks, the drawer (Pentium
Company) cannot be held liable. However, Fund House
may recover from the immediate indorser, if the latter has
no valid excuse for refusing payment.
Stale check
A check which has not been presented for payment within
a reasonable time after its issue. It is valueless and thus,
should not be paid. A check becomes stale 6 months from
date of issue.
Memorandum check
A memorandum check is an evidence of debt against the
drawer and although may not be intended to be
presented, has the same effect as an ordinary check and if
passed on to a third person, will be valid in his hands like
any other check (People v. Nitafan, G.R. No. 75954, October
22, 1992).
When drawer of check discharged from liability
1. The check is not presented within a reasonable time
after its issue;
63
2. The drawer suffers loss; and
3. The loss suffered by the drawer is attributable to the
delay (De Leon, 2010).
PRESENTMENT FOR PAYMENT
TIME
A check must be presented for payment within a
reasonable time after its issue (NIL, Sec. 186).
EFFECTS OF DELAY
Effects of delay
1. The drawer will be discharged from liability thereon
to the extent of the loss caused by the delay. (ibid.)
2. The indorser shall be discharged from liability (PNB
vs. Seeto, G.R. No. L-4388, August 13, 1952).
Q: X and Y are disputing over a property. To settle the
dispute, they entered into a compromise agreement
by which they agreed to have the property in dispute
be sold. X bought the property and delivered a
manager’s check to Y. Y refused to accept the same,
hence it was consigned with the court. Y later
accepted the check and three years after acceptance,
he filed an action alleging that the check payment did
not amount to legal tender and that he never even
encashed the check. Is the contention of Y tenable?
A: NO. It is true that a check is not a legal tender and while
delivery of a check produces the effect of payment only
when it is encashed, the rule is otherwise if the debtor (X)
was prejudiced by the creditor’s (Y) unreasonable delay
in presentment. Acceptance of a check implies an
undertaking of due diligence in presenting it for payment.
If no such presentment was made, the drawer cannot be
held liable irrespective of loss or injury sustained by the
payee. Payment will be deemed effected and the
obligation for which the check was given as conditional
payment will be discharged (Pio Barretto Realty
Development Corp. vs. Court of Appeals, G.R. No. 132362,
June 28, 2001).
Q: To ensure payment and as a business practice, SMC
required Puzon to issue postdated checks equivalent
to the value of the products purchased on credit
before the same were released to him. Said checks
were returned to Puzon when the transactions
covered by these checks were paid or settled in full.
Puzon purchased products on credit and issued to
SMC, two (2) BPI checks to cover the said transaction.
During on of his visits to the SMC Paranaque Sales
Office, he allegedly requested to see BPI Check No.
17657. However, when he got hold of BPI Check No.
27903 which was attached to a bond paper together
with BPI Check No. 17657, he allegedly immediately
left the office with his accountant, bringing the checks
with them. SMC sent a letter to Puzon, demanding the
return of the said checks. Puzon ignored the demand
hence SMC filed a complaint against him for theft. The
investigating prosecutor recommended the dismissal
of the case for lack of evidence. On appeal, the CA
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
agreed with the prosecutor. Were the prosecutor and
the DOJ correct in finding no probable cause for theft?

A: Yes. If the subject check was given by Puzon to SMC in

payment of the obligation, the purpose of giving effect to
the instrument is evident thus title to or ownership of the
check was transferred upon delivery. However, if the
check was not given as payment, there being no intent to
give effect to the instrument, then ownership of the check
was not transferred to SMC.

The evidence of SMC failed to establish that the check was

given in payment of the obligation of Puzon. There was no
provisional receipt or official receipt issued for the
amount of the check. What was issued was a receipt for
the document, a POSTDATED CHECK SLIP.

Furthermore, SMC’s demand letter sent to Puzon states:

“As per company policies on receivables, all issuances are
to be covered by post-dated checks. However, you have
deviated from this policy by forcibly taking away the
check you have issued to us to cover the December
issuance. Notably, the term payment was not used instead
the terms covered and cover were used” (San Miguel
Corporation v. Bartolome Puzon, Jr., G.R. No. 167567,
September 22, 2011)

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2016 GOLDEN NOTES
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 INSURANCE LAW
INSURANCE LAW
Laws governing contracts of insurance in the
Philippines
1. R.A. 10607
2. New Civil Code
3. Special Laws
CONCEPT OF INSURANCE
Contract of insurance
It is an agreement whereby one undertakes for a
consideration to indemnify another against the loss,
damage or liability arising from an unknown or
contingent event (IC, Sec. 2[a]).
A contract of insurance, to be binding from the date of
application, must have been a completed contract (Perez
vs. CA, GR No. 112329, January 28, 2000). Thus, it must
have all the essential elements of a valid contract as
enumerated in Art. 1318 of the New Civil Code:
1. Subject matter in which the insured has an insurable
interest;
2. Consideration, which is the premium paid by the
insured, for the insurer’s promise to indemnify the
former upon the happening of the event or peril
insured against;
3. Meeting of minds of the parties.
“Doing an insurance business” or “transacting an
insurance business”
The term “doing an insurance business” or “transacting an
insurance business” means: (ISRA)
1. Making or proposing to make, as Insurer, any
insurance contract;
2. Making or proposing to make, as Surety, any contract
of suretyship as a vocation and not as merely
incidental to any other legitimate business or activity
of the surety;
3. Doing any kind of business, including a reinsurance
business, specifically eecognized as constituting the
doing of an insurance business.
4. Doing or proposing to do any business in substance
equivalent to any of the foregoing in a manner
designed to evade the provisions of the Insurance
Code (Sec. 2[b], ibid).
In the application of the provisions of the Insurance Code,
the fact that no profit is derived from the making of the
insurance contracts, agreements or transactions or that
no separate or direct consideration is received therefor,
shall NOT be deemed conclusive to show that the
making thereof does not constitute the doing or
transacting of an insurance business.
Since the subject CBA provision is an insurance contract,
the rights and obligations of the parties must be
determined in accordance with the general principles of
insurance law. (Mitsubishi Motors Philippines Salaried
65
Employees Union vs. Mitsubishi Motors Corporation, G.R.
No. 175773, June 17, 2013, in Divina 2014).
Insurance as an Uberrimae Fides contract (1993 Bar)
The contract of insurance is one of perfect good faith
(uberrimae fidei) not for the insured alone, but equally so
for the insurer; in fact, it is more so for the latter, since its
dominant bargaining position carries with it stricter
responsibility (Qua Chee Gan vs. Law Union and Rock
Insurance, Co. Ltd., GR No. L-4611, December 17, 1955). It
requires the parties to the contract to communicate that
which a party knows and ought to communicate, that is,
the duty to disclose in good faith all facts material to the
contract. This doctrine is essential on account of the fact
that the full circumstances of the subject matter of
insurance are, as a rule, known to the insured only and the
insurer, in deciding whether or not to accept a risk, must
rely primarily upon the information supplied to him by
the applicant (Sundiang Sr. & Aquino, 2014).
Insurance as contracts of adhesion (Fine Print Rule)
While generally, stipulations in a contract come about
after deliberate drafting by the parties thereto, there are
certain contracts almost all the provisions of which have
been drafted only by one party, usually a corporation.
Such contracts are called contracts of adhesion, because
the only participation of the other party is the signing of
his signature or his 'adhesion' thereto. Insurance
contracts fall into this category (Sweet Lines, Inc. vs. Teves,
GR No. L-37750, May 19, 1978). An illustration of a
contract of adhesion is when the insurer used “fine print”
letters in conditions stated in a contract of insurance
(Ibid).
Rules in the construction or interpretation of
insurance contracts
By reason of the exclusive control of the insurance
company over the terms and phraseology of the contract,
the ambiguity must be held strictly against the insurer
and liberally in favor of the insured (Qua Chee Gan v Law
Union and Rock Insurance, supra).However, if the terms,
which the parties themselves have used, are clear and
unambiguous, they must be taken and understood in their
plain, ordinary and popular sense (Sun Life Office, Ltd. vs.
CA, G.R. No. 92383, July 17, 1992).
The phraseology used in medical or hospital service
contracts, such as “standard charges”, must be liberally
construed in favor of the subscriber, and if doubtful or
reasonably susceptible of two interpretations, the
construction conferring coverage is to be adopted, and
exclusionary clauses of doubtful import should be strictly
construed against the provider (Fortune Medicare Inc. vs.
Amorin, G.R. No. 195872, March 12, 2014).
When the terms of the insurance contract contain
limitations on liability, courts should construe them in
such a way as to preclude the insurer from non-
compliance with his obligation (Alpha Insurance and
Surety Co. vs. Castor, GR No. 198174, September 2, 2013).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Parties to the contract of insurance
1. Insurer – party who assumes or accepts the risk of
loss and undertakes for a consideration to indemnify
the insured on the happening of a specified
contingency or event.
2. Insured – person in whose favor the contract is
operative and is indemnified.
A: HMOs are not insurance business. One test that they
have applied is whether the assumption of risk and
indemnification of loss (which are elements of an
insurance business) are the principal object and purpose
of the organization or whether they are merely incidental
to its business. If these are the principal objectives, the
business is that of insurance. But if they are merely
incidental and service is the principal purpose, then the
business is not insurance.

The insured is not always the person to whom the Philippine Health Care Providers appears to provide
proceeds are paid. insurance-type benefits to its members (with respect to
its curative medical services), but these are incidental to
3. Assured/Beneficiary- a person designated by the the principal activity of providing them medical care. The
terms of the policy to receive the proceeds of the "insurance-like" aspect of Philippine Health Care
insurance. He may be the insured or a third party in Providers’ business is miniscule compared to its
the contract for whose benefit the policy is issued noninsurance activities. Therefore, since it substantially
and to whom the loss is payable. provides health care services rather than insurance
services, it cannot be considered as being in the insurance
Insurer business (Philippine Health Care Providers, Inc., v.
Commissioner of Internal Revenue, G.R. No. 167330,
Every corporation, partnership, or association duly September 18, 2009).
authorized (by the Insurance Commission) to transact
insurance business may be an insurer (IC, as amended by Persons who may be insured (2000 Bar)
RA 10607, Sec. 6).
Anyone except a public enemy may be insured (IC, Sec. 7).
The term “insurer” no longer includes “individuals” under
RA 10607. Hence, an individual natural person is no A public enemy is a nation at war with the Philippines and
longer allowed to be an insurer. However, it includes the every citizen or subject of such nation. It does not include
following: mobs, thieves or robbers (Bouvier’s Law Dictionary).
1. “Professional reinsurer” as any person, partnership,
NOTE: If majority of the stockholders of the respondent
association or corporation that transacts solely and
corporation were German subjects who became an enemy
exclusively reinsurance business in the Philippines.
corporation upon the outbreak of the war between the
2. “Mutual Insurance Companies”. The law also
United States and Germany, it stands to reason that an
provides for the procedure for mutualization of
insurance policy ceases to be allowable as soon as an
domestic stock life insurance companies. A new
insured becomes a public enemy. The respondent having
provision on RA 10607 is on demutualization or
become an enemy corporation on December 10, 1941, the
conversion of mutual insurance companies into stock
insurance policy issued in its favor on October 1, 1941, by
corporations (IC, as amended by RA 10607, Sec. 280).
a Philippine corporation had ceased to be valid and
3. Cooperatives are now expressly included in the term
enforceable, and since the insured goods were burned
“insurer” or “insurance company.” However, the
after December 10, 1941, and during the war, the
cooperative must:
respondent was not entitled to any indemnity under said
a. Have a sufficient capital and asset required
policy from the petitioner. However, elementary rules of
under the Insurance Code and the pertinent
justice (in the absence of specific provision in the
regulations issued by the Commission (IC, as
Insurance Law) require that the premium paid by the
amended, Sec. 192).
respondent for the period covered by its policy from
b. Have a certificate of authority to operate issued
December 11, 1941, should be returned by the petitioner
by the Commission which should be renewed
(Filipinas Compaña de Seguros v. Christern, Huenfeld and
every year (IC, as amended, Sec. 193, Sundiang Sr.
Co., Inc., G.R. No. L-2294 May 25, 1951).
& Aquino, 2014).
Subject matter of a contract of insurance
Q: Philippine Health Care Providers, Inc. is engaged in
operating a prepaid group practice health care
Anything having an appreciable pecuniary value, which is
delivery system or a health maintenance organization
subject to loss or deterioration or of which one may be
(HMO) to take care of the sick and disabled persons
deprived so that his pecuniary interest is or may be
enrolled in the health care plan. Individuals enrolled
prejudiced.
in its health care programs pay an annual
membership fee and are entitled to various medical
Event or peril insured against
services provided by its duly licensed physicians,
specialists and other professional technical staff
It is any contingent or unknown event, whether past or
participating in the group practice health delivery
future, which may damnify a person having an insurable
system at a hospital or clinic operated or accredited
interest, or create a liability against him subject to the
by it.Is Philippine Health Care Providers, Inc. a health
provisions of Chapter I of the Insurance Code (IC, Sec. 3).
maintenance organization or an insurance company?

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 INSURANCE LAW
Consent of spouse not necessary
The consent of the spouse is not necessary for the validity
of an insurance policy taken out by a married person on
his or her life or that of his or her children (IC, Sec. 3).
NOTE: Prior to the effectivity of the Insurance Code of
2013, the term used was “husband” instead of “spouse”
(IC, Sec. 3).
Effect of death of policy’s original owner
All rights, title and interest in the policy of insurance
taken out by an original owner on the life or health of the
person insured shall automatically vest in the latter upon
the death of the original owner, unless otherwise
provided for in the policy (IC, Sec. 3).
NOTE: Prior to the effectivity of the Insurance Code of
2013, the term used was “minor” instead of “the person
insured.” A minor cannot enter into any contract of
insurance with any insurance company.
Games of chances cannot be insured
An insurance for or against the drawing of any lottery, or
for or against any chance or ticket in a lottery drawing a
prize is not authorized (IC, Sec. 4).
ELEMENTS OF CONTRACT OF INSURANCE
1. Scheme to distribute losses – Such assumption of risk
is part of a general scheme to distribute actual losses
among a large group or substantial number of
persons bearing a similar risk.
2. Payment of premium – As consideration for the
insurer’s promise, the insured makes a ratable
contribution called “premium,” to a general
insurance fund.
3. Existence of insurable interest – The insured
possesses an interest of some kind susceptible of
pecuniary estimation, known as “insurable interest.”
4. Assumption of Risk – The insurer assumes that risk of
loss for a consideration.
5. Risk of loss – The insured is subject to a risk of loss
through the destruction or impairment of that
interest by the happening of designated peril.
NOTE: The inherent uncertainty of events is normally
described in terms of risk. A contract possessing only the
last three elements enumerated above is a risk-shifting
device, but NOT a contract of insurance which is a risk-
distributing device (De Leon, 2006).
Consequently, however, the existence of insurance could
have the perverse effect of increasing the probability of
loss. This is when the insured, having in mind the
indemnification for loss or damage caused by the
happening of the event insured against, would have
reduced incentive to take steps to protect himself or his
property, subject of insurance. This phenomenon is called
moral hazard (ibid).
67
CHARACTERISTICS AND NATURE OF
AN INSURANCE CONTRACT
Characteristics of an insurance contract
1. Consensual – It is perfected by the meeting of the
minds of the parties as to the object, cause and
consideration of the insurance contract. There
should be acceptance of the application for
insurance.
2. Voluntary – The parties may incorporate such terms
and conditions as they may deem convenient:
Provided they do not contravene any provision of law
and are not opposed to public policy, law, morals,
good customs, or public order.
GR: The taking out of an insurance contract is not
compulsory.
XPN: Liability insurance may be required by law in
certain instances (E.g. compulsory motor vehicle
liability insurance, or employees under Labor Code,
or as a condition to granting a license to conduct a
business or calling affecting the public safety or
welfare).
3. Aleatory – The liability of the insurer depends upon
some contingent event.
An aleatory contract is a contract where one or both of
the parties reciprocally bind themselves to give or do
something upon the happening of an event which is
uncertain, or which is to occur at an indeterminate
time (NCC, Art. 2010).
4. Unilateral – It imposes legal duties only on the insurer
who promises to indemnify in case of loss.
It is executed as to the insured after the payment of
the premium, and executory on the part of the insurer
in the sense that it is not executed until payment for
a loss.
5. Conditional – It is subject to conditions, the principal
one of which is the happening of the event insured
against.
6. Contract of indemnity – Recovery is commensurate
with the amount of the loss suffered.
GR: The insurer promises to make good only the loss
of the insured.
XPN: The principle is not applicable to life and
accident insurance where the result is death because
life is not capable of pecuniary estimation. The only
situation where the principle of indemnity is
applicable to life insurance is when the interest of a
person insured is capable of exact pecuniary
measurement. An example would be in a case where
a creditor insures the life of his debtor to the extent
of the latter’s debt to the former.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
7. Personal – Each party having in view the character, XPN: To have an insurable interest in the life of a person,
credit and conduct of the other.The law presumes the expectation of benefit from the continued life of that
that the insurer considered the personal person need not necessarily be of pecuniary nature (De
qualifications of the insured in approving the Leon, 2010).
insurance application (Sundiang Sr. & Aquino, 2014).
Q: Carlo and Bianca met in the La Boracay festivities.
8. Property – Since insurance is a contract, it is property Immediately, they fell inlove with each otherand got
in legal contemplation. married soon after. They have been cohabiting
blissfully as husband and wife, but they did not have
9. Risk-distributing device – Insurance serves to any offspring. As the years passed by, Carlo decided
distribute the risk of economic loss among as many to take out an insurance on Bianca’s life for P1 million
as possible of those who are subject to the same kind with him as sole beneficiary, given that he did not
of loss.By paying a pre-determined amount into a have a steady source of income and he always
general fund out of which payment will be made for depended on Bianca both emotionally and financially.
an economic loss of a defined type, each member During the term of the insurance, Bianca died of what
contributes to a small degree toward compensation appeared to be a mysterious cause so that Carlo
for losses suffered by any member of the group. This immediately requested for an autopsy to be
broad sharing of economic risk is the principle of conducted. It was established that Bianca was
risk-distribution (Sundiang Sr. & Aquino, 2014). transgender all along- a fact unknown to Carlo. Can
Carlo claim the insurance benefit? (2014 Bar)
10. Onerous – There is a valuable consideration called the
premium. A: Yes, Carlo can claim the insurance benefit. He had
insurable interest on Bianca’s life under Section 10(b) of
CLASSES OF INSURANCE the Insurance Code as the problem states that Carlo
“always depended on Bianca both emotionally and
1. Life insurance financially.” The insurable interest upon the life of
a. Individual life another under the aforesaid provision need not be based
b. Group life on kinship or legal obligation to give support. The fact
c. Industrial life that their marriage may be void is irrelevant.
2. Non-Life Insurance
a. Marine Consent of the person insured is not essential to the
b. Fire validity of the policy. So long as it could be proved that
c. Casualty the insured has an insurable interest at the inception of
3. Contracts of suretyship or bonding. the policy, the insurance is valid even without such
4. Compulsory Motor Vehicle Liability Insurance consent (IC, Sec. 10).
5. Microinsurance
Insurable interest in life insurance vs. Insurable
INSURABLE INTEREST interest in property insurance (2002 Bar)

An insurable interest is that interest which a person is LIFE PROPERTY

deemed to have in the subject matter insured, where he GR: Every person Limited to the
has a relation or connection with or concern in it, such has an unlimited actual value of the
that the person will derive pecuniary benefit or advantage insurable interest property
from the preservation of the subject matter insured and in his own life
will suffer pecuniary loss or damage from its destruction,
termination, or injury by the happening of the event XPN: Where life
insured against (Violeta R. Lalican vs. The Insular Life As to extent insurance is taken
Assurance Company Limited, G.R. No. 183526, August 25, out by a creditor
2009). on the life of the
debtor, insurable
NOTE: The existence of insurable interest is a matter of interest is limited
public policy and is not susceptible to the principle of to the amount of
estoppel. The existence of an insurable interest gives a debt
person the legal right to insure the subject matter of the Must exist at the GR: Must exist both
policy of insurance (ibid). time the policy at the time the
takes effect and policy takes effect
When does a person has insurable interest? need not exist and the time of loss,
When must thereafter (IC, Sec. but need not exist
GR: A person is deemed to have an insurable interest in insurable 19). in the period in
the subject matter insured where he has a relation or interest exist between (Sec. 19,
connection with or concern in it that he will derive ibid).
pecuniary benefit or advantage from its preservation and
will suffer pecuniary loss from its destruction or injury by XPN: Secs. 21-24;
the happening of the event insured against. 25, ibid.

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 INSURANCE LAW
The beneficiary The beneficiary
need not have must have
insurable interest insurable interest
over the life of the over the thing
insured if the insured.
insured himself
As to the secured the
beneficiary’s policy. However, if
interest the life insurance
was obtained by
the beneficiary,
the latter must
have insurable
interest over the
life of the insured.
(De Leon, 2010; Sundiang Sr. & Aquino, 2014).
Existence of insurable interest in life and property
insurance
For both life and property insurance, the insurable
interest is required to exist at the time of perfection of the
policy. For property insurance, the insurable interest
must also exist at the time of loss, however, in case of life
insurance, the insurable interest need to exist only at the
time of perfection and not thereafter (IC, Sec. 19).
Mere hope or expectancy is not insurable
A mere contingent or expectant interest in anything, not
founded on an actual right to the thing, nor upon any valid
contract for it, is not insurable(ICC, Sec. 16).
Change of beneficiary
GR: The insured shall have the right to change the
beneficiary he designated in the policy
XPN: If the insured expressly waived this right in the said
policy.
Notwithstanding the foregoing, in the event the insured
does not change the beneficiary during his lifetime, the
designation shall be deemed irrevocable (IC, Sec. 11).
NOTE: Under Sec. 64 of the Family Code, the innocent
spouse is allowed to revoke the designation of the other
spouse as irrevocable beneficiary after legal separation.
Irrevocable designation of the beneficiary to the
assignment of the policy
The insured cannot assign the policy if the designation of
the beneficiary is irrevocable. The irrevocable beneficiary
has a vested right (Sundiang Sr. & Aquino, 2014, 2005
Bar).
Effects of Irrevocable Designation of a Beneficiary:
a. The beneficiary designated in a life insurance
contract cannot be changed without the consent of
the beneficiary. (Gercio v. Sun Life Assurance of
Canada, 48 Phil. 53, 28 September 1925)
b. A new beneficiary cannot be added to the irrevocably
designated beneficiary for this would in effect reduce
69
the latter’s vested rights. (Go v. Redfern, 72 Phil. 71,
25 April 1941)
c. The irrevocably designated beneficiary may obtain a
policy loan to the extent stated in the schedule of
values attached to the policy. (Gercio v. Sun Life
Assurance of Canada, 48 Phl. 53, 28 September 1925)
d. The insured cannot take the cash surrender value
assign or even borrow on said policy without the
consent of the beneficiary.
Void stipulations in an insurance contract
Every stipulation in an insurance contract:
1. For the payment of loss whether the person insured
has or does not have any insurable interest in the
subject-matter of insurance, or
2. That the policy shall be received as proof of such
interest, and
3. Every policy executed by way of gaming or wagering
(ICC, Sec. 25).
NOTE: The Insurance Code provides that a policy may
declare that a violation of specified provisions thereof
shall avoid it. Thus, in fire insurance policies, which
contain provisions that if the claim be in any respect
fraudulent or if any false declaration be made or used in
support thereof, all the benefits under the policy shall be
forfeited, a fraudulent discrepancy between the actual
loss and that claimed in the proof of loss voids the
insurance policy. Mere filing of such a claim will exonerate
the insurer (United Merchants Corporation vs. Country
Bankers Insurance Corporation, G.R. No. 198588, July 11,
2012).
IN LIFE/ HEALTH
Two general classes of life policies
1. Insurance upon one’s life – are those taken out by the
insured upon his own life (IC, Section 10[a]) for the
benefit of himself, or of his estate, in case it matures
only at his death, for the benefit of third person who
may be designated as beneficiary.
The question of insurable interest is immaterial
where the policy is procured by the person whose life
is insured. A person who insures his own life can
designate any person as his beneficiary, whether or
not the beneficiary has an insurable interest in the
life of the insured subject to the limits under Articles
739 and 2012 of the New Civil Code (De Leon, 2010).
2. Insurance upon life of another – are those taken out
by the insured upon the life of another. Where a
person names himself beneficiary in a policy he takes
on the life of another, he must have insurable interest
in the life of the latter (De Leon, 2010). This class
includes the following:
a. His spouse and of his children.
b. Any person on whom he depends wholly or in
part for education or support, or in whom he has
a pecuniary interest.
c. Of any person under a legal obligation to him for
the payment of money, or respecting property
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
or services, of which death or illness might delay
or prevent the performance.
d. Of any person upon whose life any estate or
interest vested in him depends (IC, Sec. 10).
NOTE: In paragraph (a) of Section 10 of the Insurance
Code, mere relationship is sufficient while the rest (pars.
b, c, and d) requires pecuniary interest. Thus, the interest
of the creditor over the life of the debtor ceases upon full
payment (Sundiang Sr. & Aquino, 2009).
Persons prohibited from being designated as
beneficiaries (1998 Bar)
Under the Article 739 of the New Civil Code, the following
are prohibited designation of beneficiaries:
1. Those made between persons who were guilty of
adultery or concubinage at the time of donation.
Finding of guilt in a civil case is sufficient.
2. Those made between persons found guilty of the
same criminal offense, in consideration thereof.
3. Those made to a public officer or his wife,
descendants or ascendants by reason of his office.
The designation of the above-enumerated persons is void
but the policy is binding. The estate will get the proceeds
(Sundiang Sr. & Aquino, 2009).
Beneficiary willfully brought about the death of the
insured (2008 Bar)
GR: The interest of a beneficiary in a life insurance policy
shall be forfeited when the beneficiary is the principal,
accomplice, or accessory in willfully bringing about the
death of the insured. In such a case, the share forfeited
shall pass on to the other beneficiaries, unless otherwise
disqualified. In the absence of other beneficiaries, the
proceeds shall be paid in accordance with the policy
contract. If the policy contract is silent, the proceeds shall
be paid to the estate of the insured (Sec. 12, ibid).
XPNs:
1. The beneficiary acted in self-defense;
2. The insured’s death was not intentionally caused
(e.g., thru accident);
3. Insanity of the beneficiary at the time he killed the
insured.
Q: Juan de la Cruz was issued Policy No. 8888 of the
Midland Life Insurance Co. on a whole life plan for
P20,000 on August 19, 1989. Juan is married to
Cynthia with whom he has three legitimate children.
He, however, designated Purita, his common-law
wife, as the revocable beneficiary. Juan referred to
Purita in his application and policy as the legal wife.
Three (3) years later, Juan died. Purita filed her claim
for the proceeds of the policy as the designated
beneficiary therein. The widow, Cynthia, also filed a
claim as the legal wife. To whom should the proceeds
of the insurance policy be awarded? (1998 Bar)
A: The estate is entitled to claim for the proceeds of the
insurance policy. As a general rule, the insured may
designate anyone he wishes to be his/her beneficiary.
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
70
However, Art. 2012 of the Civil Code, which applies
suppletorily to the Insurance Code, provides that any
person who is forbidden from receiving any donation
under Art. 739 cannot be named beneficiary of a life
insurance policy by the person who cannot make any
donation to him, according to said article. Art. 739
specifically bars the donations as between persons who
were guilty of adultery or concubinage. Since Purita is a
common-law wife of Juan, she falls squarely in to this
category therefore she is disqualified to receive insurance
proceeds and when this happens, the estate of the
deceased is the one entitled to the proceeds (Insular Life
Assurance Company, Ltd. vs. Capronia Ebrado, supra).
Q: Loreto designated Eva, his common-law wife, and
illegitimate children as beneficiaries in his life
insurance policies. Loreto was killed and Eva was the
prime suspect in his death. The legitimate wife and
children of Loreto asked for the insurance proceeds
contending that illegitimate family is disqualified
from being beneficiaries and that the insurance
benefits must redound to the benefit of the estate of
Loreto. Will the claim of the legitimate family
prosper?
A: No. The insurance proceeds shall be applied
exclusively to the proper interest of the person in whose
name or for whose benefit it is made unless otherwise
specified in the policy.
While the share of Eva must be forfeited, the designation
of the illegitimate children as beneficiaries remains valid.
There is no proscription in naming illegitimate children as
beneficiaries. It is only in cases where the insured has not
designated beneficiary or when the designated
beneficiary is disqualified by law to receive the proceeds,
that the policy proceeds shall redound to the benefit of the
estate of the insured. Thus, the proceeds of the policy
must be awarded to the illegitimate children, to the
exclusion of the legitimate family. (Heirs of Loreto
Maramag vs. Maramag, G.R. No. 181132, June 5, 2009).
Because no legal proscription exists in naming as
beneficiaries children of illicit relationships by the
insured, the shares of the common-law spouse in the
insurance proceeds, whether forfeited by the Court in
view of the prohibition on donation under Article 739 of
the Civil Code or by the insurers themselves for reasons
based on the insurance contracts, must be awarded to the
said illegitimate children, the designated beneficiaries, to
the exclusion of the legitimate heirs (Heirs of Loreto
Maramag vs. Maramag, G.R. No. 181132, June 5, 2009).
Q: X is the common law wife of Y. Y loves X so much
that he took out a life insurance on his own life and
made her the sole beneficiary. Y did this to ensure
that X will be financially comfortable when he is gone.
Upon the death of Y, -(2012 Bar)
A: X as sole beneficiary under the life insurance policy on
the life of Y will be entitled to the proceeds of the life
insurance.
Q: On July 3, 1993, Delia Sotero (Sotero) took out a life
insurance policy from Ilocos Bankers Life Insurance
 INSURANCE LAW
Corporation (Ilocos Life) designating Creencia Aban
(Aban) her niece, as her beneficiary. Ilocos Life issued
Policy No. 747, with a face value of P100,000, in
Sotero’s favor on August 30,1993, after the requisite
medical examination and payment of the premium.
On April 10, 1996, Sotero died. Aban filed a claim for
the insurance proceeds on July 9, 1996, Ilocos Life
conducted an investigation into the claim and came
out with the following findings:
1. Sotero did not personally apply for insurance
coverage, as she was illiterate.
2. Sotero was sickly since 1990.
3. Sotero did not have the financial capability to
pay the premium on the policy.
4. Sotero did not sign the application for insurance
5. Alban was the one who filed the insurance
application and designated herself as the
beneficiary.
For the above reasons and claiming fraud, Ilocos Life
denied Aban’s claim on April 16, 1997 but refunded
the premium paid on the policy. May Sotero validly
designate her niece as beneficiary? (2014 Bar)
A: Yes. Sotero may validly designate her niece as
beneficiary. The same is not prohibited under the
Insurance Code or any other laws.
IN PROPERTY
Every interest in property, whether real or personal, or
any relation thereto, or liability in respect thereof, of such
nature that contemplated peril might directly damnify the
insured, is insurable interest (IC, Sec. 13).
Insurable interest in property may consist of the
following (1991 Bar):
1. An existing interest – The existing interest in the
property may be legal or equitable title.
Examples of insurable interest arising from legal
title:
a. Trustee, as in the case of the seller of property
not yet delivered;
b. Mortgagor of the property mortgaged;
c. Lessor of the property leased (De Leon, supra).
Examples of insurable interest arising from equitable
title:
a. Purchaser of property before delivery or before
he has performed the conditions of the sale
b. Mortgagee of property mortgaged;
c. Mortgagor, after foreclosure but before the
expiration of the period within which
redemption is allowed (De Leon, 2010).
2. An inchoate interest founded on an existing interest;
Example: A stockholder has an inchoate interest in
the property of the corporation of which he is a
stockholder, which is founded on an existing interest
71
arising from his ownership of shares in the
corporation (De Leon, 2014).
3. An expectancy coupled with an existing interest in
that out of which the expectancy arises.
NOTE: Existence of insurable interest is a matter of
public policy. Hence, the principle of estoppel cannot
be invoked (Sundiang Sr. & Aquino, 2014).
Measure of insurable interest in property (2000 Bar)
The extent to which the insured might be damnified by
loss or injury thereof (IC, Sec. 17). Insurable interest in
property does not necessarily imply a property interest
in, or lien upon, or possession of, the subject matter of the
insurance, and neither title nor a beneficial interest is
requisite to the existence thereof. It is sufficient that the
insured is so situated with reference to the property that
he would be liable to loss should it be injured or destroyed
by the peril against which it is insured. Anyone has an
insurable interest in property who derives a benefit from
its existence or would suffer loss from its destruction
(Gaisano Cagayan, Inc. v. Insurance Company of North
America, G.R. No. 147839, June 8, 2006).
Extent of insurable interest of a common carrier or
depository in a thing held by him
To the extent of his liability but not to exceed the value
thereof (IC, Sec. 15) because the loss of the thing by the
carrier or depository may cause liability against him to
the extent of its value.
Change of interest in any part of a thing insured
“Change of interest” contemplated by law is an absolute
transfer of the insured’s entire interest in the property
insured to one not previously interested or insured
(Perez, 2006).
GR: A change of interest in any part of a thing insured
unaccompanied by a corresponding change in interest in
the insurance suspends the insurance to an equivalent
extent, until the interest in the thing and the interest in
the insurance are vested in the same person (Sec. 20;
Sec.58, ibid).
XPNs:
1. When there is a prohibition against alienation or
change of interest without the consent of the insurer
in which case the policy is not merely suspended but
avoided (Sundiang & Aquino, 2014., citing Curtis vs.
Girard Fire and Marine Ins., 11 SE 3, 190 Ga. 954).
2. In life, accident, and health insurance (IC, Sec. 20).
3. A change of interest in a thing insured, after the
occurrence of an injury which results in a loss does
NOT affect the right of the insured to indemnity for
loss (IC, Sec. 21).
4. A change of interest in one or more distinct things,
separately insured by one policy does NOT avoid the
insurance as to the others (IC, Sec. 22).
5. A change of interest by will or succession, on the
death of the insured, does NOT avoid an insurance;
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
and his interest in the insurance passes to the person
taking his interest in the thing insured (IC, Sec. 23).
6. A transfer of interest by one of several partners, joint
owners, or owners in common, who are jointly
insured, to the others does NOT avoid an insurance
even though it has been agreed that the insurance
shall cease upon an alienation of the thing insured
(IC, Sec. 24).
7. When the policy is so framed that it will inure to the
benefit of whomsoever, during the continuance of
the risk, may become the owner of the interest
insured(IC, Sec. 57).
DOUBLE INSURANCE AND OVER INSURANCE
Double insurance
Double insurance exists where the same person is insured
by several insurers separately, in respect to the same
subject and interest (Sec. 95, ibid).
Requisites of double insurance (STRIP)
1. Subject matter is the same
2. Two or more insurers insuring separately
3. Risk or peril insured against is the same
4. Interest insured is the same
5. Person insured is the same
There is no double insurance even though two policies
were both issued over the same subject matter and both
covered the same peril insured against if the two policies
were issured to two different entitites (Malayan Insurance
Co. vs. Philippine First Insurance Co., G.R. No. 184300, July
11, 2012)
Double insurance is not prohibited by law
It is not contrary to law and hence, in case of double
insurance, the insurers may still be made liable up to the
extent of the value of the thing insured but not to exceed
the amount of the policies issued (Perez, 2006).
A provision in the policy that prohibits double insurance
is valid. However, in the absence of such prohibition,
double insurance is allowed (ibid).
Nature of the liability of the several insurers in double
insurance (2005 Bar)
A: In double insurance, the insurers are considered as co-
insurers. Each one is bound to contribute ratably to the
loss in proportion to the amount for which he is liable
under his contract. This is known as the “principle of
contribution” or “contribution clause” (IC, Sec. 96 [e]).
Overinsurance
There is overinsurance whenever the insured obtains a
policy in an amount exceeding the value of his insurable
interest (Perez, 2006).
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
72
Double Insurance vs. Over Insurance
DOUBLE INSURANCE OVER INSURANCE
There may be no over When the amount of the
insurance as when the insurance is beyond the
sum total of the amounts value of the insured’s
of the policies issued insurable interest.
does not exceed the
insurable interest of the
insured.
Two or more insurers. There may be only one
insurer, with whom the
insured takes insurance
beyond the value of his
insurable interest.
Rules when the insured in a policy other than life is
over insured by double insurance
1. The insured, unless the policy otherwise provides,
may claim payment from the insurers in such order
as he may select, up to the amount which the insurers
are severally liable under their respective contracts;
2. Where the policy under which the insured claims is a
valued policy, any sum received by him under any
other policy shall be deducted from the value of the
policy without regard to the actual value of the
subject matter insured;
3. Where the policy under which the insured claims is
an unvalued policy, any sum received by him under
any policy shall be deducted against the full insurable
value, for any sum received by him under any policy;
4. Where the insured receives any sum in excess of the
valuation in the case of valued policies, or of the
insurable value in the case of unvalued policies, he
must hold such sum in trust for the insurers,
according to their right of contribution among
themselves.
5. Each insurer and the other insurers, to contribute
ratably to the loss in proportion to the amount for
which he is liable under his contract (Sec. 96, ibid).
Additional or other insurance clause (2008 Bar)
A clause in the policy that provides that the policy shall be
void if the insured procures additional insurance without
the consent of the insurer (Pioneer Insurance and Surety
Corp vs. Yap, G.R. No. L-36232, December 19, 1974).
The insurer may insert an “other insurance clause” which
will prohibit double insurance. The rationale is to prevent
the danger that the insured will over insure his property
and thus avert the possibility of perpetration of fraud
(ibid). It is lawful and specifically allowed under Sec. 75 of
the Insurance Code which provides that “a policy may
declare that a violation or a specified provision thereof
shall avoid it, otherwise the breach of an immaterial
provision does not avoid it.”
Waiver of violation
When the insurer, with the knowledge of the existence of
other insurances, which the insurer deemed a violation of
the contract, preferred to continue the policy, its action
 INSURANCE LAW
amounted to a waiver of annulment of the contract(Perez,
2006 citing Gonzales Lao v. Yek Tong Lin Fire & Marine Ins.
Co., G.R. No. L-33131, December 13, 1930).
Q: Wyeth Philippines, Inc. (Wyeth) procured amarine
policy from Philippines First Insurance Co., Inc.
(Philippines First) to secure its interest over its own
products while the same were being transported or
shipped in the Philippines. Thereafter, Wyeth
executed its annual contract of carriage with
Reputable Forwarder Services, Inc. (Reputable).
Under the contract, Reputable undertook to answer
for all risks with respect to the goods and shall be
liable to Wyeth, for the loss, destruction, or damage of
the goods/products due to any and all causes
whatsoever, including theft, robbery, flood, storm,
earthquakes, lightning, and other force majeure
while the goods/products are in transit and until
actual delivery to the customers, salesmen, and
dealers. The contract also required Reputable to
secure an insurance policy on Wyeth’s goods.Thus,
Reputable signed a Special Risk Insurance Policy (SR
Policy) with Malayan Insurance Co., Inc., (Malayan)
for the amount of P1,000,000.00. Is there is double
insurance (as prohibited in Section 5 of the SR policy
between Malayan and Reputable) so as to preclude
Philippine First from claiming indemnity from
Malayan?
A: No. The interest of Wyeth over the property subject
matter of both insurance contracts is different and
distinct from that of Reputable’s. The policy issued by
Philippines First was in consideration of the legal and/or
equitable interest of Wyeth over its own goods. On the
other hand, what was issued by Malayan to Reputable was
over the latter’s insurable interest over the safety of the
goods, which may become the basis of the latter’s liability
in case of loss or damage to the property and falls within
the contemplation of Section 15 of the Insurance
Code.Therefore, even though the two concerned
insurance policies were issued over the same goods and
cover the same risk, there arises no double insurance
since they were issued to two different persons/entities
having distinct insurable interests. Necessarily, over
insurance by double insurance cannot likewise exist
(Malayan Insurance Co., Inc., v. Philippine First Insurance
Co., Inc. and Reputable Forwarder Services, Inc., G.R. No.
184300, July 11, 2012).
Absence of notice of existence of other insurance
constitutes fraud
When the insurance policy specifically requires that
notice should be given by the insured of the existence of
other insurance policies upon the same property, the total
absence of such notice nullifies the policy. Such failure to
give notice of the existence of other insurance on the same
property when required to do so constitutes deception
and it could be inferred that had the insurer known that
there were many other insurance policies on the same
property, it could have hesitated or plainly desisted from
entering into such contract (Perez, 2006).
Cancellation of policy of insurance by reason of over
insurance
73
Sec. 64 of the Insurance Code of 2013 provides that upon
discovery of other insurance coverage that makes the
total insurance in excess of the value of the property
insured, the insurer may cancel such policy of insurance;
provided there is prior notice and such circumstance
occurred after the effective date of the policy.
Q: The Peninsula Insurance Company offered to
insure Francis' brand new car against all risks in the
sum of P1 Million for 1 year. The policy was issued
with the premium fixed at P60,000.00 payable in 6
months. Francis only paid the first two months
installments. Despite demands, he failed to pay the
subsequent installments. Five months after the
issuance of the policy, the vehicle was carnapped.
Francis filed with the insurance company a claim for
its value. However, the company denied his claim on
the ground that he failed to pay the premium
resulting in the cancellation of the policy. Can Francis
recover from the Peninsula Insurance Company?
(2006 Bar)
A: Yes. As a general rule, no policy is binding unless the
premiums thereof have been paid. However, one of the
exceptions is when there is an agreement allowing the
insured to pay the premium in installments and partial
payment has been made at the time of loss. In the case at
hand Francis already paid two installments at the time of
the loss and as such may recover on the policy (Makati
Tuscany Condominium Corp. v. CA, G.R. No. 95546, Nov. 6,
1992). Furthermore, the contention of the insurer that the
failure to pay premium resulted in the cancellation of the
policy since no policy of insurance shall be cancelled
except upon notice thereof to the insured (IC, Sec. 64).
MULTIPLE OR SEVERAL INTERESTS
ON SAME PROPERTY
Instances where more than one insurable interest
may exist in the same property
1. In trust, both trustor and trustee have insurable
interest over the property in trust.
2. In a corporation, both the corporation and its
stockholders have insurable interest over the assets.
3. In partnership both the firm and partners have
insurable interest over its assets.
4. In assignment both the assignor and assignee have
insurable interest over the property assigned.
5. In lease, the lessor, lessee and sub-lessees have
insurable interest over the property in lease.
6. In mortgage, both the mortgagor and mortgagee
have insurable interest over the property mortgaged.
Insurable interest of mortgagor and mortgagee in
case of a mortgaged property are NOT the same
(1999, 2010 Bar)
Each has an insurable interest in the property mortgaged
and this interest is separate and distinct from the other.
Therefore, insurance taken by one in his name only and in
his favor alone does not inure to the benefit of the other.
The same is not open to objection that there is double
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
insurance (RCBC vs. CA, 289 G.R. Nos. 128833-34, 128866,
April 20, 1998; IC, Sec. 8).
Extent of insurable interest of mortgagor and
mortgagee (1999 Bar)
1. Mortgagor – The mortgagor of property, as owner,
has an insurable interest to the extent of its value
even though the mortgage debt equals such value.
2. Mortgagee –The mortgagee as such has an insurable
interest in the mortgaged property to the extent of
the debt secured; such interest continues until the
mortgage debt is extinguished (Sundiang Sr. &
Aquino, 2014).
NOTE: In case of an insurance taken by the mortgagee
alone and for his benefit, the mortgagee, after recovery
from the insurer, is not allowed to retain his claim against
the mortgagor but it passes by subrogation to the insurer
to the extent of the insurance money paid (De Leon, 2010)
Q: To secure a loan of P10 million, Mario mortgaged
his building to Armando. In accordance with the loan
arrangements, Mario had the building insured with
First Insurance Company for P10 million, designating
Armando as the beneficiary. Armando also took an
insurance on the building upon his own interest with
Second Insurance Company for P5 million. The
building was totally destroyed by fire, a peril insured
against under both insurance policies. It was
subsequently determined that the fire had been
intentionally started by Mario and that in violation of
the loan agreement, he had been storing inflammable
materials in the building.
a. How much, if any, can Armando recover from
either or both insurance companies?
b. What happens to the P10 million debt of Mario to
Armando? Explain. (2010 Bar)
A:
a. Armando can receive P5 million from Second
Insurance Company. As mortgagee, he had an
insurable interest in the building (Panlileo v. Cosio, 97
Phil. 919 (1955). Armando cannot collect anything
from First Insurance Company. First Insurance
Company is not liable for the loss of the building.
First, it was due to a willful act of Mario, who
committed arson (Section 87 of the Insurance Code;
East Furnitures, Inc. v. Globe & Rutgers Fire Insurance
Company, 57 Phil. 576 (1932)). Second, fire insurance
policies contain a warranty that the insured will not
store hazardous materials within the insured
premises. Mario breached this warranty when he
stored inflammable materials in the building (Young
v. Midland Textile Insurance Company, 30 Phil. 617
(1915).These two factors exonerate First Insurance
Company from liability to Armando as mortgagee
even though it was Mario who committed them (Sec.
8 of the Insurance Code).
b. Since Armando would have collected P5 million from
Second Insurance Company, this amount should be
considered as partial payment of the loan. Armando
can only collect the balance of P5 million. Second
Insurance Company can recover from Mario the
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
74
amount of P5 million it paid, because it became
subrogated to the rights of Armando.
Standard or union mortgage clause
It is a clause that states that the acts of the mortgagor do
not affect the mortgagee. The purpose of the clause is to
make a separate and distinct contract of insurance on the
interest of the mortgagee (De Leon, 2010).
Open or loss-payable mortgage clause
It is a clause which provides for the payment of loss, if any,
to the mortgagee as his interest may appear and under it,
the acts of the mortgagor affect the mortgagee (ibid).
In a policy obtained by the mortgagor with loss payable
clause in favor of the mortgagee as his interest may
appear, the mortgagee is only a beneficiary under the
contract, and recognized as such by the insurer but not
made a party to the contract itself. This kind of policy
covers only such interest as the mortgagee has at the
issuance of the policy (Sundiang Sr. & Aquino, 2014,
Geagonia v. CA, supra).
The mortgagee may be made a beneficial payee through
any of the following:
1. He may become the assignee of the policy with the
consent of the insurer
2. He may be the mere pledgee without such consent
3. A rider making the policy payable to the mortgagee
“as his interest may appear” may be attached
4. A “standard mortgage clause” containing a collateral
independent contract between the mortgagee and
the insurer may be attached
The policy, though, by its terms payable absolutely to the
mortgagor; may have been procured by a mortgagor
under a contract duty to insure for the mortgagee’s
benefit, in which the mortgagee acquires an equitable lien
upon the proceeds (ibid.).
The following are the effects if the insurance is procured
by mortgagor for benefit of mortgagee, or policy assigned
to mortgagee:
1. The contract is deemed to be upon the interest of the
mortgagor; hence he does not cease to be party to the
contract;
2. Any act of the mortgagor prior to the loss, which
would otherwise avoid the insurance affects the
mortgagee even if the property is in the hands of the
mortgagee;
3. Any act which under the contract of insurance is to
be performed by the mortgagor may be performed by
the mortgagee with the same effect;
4. In case of loss, the mortgagee is entitled to the
proceeds to the extent of his credit at the time of loss
and
5. Upon recovery by the mortgagee to the extent of his
credit, the debt is extinguished (ibid., citing IC, Sec. 8).
NOTE: The rule on subrogation by the insurer to the right
of the mortgagee does not apply in this case.
 INSURANCE LAW
Assignment of policy to mortgagee is not a payment
The assignment is merely to afford the mortgagee a
greater security for the settlement of the mortgagor’s
obligation and should not be construed as payment in just
the same way that delivery of negotiable instruments
does not constitute payment until the proceeds are
realized or collected (Perez, 2006).
Effects of “mortgage redemption” insurance procured
by the mortgagor
A “mortgage redemption insurance” is simply a kind of life
insurance procured by the mortgagor with the mortgagee
as beneficiary up to the extent of the mortgage
indebtedness. Its rationale is to give protection to both the
mortgagee and the mortgagor. In case the mortgagor-
insured dies, the proceeds of such insurance will be
applied to the payment of the mortgage debt to the
mortgagee, thereby relieving the heirs of the mortgagor of
the burden of paying the debt (Great Pacific Assur. Corp. v.
Court of Appeals, et. al., G.R. No. 113899, October 13, 1999).
PERFECTION OF THE INSURANCE CONTRACT
Policy of insurance
It is the written instrument in which the contract of
insurance is set forth (IC, Sec. 49.). It is the written
document embodying the terms and stipulations of the
contract of insurance between the insured and insurer.
The policy is not necessary for the perfection of the
contract (Sundiang Sr. & Aquino, 2014).
Form of an insurance contract
1. The policy shall be in printed form which may
contain blank spaces to be filled in;
2. Any rider, clause, warranty or endorsement
purporting to be part of the contract of insurance and
which is pasted or attached to said policy is not
binding on the insured, unless the descriptive title or
name of the rider, clause, warranty or endorsement
is also mentioned and written on the blank spaces
provided in the policy.
3. Unless applied for by the insured or owner, any rider,
clause, warranty or endorsement issued after the
original policy shall be countersigned by the insured
or owner.
NOTE: Notwithstanding the foregoing, the policy may be
in electronic form subject to the pertinent provisions of
Republic Act No. 8792, otherwise known as the
‘Electronic Commerce Act’ and to such rules and
regulations as may be prescribed by the Commissioner
(IC, Sec. 50).
Types of policy of insurance
1. Open – one in which the value of the thing insured is
not agreed upon, and the amount of the insurance
merely represents the insurer’s maximum liability.
75
The value of such thing insured shall be ascertained
at the time of the loss (IC, Sec. 60).
2. Valued – is one which expresses on its face an
agreement that the thing insured shall be valued at a
specific sum (IC, Sec. 61).
3. Running – one which contemplates successive
insurances, and which provides that the object of the
policy may be from time to time defined, especially as
to the subjects of insurance, by additional statements
or indorsements (IC, Sec. 62).
Basic contents of a policy
1. Parties;
2. Amount of insurance, except in open or running
policies;
3. Rate of premium;
4. Property or life insured;
5. Interest of the insured in the property if he is not the
absolute owner;
6. Risk insured against; and
7. The period during which the insurance is to continue
(IC, Sec. 51).
Rider
An attachment to an insurance policy that modifies the
conditions of the policy by expanding or restricting its
benefits or excluding certain conditions from the
coverage (Black’s Law Dictionary).
Riders are not binding on the insured unless the
descriptive title or name thereof is mentioned and written
on the blank spaces provided in the policy. It should be
countersigned by the insured or owner unless he was the
one who applied for the same (IC, Sec. 50).
Cover notes
Persons who wish to be insured may get protection before
the perfection of the insurance contract by securing a
cover note. The cover note issued by the insurer shall be
deemed an insurance contract as contemplated under
Section 1(1) of the Insurance Code subject to the
following rules:
1. The cover note shall be issued or renewed only upon
prior approval of the Insurance Commission;
2. The cover note shall be valid and binding for not
more than sixty (60) days from the date of its
issuance;
3. No separate premium (separate from the policy or
main contract) is required for the cover note;
4. The cover note may be canceled by either party upon
prior notice to the other of at least seven (7) days;
5. The policy should be issued within sixty (60) days
after the issuance of the cover note;
6. The sixty (60)-day period may be extended upon
written approval of the Insurance Commission; and
7. The written approval of the Insurance Commission is
dispensed with upon the certification of the
president, vice-president or general manager of the
insurer that the risk involved, the values of such risks
and premium therefor, have not as yet been
determined or established and the extension or
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
renewal is not contrary to or is not for the purpose of
violating the Insurance Code or any rule
OFFER AND ACCEPTANCE/CONSENSUAL
Perfection of an insurance contract
The contract of insurance is perfected when the assent or
consent is manifested by the meeting of the offer and the
acceptance upon the thing and the cause which are to
constitute the contract. Mere offer or proposal is not
contemplated (De Lim v. Sun Life Assurance Co., G.R. No. L-
15774, November 29, 1920).
Cognition Theory
Mere submission of the application without the
corresponding approval of the policy does not result in
the perfection of the contract of insurance.
Insurance contracts through correspondence follow the
“cognition theory” wherein an acceptance made by letter
shall not bind the person making the offer except from the
time it came to his knowledge (Enriquez v. Sun Life
Assurance Co. of Canada, GR No. L-15774, Nov. 29, 1920).
Where the applicant died before he received notice of the
acceptance of his application for the insurance, there is no
perfected contract (Perez v. Court of Appeals, G.R. No.
112329, January 28, 2000).
Q: On June 1, 2011, X mailed to Y Insurance Co. his
application for life insurance. On July 21, 2011, the
insurance company accepted the application and
mailed, on the same day, its acceptance plus the cover
note. It reached X's residence on August 11. On August
4, 2011, X figured in a car accident. He died a day later.
May X's heirs recover on the insurance policy? (2011
Bar)
A: No, since X had no knowledge of the insurer's
acceptance of his application before he died. What is being
followed in insurance contracts is what is known as the
“cognition theory”.
Offer in property and liability insurance
It is the insured who makes an offer to the insurer, who
accepts the offer, rejects it, or makes a counter-offer. The
offer is usually accepted by an insurance agent on behalf
of the insurer (De Leon, 2010).
Offer in life and health insurance
It depends upon whether the insured pays the premium
at the time he applies for insurance.
1. If he does not pay the premium, his application is
considered an invitation to the insurer to make an
offer, which he must then accept before the contract
goes into effect.
2. If he pays the premium with his application, his
application will be considered an offer (De Leon,
2010).
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
76
DELAY IN ACCEPTANCE
The acceptance of an insurance policy must be
unconditional, but it need not be by a formal act (De Leon,
2010).
Mere delay in acceptance of the insurance application will
not result in a binding contract. Court cannot impose upon
the parties a contract if they did not consent. However, in
proper cases, the insurer may be liable for tort (Sundiang
Sr. & Aquino, 2014).
Unreasonable delay in returning the premium raises the
presumption of acceptance of the insurance application
(Gloria v. Philippine American Life Ins. Co., CA 73 O.G.
[No.37] 8660).
DELIVERY OF POLICY
Delivery is not necessary in the formation of the contract
of insurance. Since the contract of insurance is
consensual, delivery of the policy is not necessary for its
perfection (Sundiang Sr. & Aquino, 2014).
The mere delivery of an insurance policy to someone does
not give rise to the formation of a contract in the absence
of proof that he had agreed to be insured.
Two types of delivery
1. Actual – delivery to the person of the insured.
2. Constructive
a. By mail –If policy was mailed already and
premium was paid and nothing is left to be done
by the insured, the policy is considered
constructively delivered if insured died before
receiving the policy.
b. By agent –If delivered to the agent of the insurer,
whose duty is ministerial, or delivered to the
agent of the insured, the policy is considered
constructively delivered (De Leon, 2010).
PREMIUM PAYMENT
Premium
It is an agreed price for assuming and carrying the risk –
that is, the consideration paid an insurer for undertaking
to indemnify the insured against a specified peril (De
Leon, 2010).
The burden is on an insured to keep a policy in force by
the payment of premiums, rather than on the insurer to
exert every effort to prevent the insured from allowing a
policy to elapse through a failure to make premium
payments. The continuance of the insurer's obligation is
conditional upon the payment of premiums, so that no
recovery can be had upon a lapsed policy, the contractual
relation between the parties having ceased. (Philippine
Phoenix Surety & Insurance Company Vs. Woodworks, Inc.
G.R. No. L-25317 August 6, 1979)
 INSURANCE LAW
Premium vs. Assessment
PREMIUM ASSESSMENT
Levied and paid to meet Collected to meet actual
anticipated losses losses
Premium is not a debt Assessment when
properly levied, unless
otherwise expressly
agreed, is a debt.
Acceptance of premium
Acceptance of premium within the stipulated period for
payment thereof, including the agreed grace period,
merely assures continued effectivity of the insurance
policy in accordance with its terms (Stoke v. Malayan
Insurance Co., Inc., G.R. No. L-34768, February 28, 1984).
Payment of the premium to agent of the insurance
company is binding on it (Malayan Insurance v. Arnaldo
G.R. No.L-67835, October 12, 1987 and Areola v. CA G.R. No.
95641, September 22, 1994). If an insurance company
delivers a policy to an insurance broker, it is deemed to
have authorized him to receive the payment of the
premium (Sec. 306, South Sea v. CA G.R. No. 102253, June 2,
1995; American Home Assurance v. Chua, G.R. No. 130421,
June 28, 1999).
“Cash and carry” rule (2003 Bar)
GR: No policy or contract of insurance issued by an
insurance company is valid and binding unless and until
the premium thereof has been paid. Any agreement to the
contrary is void.
XPN: A policy is valid and binding even when there is non-
payment of premium:
1. In case of life or industrial life policy whenever the
grace period provision applies, or whenever under
the broker and agency agreements with duly licensed
intermediaries, a ninety (90)-day credit extension is
given. No credit extension to a duly licensed
intermediary should exceed ninety (90) days from
date of issuance of the policy (IC, Sec. 77).
2. When there is acknowledgment in a policy of a receipt
of premium, which the law declares to be conclusive
evidence of payment, even if there is stipulation
therein that it shall not be binding until the premium
is actually paid. This is without prejudice however to
right of insurer to collect corresponding premium
(Sec. 77, ibid).
3. When there is an agreement allowing the insured to
pay the premium in installments and partial payment
has been made at the time of loss (Makati Tuscany
Condominium Corp. v. CA, G.R. No. 95546, Nov. 6, 1992)
4. When there is an agreement to grant the insured
credit extension for the payment of the premium.
(Art. 1306, NCC), and loss occurs before the
expiration of the credit term (UCPB General
Insurance v. Masagana Telemart, G.R. No. 137172, Apr.
4, 20012006, 2007 Bar).
5. When estoppel bars the insurer to invoke non-
recovery on the policy.
77
6. When the public interest so requires, as determined
by the Insurance Commissioner
Example: In compulsory motor vehicle insurance, if
the policy was issued without payment of premium
by the vehicle owner, the insurer will still be held
liable. To rule otherwise would prejudice the 3rd
party victim.
Grace Period
In case of individual life or endowment insurance and
group life insurance, the policyholder is entitled to a grace
period of either 30 days or 1 month within which the
payment of any premium after the first may be made (IC,
Secs. 233[a], 234[a]).
In case of industrial life insurance, the grace period is 4
weeks, where premiums are payable monthly, either 30
days or 1 month (IC, Sec. 236 [a]).
Acknowledgment of receipt of premium
Acknowledgment of receipt of premium is conclusive
evidence of its payment, in so far as to make the policy
binding, notwithstanding any stipulation therein that it
shall not be binding until the premium is actually paid (IC,
Sec. 79).
When the policy contains such written acknowledgment,
it is presumed that the insurer has waived the condition
of prepayment. It hereby creates a legal fiction of
payment. The presumption is however, extended only to
the question of the binding effect of the policy.
As far as the payment of the premium itself is concerned,
the acknowledgment is only a prima facie evidence of the
fact of such payment. The insurer may still dispute its
acknowledgment but only for the purpose of recovering
the premium due and unpaid. Whether payment was
indeed made is a question of fact.
Credit Extension
Under Sec. 77 as amended by RA 10607, a ninety (90)-day
credit extension may be given whenever credit extension
is given under the broker and agency agreements with
duly licensed intermediaries. The requisites are as
follows:
1. The credit extension must be provided for under the
broker and agency agreements;
2. The credit extension to a duly licensed intermediary
should not exceed ninety (90) days from date of
issuance of the policy (Sundiang Sr. & Aquino, 2014).
Q: Stable Insurance Co. (SIC) and St. Peter
Manufacturing Co. (SPMC) have had a long-standing
insurance relationship with each other; SPMC secures
the comprehensive fire insurance on its plant and
facilities from SIC. The standing business practice
between them has been to allow SPMC a credit period
of 90 days from the renewal of the policy within which
to pay the premium.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Soon after the new policy was issued and before
premium payments could be made, a fire gutted the
covered plant and facilities to the ground. The day
after the fire, SPMC issued a manager's check to SIC
for the fire insurance premium, for which it was
issued a receipt; a week later SPMC issued its notice
of loss. SIC responded by issuing its own manager's
check for the amount of the premiums SPMC had paid,
and denied SPMC's claim on the ground that under the
"cash and carry" principle governing fire insurance,
no coverage existed at the time the fire occurred
because the insurance premium had not been paid.Is
SPMC entitled to recover for the loss from SIC? (2003,
2013 Bar)
A: St. Peter Manufacturing Company is entitled to recover
for the loss from Stable Insurance Company. Stable
Insurance Company granted a credit term to pay the
premiums. This is not against the law, because the
standing business practice of allowing St. Peter
Manufacturing Company to pay the premiums after 60 or
90 days, was relied upon in good faith by SPMC. Stable
Insurance Company is in estoppels (UCPB General
Insurance Company, Inc. v. Masagana Telemart, Inc., G.R.
No. 137172, April 4, 2001).
Payment in installments
Q: American Home Assurance Co. (AHAC) , issued in
favor of Makati Tuscany Condominium Corporation
insurance policies for 2 years. The premiums were
paid by Tuscany on installments. The policy was again
renewed, however, Tuscany thereafter refused to pay
the balance of the premium. AHAC filed an action to
recover the unpaid balance. Tuscany contented that
payment by installment of the premiums due on an
insurance policy invalidates the contract of insurance
and no risk attached to the policy. The policy was
never binding and valid, and no risk attached to the
policy. Is the contention of Tuscany valid?
A: No. The subject policies are valid even if the premiums
were paid on installments. The records clearly show that
Tuscany and AHAC intended subject insurance policies
to be binding and effective notwithstanding the staggered
payment of the premiums. For 3 years, the insurer
accepted all the installment payments. Such acceptance
of payments speaks loudly of the insurer's intention to
honor the policies it issued to Tuscany.
While the import of Section 77 is that prepayment of
premiums is strictly required as a condition to the
validity of the contract, Section 78 of the Insurance
Code in effect allows waiver by the insurer of the
condition prepayment by making an acknowledgment
in the insurance policy of receipt of premium as
conclusive evidence of payment so far as to make the
policy binding despite the fact that premium is actually
unpaid. (Makati Tuscany Condominium Corp. vs. Court of
Appeals G.R. No. 95546, November 6, 1992)
Estoppel
Q: Maxilite and Marques entered into a trust receipt
transaction with FEBTC for the shipment of various
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
78
high-technology equipment. FEBIBI, upon the advice
of FEBTC, facilitated the procurement and processing
from Makati Insurance Company of four separate and
independent fire insurance policies over the
merchandise. Maxilite agreed that FEBTC would debit
Maxilite’s account for the premium payments.
However, said premiums were not paid. A fire gutted
Maxilite’s office and warehouse. As a result, Maxilite
suffered losses amounting to at least P2.1 million,
which Maxilite claimed against the fire insurance
policy with Makati Insurance Company. Makati
Insurance Company denied the fire loss claim on the
ground of non-payment of premium. FEBTC and
FEBIBI disclaimed any responsibility for the denial of
the claim. Will the claim of Maxilite prosper?
A: Yes. The claim of Maxilite will prosper. FEBTC is
estopped from claiming that the insurance premium has
been unpaid. That FEBTC induced Maxilite to believe that
the insurance premium has in fact been debited from
Maxilite’s account is grounded on the the following facts:
(1) FEBTC represented and committed to handle
Maxilite’s financing and capital requirements, including
the insurance of the trust receipted merchandise; (2)the
premiums of prior insurance policies had been paid
through automatic debit arrangement; (3) FEBIBI sent
FEBTC, not Maxilite, to debit Maxilite’s account(4) there
was no written demand from FEBTC or Makati Insurance
Company for Maxilite to pay the insurance premium; (5)
the subject insurance policy remained uncancelled
despite the alleged non-payment of the premium, making
it appear that the insurance policy remained in force and
binding. Thus, Maxilite can still claim from FEBTC. (Jose
Marques and Maxilite Technologies, Inc. vs Far East Bank
and Trust Company, etc GR No. 171379, January 10, 2011)
Payment through salary deduction
Employees of the Republic of the Philippines, including its
political subdivisions and instrumentalities, and
government-owned or -controlled corporations, may pay
their insurance premiums and loan obligations through
salary deduction: Provided, That the treasurer, cashier,
paymaster or official of the entity employing the
government employee is authorized, notwithstanding the
provisions of any existing law, rules and regulations to the
contrary, to make deductions from the salary, wage or
income of the latter pursuant to the agreement between
the insurer and the government employee and to remit
such deductions to the insurer concerned, and collect
such reasonable fee for its services (IC, Sec. 78,). This is a
new provision.
Non-payment of premiums
Non-payment of the premium will not entitle the insurer
to recover the premium from the insured. The
continuance of the insurer’s obligation is conditioned
upon the payment of the premium, so that no recovery can
be had upon a lapsed policy, the contractual relation
between the parties having ceased. If the peril insured
against had occurred, the insurer would have had a valid
defense against recovery under the policy.
 INSURANCE LAW
Non-payment of the first premium prevents the contract
from becoming binding notwithstanding the acceptance
of the application or the issuance of the policy, unless
waived. But nonpayment of the balance of the premium
due does not produce the cancellation of the contract.
With respect to subsequent premiums, non-payment does
not affect the validity of the contracts unless, by express
stipulation, it is provided that the policy shall in that event
be suspended or shall lapse (De Leon, 2010).
Non-payment of premiums by reason of fortuitous
event
GR: Non-payment of premiums does not merely suspend
but put an end to an insurance contract since the time of
the payment is peculiarly of the essence of the contract
(De Leon, 2010).
XPN:
1. The insurer has become insolvent and has suspended
business, or has refused without justification a valid
tender of premiums (Gonzales v. Asia Life Ins. Co., G.R.
No. L-5188, Oct. 29, 1952).
2. Failure to pay was due to the wrongful conduct of the
insurer.
3. The insurer has waived his right to demand payment
Q: If the applicant failed to pay premium and instead
executed a promissory note in favor of the insurer
payable within 30 days which was accepted by the
latter, is the insurer liable in case of loss?
A: Yes, the insurer is liable because there has been a
perfected insurance contract. The insurer accepted the
promise of the applicant to pay the insurance premium
within thirty 30 days from the effective date of policy. By
so doing, it has implicitly agreed to modify the tenor of the
insurance policy and in effect, waived any provision
therein that it would only pay for the loss or damage in
case the same occurs after the payment of the premium.
Considering that the insurance policy is silent as to the
mode of payment, insurer is deemed to have accepted the
promissory note in payment of the premium. This
rendered the policy immediately operative on the date it
was delivered (Capital Insurance & Surety Co. Inc. v. Plastic
Era Co., Inc. G.R. No. L-22375, July 18, 1975).
Payment of premium by post-dated check
Delivery of a promissory note or a check will not be
sufficient to make the policy binding until the said note or
check has been converted into cash. This is consistent
with Article 1249 of the New Civil Code.
NOTE: Payment by means of a check or note, accepted by
the insurer, bearing a date prior to the loss, assuming
availability of the funds thereof, would be sufficient even
if it remains unencashed at the time of the loss. The
subsequent effects of encashment would retroact to the
date of the instrument and its acceptance by the creditor
(2007 Bar).
79
Q: On September 25, 2013, Danny Marcial (Danny)
procured an insurance on his life with a face value of
P5 million from RN Insurance Company (RN), with his
wife Tina Marcial (Tina) as sole beneficiary. On the
same day, Danny issued an undated check to RN for
the full amount of the premium. On October 1, 2013,
RN issued the policy covering Danny’s life insurance.
On October 5, 2013, Danny met a tragic accident and
died. Tina claimed the insurance benefit, but RN was
quick to deny the claim because at the time of Danny’s
death, the check was not yet encashed and therefore
the premium remained unpaid.
a. Is RN correct?
b. Will your answer be the same if the check is dated
October 15, 2013? (2014 Bar)
A:
a. RN Insurance is not correct. The facts of the case
show that Danny procured insurance on his life on
September 25, 2013, with his wife Tina as
beneficiary, and on that same day, he issued an
undated check to RN for the full amount of the
premium. Since the undated check was issued to RN
on September 25, 2013, it will be considered dated as
of the same day.
RN Insurance denied the claim of Tina because at the
time of Danny’s death, the check was not yet
encashed, therefore, the premium remained unpaid.
The payment by means of a check or note, accepted
by the insurer, bearing a date prior to the loss,
assuming the availability of the funds thereof, would
be sufficient even if it remains unencashed at the
time of the loss. The subsequent effects of
encashment would retroact to the date of the
mercantile instrument.
b. The answer would not be the same if the check were
dated October 15, 2013. The payment of a
promissory note or postdated check at a stated
maturity subsequent to the loss, is insufficient to put
the insurance into effect. (Vitug, Commercial Laws
and Jurisprudence, 2006, Vol. I, p. 250)
If it were RN Insurance who dated the check October
15, 2013, then my answer would be the same as my
answer to the first question.
Q: Alfredo took out a policy to insure this commercial
building fire. The broker for the insurance company
agreed to give a 15-day credit within which pay the
insurance premium. Upon delivery of the policy on
May 15, 2006, Alfredo issued a postdated check
payable on May 30, 2006. On May 28, 2006, a fire
broke out and destroyed the building owned by
Alfredo. May Alfredo recover on the insurance policy?
(2007 Bar)
A: Yes, Alfredo may recover on the policy. It is valid to
stipulate that the insured will be granted credit term for
payment of premium. Payment by means of a check which
was accepted by the insurer, bearing a date prior to the
loss, would be sufficient. The subsequent effects of
encashment retroact to the date of the check (UCPB
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
General Insurance Co., Inc. v. Masagana Telamart, Inc., 356
SCRA 307 [2001]).
Instances when payment of premium becomes a debt
or obligation
1. In fire, casualty and marine insurance, the premium
payable becomes a debt as soon as the risk attaches.
2. In life insurance, the premium becomes a debt only
when, in the case of the first premium, the contract
has become binding, and in the case of subsequent
premiums, when the insurer has continued the
insurance after maturity of the premium, in
consideration of the insured’s express or implied
promise to pay (De Leon, 2010).
Payments in addition to regular premium
An insurer may contract and accept payments, in addition
to regular premium, for the purpose of paying future
premiums on the policy or to increase the benefits thereof
(IC, Sec. 84)
Q: The Peninsula Insurance Company offered to
insure Francis' brand new car against all risks in the
sum of PI Million for 1 year. The policy was issued
with the premium fixed at 160,000.00 payable in 6
months. Francis only paid the first two months
installments. Despite demands, he failed to pay the
subsequent installments. Five months after the
issuance of the policy, the vehicle was carnapped.
Francis filed with the insurance company a claim for
its value. However, the company denied his claim on
the ground that he failed to pay the premium
resulting in the cancellation of the policy. Can Francis
recover from the Peninsula Insurance Company?
(2006 Bar)
A: Yes, when insured and insurer have agreed to the
payment of premium by installments and partial payment
has been made at the time of loss, then the insurer
becomes liable. When the car loss happened on the 5th
month, the six months agreed period of payment had not
yet elapsed. The owner may recover from Peninsula
Insurance Company, but the latter has the right to deduct
the amount of unpaid premium from the insurance
proceeds.
NON-DEFAULT OPTIONS IN LIFE INSURANCE
Devices used to prevent the forfeiture of a life
insurance after the payment of the first premium
1. Grace period – After the payment of the first
premium, the insured is entitled to a grace period of
30 days within which to pay the succeeding
premiums (Sec. 233 [a], ibid).
2. Cash surrender value – The amount the insurer agrees
to pay to the holder of the policy if he surrenders it
and releases his claim upon it (Cyclopedia Law
Dictionary, 3rd ed.).
3. Extended insurance – It is where the insured is given
a right, upon default, after payment of at least three
full annual premiums (IC, Sec. 233 [f]) to have the
policy continued in force from the date of default for
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
80
a time either stated or equal to the amount as the net
value of the policy taken as a single premium, will
purchase (De Leon, 2010).
4. Paid up Insurance – The insured is given a right, upon
default, after the payment of at least three annual
premiums to have the policy continued in force from
the date of default for the whole period of the
insurance without further payment of premiums. It
results to a reduction of the original amount of
insurance, but for the same period originally
stipulated (6 Couch 2d., 355; 37 C.J.S. 364).
5. Automatic Loan Clause – A stipulation in the policy
providing that upon default in payment of premium,
the same shall be paid from the loan value of the
policy until that value is consumed. In such a case, the
policy is continued in force as fully and effectively as
though the premiums had been paid by the insured
from funds derived from other sources (6 Couch 2d.,
383).
6. Reinstatement – Provision that the holder of the
policy shall be entitled to reinstatement of the
contract at anytime within 3 years from the date of
default in the payment of premium, unless the cash
surrender value has been paid, or the extension
period expired, upon production of evidence of
insurability satisfactory to the company and the
payment of all overdue premiums and any
indebtedness to the company upon said policy (IC,
Sec. 233 [j]).
REINSTATEMENT OF A LAPSED POLICY
OF LIFE INSURANCE
Purpose of the reinstatement provision
The purpose of the provision is to clarify the
requirements for restoring a policy to premium-paying
status after it has been permitted to lapse.
The law requires that the policy owner be permitted to
reinstate the policy, subject to the violations specified,
any time within three (3) years from the date of default
of premium payment. A longer period, being more
favorable to the insured, may be used.
Reinstatement is not an absolute right of the insured, but
discretionary on the part of the insurer, which has the
right to deny reinstatement if it were not satisfied as to
the insurability of the insured, and if the latter did not
pay all overdue premiums and other indebtedness to the
insurer (McGuire vs. Manufacturer’s Life Ins. Co., G.R. No.
L-3581, September 21, 1950).
Evidence of insurability
Evidence of Insurability is broader phrase than
“Evidence of Good Health” and includes such other
factors as the insured’s occupation, habits, financial
condition, and other risk selection factors.
Q: A life insurance policy lapsed. The insured applied
for reinstatement of the policy and paid only a part
of the overdue premiums. Subsequently, the insured
died. Was the insurer liable?
 INSURANCE LAW
A: The insurer is not liable as the policy was not
reinstated. The failure to pay the balance of the overdue
premiums prevented reinstatement and recovery of the
face value of the policy (Andres vs. Crown Life Ins. Co., 55
O.G. 3483).
Q: Eulogio took out a life insurance policy which
contained a provision which allows for
reinstatement any time within three years after it
lapsed. Eulogio paid the premiums due on the first
two months. However, he failed to pay subsequent
premiums. One month after the policy lapsed, he
filed an application for the reinstatement of his
policy. He deposited the overdue premiums and
signed a reinstatement policy stating that the
payment deposit only and shall not bind the
Company until this application is finally approved.
Hours later, Eulogio died of electrocution. The
insurance company denied the claim of his
beneficiaries stating that the policy was never
approved. Is the contention of the insurance
company valid?
A: Yes. The stipulation in a life insurance policy giving
the insured the privilege to reinstate it upon written
application does not give the insured absolute right to
such reinstatement by the mere filing of an application.
The insurer has the right to deny the reinstatement if it
is not satisfied as to the insurability of the insured and if
the latter does not pay all overdue premium and all other
indebtedness to the insurer. After the death of the
insured, the Insurance Company cannot be compelled to
entertain an application for reinstatement of the policy
because the conditions precedent to reinstatement can
no longer be determined and satisfied.
Eulogio’s death, just hours after filing his Application for
Reinstatement and depositing his payment for overdue
premiums and interests does not constitute a special
circumstance that can persuade to consider the policy
reinstated. Said circumstance cannot override the clear
and express provisions of the Policy Contract and
Application for Reinstatement, and operate to remove
the prerogative of Insular Life thereunder to approve or
disapprove the Application for Reinstatement (Violeta R.
Lalican vs. The Insular Life Assurance Company Limited,
supra).
REFUND OF PREMIUMS
Instances when the insured entitled to recover
premiums already paid or a portion thereof (2000
Bar)
1. Whole:
a. When no part of the thing insured has been
exposed to any of the perils insured against (IC,
Sec. 80).
b. When the contract is voidable because of the
fraud or misrepresentations of the insurer of his
agent (IC, Sec. 82).
c. When the insurance is voidable because of the
existence of facts of which the insured was
ignorant without his fault (IC, Sec. 82).
81
d. When the insurer never incurred any liability
under the policy because of the default of the
insured other than actual fraud (IC, Sec. 82).
e. When rescission is granted due to insurer’s
breach of contract (IC, Sec. 74).
NOTE: When the contract is voidable, a person
insured is entitled to a return of the premium when
such contract is subsequently annulled under the
provisions of the New Civil Code.
A person insured is not entitled to a return of premium if
the policy is annulled, rescinded or if a claim is denied by
reason of fraud (IC, Sec. 82).
2. Pro rata:
a. When the insurance is for a definite period and
the insured surrenders his policy before the
termination thereof; (IC, Sec. 80 [b]); except:
i. Policy not made for a definite period of
time;
ii. Short period rate is agreed upon;
iii. Life insurance policy.
b. When there is over-insurance. The premiums to
be returned shall be proportioned to the amount
by which the aggregate sum insured in all the
policies exceeds the insurable value of the thing
at risk (IC, Sec. 83).
i. In case of over-insurance by double
insurance, the insurer is not liable for the
total amount of the insurance taken, his
liability being limited to the property
insured. Hence, the insurer is not entitled
to that portion of the premium
corresponding to the excess of the
insurance over the insurable interest of
the insured (1990 Bar).
ii. In case of over-insurance by several
insurers, the insured is entitled to a
ratable return of the premium,
proportioned to the amount by which the
aggregate sum insured in all the policies
exceeds the insurable value of the thing
insured (IC, Sec. 83).
Illustration
Where there is a total over insurance of
P500,000.00 in an aggregate P2,000,000.00
policy (P1,500,000.00 is only the insurable
value), 25% (proportion of P500k to P2M) of the
premiums paid to the several insurers should be
returned.
Insured is not entitled to return of premiums paid
1. If the peril insured against has existed, and the
insurer has been liable for any period, the peril being
entire and indivisible (IC, Sec. 81);
2. In life insurance policies (IC, Sec. 80 [b]);
3. If the policy is annulled, rescinded or if a claim is
denied by reason of fraud (IC, Sec. 82);
4. If contract is illegal and the parties are in pari delicto.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Q: Teodoro Cortez, applied for a 20-year endowment
policy with Great Pacific Insurance Corporation
(Great Pacific). His application, with the requisite
medical examination, was accepted and approved by
the Great Pacific and in due course, an endowment
policy was issued in his name. Thereafter, Great
Pacific advised Cortez that the policy was not in force.
To make it enforceable and operative, Cortez was
asked to remit the balance to complete his initial
annual premium and to see Dr. Felipe V. Remollo for
another full medical examination at his own expense.
Because of this, Cortez informed that it that he was
cancelling the policy and he demanded the return of
his premium plus damages. Great Pacific ignored his
demand. Is Cortez is entitled to a refund of his
premium?
A: Yes. Great Pacific should have informed Cortez of the
deadline for paying the first premium before or at least
upon delivery of the policy to him, so he could have
complied with what was needful and would not have been
misled into believing that his life and his family were
protected by the policy, when actually they were not. And,
if the premium paid by Cortez was unacceptable for being
late, it was the company's duty to return it. Since his policy
was in fact inoperative or ineffectual from the beginning,
the company was never at risk, hence, it is not entitled to
keep the premium (Great Pacific Life Insurance
Corporation v. CA, et al., G.R. No. L-57308, April 23, 1990).
RESCISSION OF INSURANCE CONTRACTS
Instances wherein a contract of insurance may be
rescinded (1991, 1994, 1996 - 1998 Bar)
1. Concealment
2. Misrepresentation/ omission
3. Breach of warranties
Instances wherein a contract of insurance may be
canceled by the insurer
1. Nonpayment of premium;
2. Conviction of a crime arising out of acts increasing
the hazard insured against;
3. Discovery of fraud or material misrepresentation;
4. Discovery of willful or reckless acts or omissions
increasing the hazard insured against;
5. Physical changes in the property insured which
result in the property becoming uninsurable;
6. Discovery of other insurance coverage that makes
the total insurance in excess of the value of the
property insured; or
7. A determination by the Commissioner that the
continuation of the policy would violate or would
place the insurer in violation of the Insurance Code
(IC, Sec. 64).
No policy of insurance other than life shall be canceled by
the insurer except upon prior notice thereof to the
insured, and no notice of cancellation shall be effective
unless it is based on the occurrence, after the effective
date of the policy, of one or more of the abovementioned
instances (Sec. 64, ibid).
UNIVERSITY OF SANTO TOMAS
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Notice of cancellation of the contract
All notices of cancellation shall be in writing, mailed or
delivered to the named insured at the address shown in
the policy, or to his broker provided the broker is
authorized in writing by the policy owner to receive the
notice of cancellation on his behalf, and shall state:
1. Which of the grounds set forth in Section 64 is relied
upon; and
2. That, upon written request of the named insured, the
insurer will furnish the facts on which the cancellation is
based (Sec. 65, ibid).
CONCEALMENT
Concealment
Concealment is a neglect to communicate that which a
party knows and ought to communicate (IC, Sec. 26).
Under Section 27 of the Insurance Code, “a concealment
entitles the injured party to rescind a contract of
insurance.” Moreover, under Section 168 of the Insurance
Code, the insurer is entitled to rescind the insurance
contract in case of an alteration in the use or condition of
the thing insured (Malayan Insurance Company vs. PAP Co.
(Phil. Branch), G.R. No. 200784, August 7, 2013, in Divina
2014).
Requisites
1. A party knows a fact which he neglects to
communicate or disclose to the other party
2. Such party concealing is duty bound to disclose such
fact to the other
3. Such party concealing makes no warranty as to the
fact concealed
4. The other party has no means of ascertaining the fact
concealed
5. The fact must be material
Test of materiality (2000 Bar)
It is determined not by the event, but solely by the
probable and reasonable influence of the facts upon the
party to whom the communication is due, in forming his
estimate of the disadvantages of the proposed contract, or
in making his inquiries (IC, Sec. 31).
NOTE: As long as the facts concealed are material,
concealment, whether intentional or not, entitles the
injured party to rescind (IC, Sec.27).
Concealment in marine insurance
Rules on concealment are stricter since the insurer would
have to depend almost entirely on the matters
communicated by the insured. Thus, in addition to
material facts, each party must disclose all the
information he possesses which are material or the
information of the belief or expectation of a third person,
in reference to a material fact. But concealment in a
marine insurance in any of the following matters
enumerated under Section 112 Insurance Code does not
 INSURANCE LAW
vitiate the entire contract, but merely exonerates the
insurer from a loss resulting from the risk concealed.
Test in ascertaining the existence of concealment
If the applicant is aware of the existence of some
circumstances which he knows would probably influence
the insurer in acting upon his application, good faith
requires him to disclose that circumstance, though
unasked.
Matters that need not be disclosed
GR: The parties are not bound to communicate
information of the following matters:
1. Those which the other knows
2. Those which, in the exercise of ordinary care, the
other ought to know and of which, the former has no
reason to suppose him ignorant
3. Those of which the other waives communication
4. Those which prove or tend to prove the existence of
a risk excluded by a warranty, and which are not
otherwise material
5. Those which relate to a risk excepted from the policy
and which are not otherwise material;
6. The nature or amount of the interest of one insured
(except if he is not the owner of the property insured)
(IC, Sec. 34).
XPN: In answer to inquiries of the other (IC, Sec. 30).
Neither party is bound to communicate, even upon
inquiry, information of his own judgment, because such
would add nothing to the appraisal of the application (IC,
Sec. 35).
The parties are bound to know all the general causes
which are open to his inquiry, equally with the other, and
all general usages of trade (IC, Sec. 32).
Matters that must be disclosed even in the absence of
inquiry
1. Those material to the contract
2. Those which the other has no means of ascertaining
3. Those as to which the party with the duty to
communicate makes no warranty
NOTE: Matters relating to the health of the insured are
material and relevant to the approval of the issuance of
the life insurance policy as these definitely affect the
insurer’s action to the application. It is well-settled that
the insured need not die of the disease he had failed to
disclose to the insurer, as it is sufficient that his non-
disclosure misled the insurer in forming his estimates of
the risks of the proposed insurance policy or in making
inquiries (Sunlife Assurance Company of Canada v. CA, G.R.
No. 105135, June 22, 1995).
Information as to the nature of interest need not be
disclosed except in property insurance, if the insured is
not the owner. If somebody is insuring properties of
which he is not the owner, he must disclose why he has
insurable interest that would entitle him to ensure it, and
the extent thereof (IC, Secs. 34 & 51 [e]).
83
Q: Ngo Hing filed an application with the Great Pacific
Life Assurance Company (Pacific Life) for a twenty-
year endownment policy on the life of his one-year
old daughter Helen Go. Ngo Hing supplied the
essential data and filed the application to Mondragon,
the branch manager.After sometime, Helen Go died of
influenza with complication of bronchopneumonia.
Thereupon, Ngo Hing sought the payment of the
proceeds of the insurance, but having failed in his
effort, he filed the action for the recovery of the same.
Did Ngo Hing concealed the state of health and
physical condition of Helen Go, which rendered void
the binding receipt?
A: Ngo Hing intentionally concealed the state of health of
his daughter Helen Go. He was fully aware that his child
was a typical mongoloid child upon filling out the
application form. It is evident that he withheld a fact
material to the risk to be assumed by the insurance
company had the plan be approved.
The contract of insurance is one of perfect good faith,
uberrima fides, absolute and perfect candor; the absence
of any concealment or demotion. Concealment is a neglect
to communicate that which needs to be communicated
whether intentional or unintentional. In case of
concealment, the insurer is entitled to rescind the
contract of insurance. In the case at bar, the respondent is
guilty of such concealment. Ultimately, there was no
perfected contract of insurance since the conditions in the
binding receipt were not complied with by the applicant
(Great Pacific Life Assurance Company v. CA, G.R. No. L-
31845, April 30, 1979).
Q: Benny applied for life insurance for Php 1.5 Million.
The insurance company approved his application and
issued an insurance policy effective Nov. 6, 2008.
Benny named his children as his beneficiaries. On
April 6, 2010, Benny died of hepatoma, a liver
ailment.
The insurance company denied the children's claim
for the proceeds of the insurance policy on the ground
that Benny failed to disclose in his application two
previous consultations with his doctors for diabetes
and hypertension, and that he had been diagnosed to
be suffering from hepatoma. The insurance company
also rescinded the policy and refunded the premiums
paid.
Was the insurance company correct? (2013 Bar)
A: The insurance company correctly rescinded the policy
because of concealment (Section 27 of Insurance Code).
Benny did not disclose that he was suffering from
diabetes, hypertension, and hepatoma. The concealment
is material, because these are serious ailments (Florendo
v. Philam Plans, Inc., G.R. No. 186983, February 22, 2012).
Benny died less than two years from the date of the
issuance of the policy (IC, Sec. 48).
Right to information of material facts may be waived
1. By the terms of the contract
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
2. By the failure to make an inquiry as to such facts,
where they are distinctly implied in other facts from
which information is communicated (IC, Sec. 33).
Rules on concealment
1. If there is concealment under Section 27, the remedy
of the insurer is rescission since concealment vitiates
the contract of insurance. (1996 Bar)
2. The party claiming the existence of concealment
must prove that there was knowledge of the fact
concealed on the part of the party charged with
concealment.
3. Good faith is not a defense in concealment.
Concealment, whether intentional or unintentional
entitles the injured party to rescind the contract of
insurance (IC, Sec. 27).
4. The matter concealed need not be the cause of loss
(IC, Sec. 31).
5. To be guilty of concealment, a party must have
knowledge of the fact concealed at the time of the
effectivity of the policy.
In order for concealment to produce the effect of
avoiding the policy, it should take place at the time
the contract is entered into
Concealment should take place at the time the contract is
entered into and not afterwards in order that the policy
may be avoided. The duty of disclosure ends with the
completion of the contract. Waiver of medical
examination in a non-medical insurance contract renders
even more material the information required of the
applicant concerning previous condition of health and
diseases suffered, for such information necessarily
constitutes an important factor which the insurer takes
into consideration in deciding whether to issue the policy
or not. Failure to communicate information acquired after
the effectivity of the policy will not be a ground to rescind
the contract.
NOTE: The reason for this is that if concealment should
take place after the contract is entered into, the
information concealed is no longer material as it will no
longer influence the other party to enter into such
contract.
Q: Joanna applied for a non-medical life insurance.
Joanna did not inform the insurer that one week prior
to her application for insurance, she was examined
and confined at St. Luke’s Hospital where she was
diagnosed for lung cancer. The insured soon
thereafter died in a plane crash. Is the insurer liable
considering that the fact concealed had no bearing
with the cause of death of the insured? Why? (2001
Bar)
A: No. The concealed fact is material to the approval and
issuance of the insurance policy. It is well settled that the
insured need not die of the disease she failed to disclose
to the insurer. It is sufficient that his nondisclosure misled
the insurer in forming his estimate of the risks of the
proposed insurance policy or in making inquiries (Sun
Life v. CA, supra).
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84
Instances whereby concealment made by an agent
procuring the insurance binds the principal
1. Where it was the duty of the agent to acquire and
communicate information of the facts in question;
2. Where it was possible for the agent, in the exercise of
reasonable diligence to have made such
communication before the making of the insurance
contract.
NOTE: Failure on the part of the insured to disclose such
facts known to his agent, or wholly due to the fault of the
agent, will avoid the policy, despite the good faith of the
insured.
MISREPRESENTATION/OMISSION
Representation
An oral or written statement of a fact or condition
affecting the risk made by the insured to the insurance
company, tending to induce the insurer to assume the
risk.
Representation should be made, altered or withdrawn at
the time of or before the issuance of the policy. (Sec. 37,
Insurance Code). It may be altered or withdrawn before
the insurance is effected, but not afterwards (Sec.41, ibid).
Kinds of representation
1. Oral or written (Sec. 36, ibid);
2. Affirmative (Sec. 42, ibid); or
3. Promissory (Sec. 39, ibid).
Affirmative representation
Any allegation as to the existence or non-existence of a
fact when the contract begins (e.g. the statement of the
insured that the house to be insured is used only for
residential purposes is an affirmative representation).
Promissory representation
Any promise to be fulfilled after the contract has come
into existence or any statement concerning what is to
happen during the existence of the insurance.
Misrepresentation
Misrepresentation is an affirmative defense. To avoid
liability, the insurer has the duty to establish such a
defense by satisfactory and convincing evidence (Ng Gan
Zee v. Asian Crusader Life Assn. Corp., G.R. No. L- 30685,
May 30, 1983). [See also Sec. 44 (when the facts fail to
correspond to the assertions or stipulations), Insurance
Code].
NOTE: In the absence of evidence that the insured has
sufficient medical knowledge to enable him to distinguish
between “peptic ulcer” and “tumor”, the statement of
deceased that said tumor was “associated with ulcer of
the stomach” should be considered an expression in good
faith. Fraudulent intent of insured must be established to
entitle insurer to rescind the insurance contract.
 INSURANCE LAW
Misrepresentation, as a defense of insurer, is an
affirmative defense which must be proved (Ng Gan Zee v.
Asian Crusader Life Assn. Corp., G.R. No. L- 30685, May 30,
1983).
Requisites of misrepresentation
1. The insured stated a fact which is untrue;
2. Such fact was stated with knowledge that it is untrue
and with intent to deceive or which he states
positively as true without knowing it to be true and
which has a tendency to mislead;
3. Such fact in either case is material to the risk.
A representation cannot qualify an express provision in a
contract of insurance but it may qualify an implied
warranty (IC, Sec. 40).
Representation as to a future undertaking
A representation as to the future is to be deemed a
promise unless it appears that it was merely a statement
of belief or an expectation that is susceptible to present,
actual knowledge (IC, Sec. 39).
An erroneous opinion or belief will not avoid the
insurance policy
1. Not a part of the contract but merely a collateral
inducement to it
2. Oral or written
3. Made at the time of, or before issuing the policy and
not after
4. Altered or withdrawn before the insurance is
effected but not afterwards
5. Must be presumed to refer to the date the contract
goes into effect (IC, Sec. 42).
Similarities of concealment and representation
1. Both refer to the same subject matter and both take
place before the contract is entered.
2. Concealment or representation prior to loss or death
gives rise to the same remedy; that is rescission or
cancellation.
3. The test of materiality is the same (IC, Secs. 31, 46).
4. The rules of concealment and representation are the
same with life and non-life insurance.
5. Whether intentional or not, the injured party is
entitled to rescind a contract of insurance on ground
of concealment or false representation.
6. Since the contract of insurance is said to be one of
utmost good faith on the part of both parties to the
agreement, the rules on concealment and
representation apply likewise to the insurer.

The statement of an erroneous opinion, belief or Concealment vs. Misrepresentation

information, or of an unfulfilled intention, per se, will not
avoid the contract of insurance, unless fraudulent. Concealment Misrepresentation
The insured withholds the The insured makes
Test of materiality information of material erroneous statements of
facts from the insurer facts with the intent of
It is to be determined not by the event, but solely by the inducing the insurer to
probable and reasonable influence of the facts upon the enter into the insurance
party to whom the representation is made, in forming his contract
estimates of the disadvantages of the proposed contract
or in making his inquiries (similar with concealment) (IC, Application of concealment and misrepresentation in
Sec. 46). case of loss or death
Effects of misrepresentation GR: If the concealment or misrepresentation is
discovered before loss or death, the insurer can cancel the
1. It renders the insurance contract voidable at the policy. If the discovery is after loss or death, the insurer
option of the insurer, although the policy is not can refuse to pay.
thereby rendered void ab initio. The injured party
entitled to rescind from the time when the XPN: The incontestability clause under paragraph 2 of
representation becomes false; Section 48.
2. When the insurer accepted the payment of premium
with the knowledge of the ground for rescission,
XPN to XPN: (i.e., when the contract may be rescinded even
there is waiver of such right;
beyond the incontestability period)
3. There is no waiver of the right of rescission if the
insurer had no knowledge of the ground therefor at
1. Non-payment of premiums.
the time of acceptance of premium payment.
2. Violation of condition (IC, Secs. 233 [b], 234 [b]).
3. No insurable interest
Effect of collusion between the insurer’s agent and the
4. Cause of death was excepted or not covered
insured
5. Fraud of a vicious type
6. Proof of death was not given (IC, Sec. 248).
It vitiates the policy even though the agent is acting within 7. That the conditions of the policy relating to military
the apparent scope of his authority. The agent ceases to or naval service (IC, Secs. 233 [b], 234 [b]).
represent his principal. He, thus, represents himself; so 8. That the action was not brought within the time
the insurer is not estopped from avoiding the policy. specified (IC, Sec. 63).
Characteristics of representation

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85 FACULTY OF CIVIL LAW
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Incontestability clause (1991, 1994, 1996 – 1998 Bar)
After the policy of life insurance made payable on the
death of the insured shall have been in force during the
lifetime of the insured for a period of two (2) years from
the date of its issue or its last reinstatement, the insurer
cannot prove that the policy is void ab initio or is
rescindible by reason of the fraudulent concealment or
misrepresentation of the insured or his agent (Sundiang
Sr. & Aquino, 2014, citing IC, Sec. 48; Florendo v. Philam
Plans, G.R. No. 186983, February 22, 2012).
The “Incontestability Clause” under Section 48 of the
Insurance Code regulates both the actions of the insurers
and prospective takers of life insurance. It gives insurers
enough time to inquire whether the policy was obtained
by fraud, concealment, or misrepresentation; on the other
hand, it forewarns scheming individuals that their
attempts at insurance fraud would be timely uncovered-
thus deterring them from venturing into such nefarious
enterprise (Manila Bankers Life Insurance Corporation vs.
Cresencia-Aban, G.R. No. 175666, July 29, 2013).
Q: On July 3, 1993, Delia Sotero (Sotero) took out a life
insurance policy from Ilocos Bankers Life Insurance
Corporation (Ilocos Life) designating Creencia Aban
(Aban) her niece, as her beneficiary. Ilocos Life issued
Policy No. 747, with a face value of P100, 000, in
Sotero’s favor on August 30,1993, after the requisite
medical examination and payment of the premium.
On April 10, 1996, Sotero died. Aban filed a claim for
the insurance proceeds on July 9, 1996, Ilocos Life
conducted an investigation into the claim and came
out with the following findings:
1. Sotero did not personally apply for insurance
coverage, as she was illiterate.
2. Sotero was sickly since 1990.
3. Sotero did not have the financial capability to
pay the premium on the policy.
4. Sotero did not sign the application for insurance
5. Alban was the one who filed the insurance
application and designated herself as the
beneficiary.
For the above reasons and claiming fraud, Ilocos Life
denied Aban’s claim on April 16, 1997 but refunded
the premium paid on the policy. May the
incontestability period set in even in cases of fraud as
alleged in this case? (2014, Bar)
A: Yes. The incontestability period applies even in cases
of fraud. Section 48 regulates both the actions of the
insurers and prospective takers of the life insurance. It
gives insurers enough time to inquire whether the policy
was obtained by fraud, concealment, or
misrepresentation; on the other hand, it forewarns
scheming individuals that their attempts at insurance
fraud would be timely uncovered. Legitimate policy
holders are absolutely protected from unwarranted
denial of their claims or delay in the collection of
insurance proceeds occasioned by allegations of fraud,
concealment,, or misrepresentation by insurers, claims
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
86
which may no longer be set up after the two-year period
expires.
Section 48 prevents a situation where the insurer
knowingly continues to accept annual premium
payments, only to later on deny a claim on the policy on
specious claims of fraudulent concealment or
misrepresentation. (Manila Bankers Life Insurance Corp. v.
Aban, G.R. No. 175666, July 29, 2013)
Defenses that are not barred by incontestability
clause
The following defenses are not barred by the
incontestability clause:
1. That the person taking the insurance lacked
insurable interest as required by law;
2. That the cause of the death of the insured is an
excepted risk;
3. That the premiums have not been paid (IC, Secs. 77,
233[b], 236[b]);
4. That the conditions of the policy relating to military
or naval service have been violated (IC, Secs. 233[b],
234[b]);
5. That the fraud is of a particularly vicious type;
6. That the beneficiary failed to furnish proof of death
or to comply with any condition imposed by the
policy after the loss has happened; or
7. That the action was not brought within the time
specified (Sundiang Sr. & Aquino, 2014).
Remedy of the injured party in case of
misrepresentation
If there is misrepresentation, the injured party is entitled
to rescind from the time when the representation
becomes false.
Exercise of the right to rescind the contract
The right to rescind must be exercised previous to the
commencement of an action on the contract (the action
referred to is that to collect a claim on the contract) (IC,
Sec.48, par.1).
Omission
The failure to communicate information on matters
proving or tending to prove the falsity of warranty. In case
of omission, the aggrieved party may rescind the contract
of insurance.
BREACH OF WARRANTIES
Warranties (1993 Bar)
Statements or promises by the insured set forth in the
policy itself or incorporated in it by proper reference, the
untruth or non-fulfillment of which in any respect, and
without reference to whether the insurer was in fact
prejudiced by such untruth or non-fulfillment render the
policy voidable by the insurer.
Purpose of warranties
 INSURANCE LAW
To eliminate potentially increasing moral or physical For instance, an “Other Insurance Clause” which is a
hazards which may either be due to the acts of the insured condition in the policy requiring the insured to
or to the change of the condition of the property. inform the insurer of any other insurance coverage of
the property. A violation of the clause by the insured
Basis of warranties will not constitute a breach unless there is an
additional provision stating that the violation thereof
The insurer took into consideration the condition of the will avoid the policy (IC, Sec. 75).
property at the time of effectivity of the policy.
Q: On May 13, 1996 PAM Inc. obtained a P15 million
Kinds of warranties fire insurance policy from Ilocano Insurance covering
its machineries and equipment effective for one year
1. Affirmative warranty – one which relates to matters or until May 14, 1997. The policy expressly stated
which exist at or before the issuance of the policy. that the insured properties were located at “Sanyo
2. Promissory warranty – one in which the insured Precision Phils. Building Phase III Lots 4 and 6 Block
undertakes that something shall be done or omitted 15 PEZA, Rosario, Cavite.” Before its expiration, the
after the policy takes effect and during its policy was renewed on “as is” basis for another year
continuance. or until May 13 1998. The subject properties were
3. Express warranty – a statement in a policy, of a matter later transferred to Pace Factory also in PEZA. On
relating to the person or thing insured, or to the risk, October 12, 1997 during the effectivity of the
as a fact. renewed policy, a fire broke out at the Pace Factory
4. Implied warranty – an agreement or stipulation not which totally burned the insured properties.
expressed in the policy but the existence of which is
admitted or presumed from the fact that the contract The policy forbade the removal of the insured
of insurance has been executed. properties unless sanctioned by Ilocano. Condition 9
(c) of the policy provides that “the insurance ceases to
Warranty vs. Representation attach as regards the property affected unless the
insured, before the occurrence of any loss or damage,
WARRANTY REPRESENTATION obtains the sanction of the company signified by
Considered parts of the Collateral inducement to the endorsement upon the policy… (c) if the property
contract. contract. insured is removed to any building or place other
Always written on the May be written in a totally than in which is herein stated to be insured.” PAM
face of the policy, disconnected paper or may be claims that it has substantially complied with
actually or by reference. oral. notifying Ilocano through its sister company, the RBC
Must be strictly Only substantial proof is which in fact, referred PAM to Ilocano for the
complied with. required. insurance coverage. Is Ilocano liable under the
Its falsity or non- policy? (2014 Bar)
Its falsity renders the policy
fulfillment operates as a
void on the ground of fraud. A: Ilocano Insurance is not liable under the policy. By the
breach of contract.
Insurer must show its clear and express condition in the renewal policy, the
Presumed material. removal of the insured property to any building or place
materiality in order to defeat
an action on the policy. required the consent of Ilocano. Any transfer effected by
PAM, Inc. without Ilocano’s consent would free the latter
from any liability (Malayan Insurance Company, Inc v.
Effects of breach of warranty
PAPCO, Ltd., G.R. No. 200784, August 7,2013)
1. Material
Effect of a breach of warranty without fraud
GR: Violation of material warranty or of material
The policy is avoided only from the time of breach (IC, Sec.
provision of a policy will entitle the other party to
76) and the insured is entitled:
rescind the contract.
1. To the return of the premium paid at a pro rata from
XPN: (with regard to “promissory” warranties) the time of breach or if it occurs after the inception of
the contract; or
a. Loss occurs before the time of performance of
the warranty; 2. To all premiums if it is broken during the inception
b. The performance becomes unlawful at the place of the contract.
of the contract; and
c. Performance becomes impossible (IC, Sec. 73). CLAIMS SETTLEMENT AND SUBROGATION

2. Immaterial NOTICE AND PROOF OF LOSS

GR: It will not avoid the policy. Loss in insurance

XPN: When the policy expressly provides or declares The injury, damage or liability sustained by the insured in
that a violation thereof will avoid it. consequence of the happening of one or more of the perils
against which the insurer, in consideration of the

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87 FACULTY OF CIVIL LAW
 MERCANTILE LAW
premium, has undertaken to indemnify the insured. It
may be total, partial, or constructive in marine insurance.
Conditions before the insured may recover on the
policy after the loss
It is the more or less formal evidence given the company
by the insured or claimant under a policy of the
occurrence of the loss, the particulars thereof and the data
necessary to enable the company to determine its liability
and the amount thereof.

1. The insured or some person entitled to the benefit of Time for payment of claims
the insurance, without unnecessary delay, must give
written notice to the insurer (IC, Sec. 90); LIFE POLICIES NON-LIFE POLICIES
2. When required by the policy, insured must present a 1. Maturing upon the The proceeds shall be
preliminary proof loss which is the best evidence he expiration of the term– the paid within 30 days after
has in his power at the time (IC, Sec. 91). proceeds are immediately the receipt by the insurer
payable to the insured, of proof of loss and
NOTE: For other non-life insurance, the Commissioner except if proceeds are ascertainment of the loss
may specify the period for the submission of the notice of payable in installments or or damage by agreement
loss (IC, Sec. 90). annuities which shall be of the parties or by
paid as they become due. arbitration but not later
Notice of loss than 90 days from such
2. Maturing at the death of receipt of proof of loss,
It is the more or less formal notice given the insurer by the the insured, occurring prior whether or not
insured or claimant under a policy of the occurrence of the to the expiration of the ascertainment is had or
loss insured against. term stipulated – the made (IC, Sec. 249).
proceeds are payable to
Purposes of notice of loss (IFC) the beneficiaries within 60
days after presentation of
1. To give insurer Information by which he may claim and filing of proof of
determine the extent of his liability; death (IC, Sec. 248).
2. To afford the insurer a means of detecting any Fraud
that may have been practiced upon him; and GUIDELINES ON CLAIMS SETTLEMENT
3. To operate as a Check upon extravagant claims.
Claim Settlement
Effect of failure to give notice of loss
Claim settlement is the indemnification of the suffered by
FIRE INSURANCE OTHER TYPES OF INSURANCE the insured. The claimant may be the insured or
Failure to give notice will not reinsured, the insurer who is entitled to subrogation, or a
Failure to give notice
exonerate the insurer, unless third party who has a claim against the insured.
defeats the right of
there is a stipulation in the
the insured to
policy requiring the insured to Purpose of the rule
recover.
do so.
To eliminate unfair claim settlement practices.
Instances when the defects in the notice or proof of
loss are considered waived (MaJoR-DeW) Rules in claim settlement

When the insurer: 1. No insurance company doing business in the

1. Writes to the insured that he considers the policy
null and void as the furnishing of notice or proof of
loss would be useless;
2. Recognizes his liability to pay the claim;
3. Denies all liability under the policy
4. Joins in the proceedings for determining the amount
of the loss by arbitration, making no objections on
account of notice and preliminary proof; or
5. Makes Objection on any ground other than the
formal defect in the preliminary proof.
Instances when delay in the presentation of notice or
proof of loss deemed waived
If caused by:
1. Any act of the insurer; and
2. By failure to take objection promptly and specifically
upon that ground (IC, Sec. 93).
Proof of loss
Philippines shall refuse, without justifiable cause, to
pay or settle claims arising under coverages
provided by its policies, nor shall any such company
engage in unfair claim settlement practices.
2. Evidence as to numbers and types of valid and
justifiable complaints to the Commissioner against
an insurance company, and the Commissioner’s
complaint experience with other insurance
companies writing similar lines of insurance shall be
admissible in evidence in an administrative or
judicial proceeding brought under this section (IC,
Sec. 247 [b]).
Claims settlement in life insurance
1. The proceeds shall be paid immediately upon the
maturity of the policy if there is such a maturity date.
2. If the policy matures by the death of the insured,
within sixty (60) days after presentation of the claim

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 INSURANCE LAW
and filing of the proof of the death of the insured
(Sundiang Sr. & Aquino, 2014; IC, Section 248).
Claims settlement in property insurance
1. Proceeds shall be paid within thirty (30) days after
proof of loss is received by the insurer and
ascertainment of the loss or damage is made either
by agreement or by arbitration.
2. If no ascertainment is made within sixty (60) days
after receipt of proof of loss, it shall be paid within
ninety (90) days after such receipt (Sundiang Sr. &
Aquino, 2014; IC, Sec. 249).
UNFAIR CLAIMS SETTLEMENT; SANCTIONS
Unfair settlement practices (MAI-GL)
The following constitutes unfair settlement practices:
1. Knowingly misrepresenting to claimants pertinent
facts or policy provisions relating to coverage at
issue;
2. Failing to acknowledge with reasonable promptness
pertinent communications with respect to claims
arising under its policies;
3. Failing to adopt and implement reasonable
standards for the prompt investigation of claims
arising under its policies;
4. Not attempting in good faith to effectuate prompt,
fair and equitable settlement of claims submitted in
which liability has become reasonably clear; or
5. Compelling policyholders to institute suits to recover
amounts due under its policies by offering without
justifiable reason substantially less than the amounts
ultimately recovered in suits brought by them.
Sanction for the insurance companies which engaged
to unfair settlement practices
The suspension or revocation of an insurance company’s
certificate of authority (IC, Sec 247).
Effect of refusal or failure to pay the claim within the
time prescribed
The insurer shall be liable to pay interest twice the ceiling
prescribed by the Monetary Board on the proceeds of the
insurance from the date following the time prescribed
under the Insurance Code, until the claim is fully satisfied
(Prudential Guarantee and Assurance, Inc. v. Trans-Asia
Shipping Lines, Inc. G. R. No. 151890, June 20, 2006).
NOTE: Refusal or failure to pay the loss or damage will
entitle the assured to collect interest UNLESS such refusal
or failure to pay is based on the ground that the claim is
fraudulent.
Where the mortgagor and the mortgagee were both
claiming the proceeds of a fire insurance policy and the
creditors of the mortgagor also attached the proceeds, the
insurance company cannot be held liable for damages for
withholding payment since the delay was not malevolent
(Rizal Commercial Bank Corporation v. Court of Appeals,
supra).
89
PRESCRIPTION OF ACTIONS
Rules on the prescriptive period for filing an
insurance claim
1. The parties to a contract of insurance may validly
agree that an action on the policy should be brought
within a limited period of time, provided such period
is not less than 1 year from the time the cause of
action accrues. If the period agreed upon is less than
1 year from the time the cause of action accrues, such
agreement is void (IC, Sec. 63, 1996 Bar).
a. The stipulated prescriptive period shall begin
to run from the date of the insurer’s rejection of
the claim filed by the insured or beneficiary and
not from the time of loss.
b. In case the claim was denied by the insurer but
the insured filed a petition for reconsideration,
the prescriptive period should be counted from
the date the claim was denied at the first
instance and not from the denial of the
reconsideration (Sun Life Office, Ltd. vs. CA,
supra).
2. If there is no stipulation or the stipulation is void, the
insured may bring the action within 10 years in case
the contract is written.
3. In a comprehensive motor vehicle liability insurance
(CMVLI), the written notice of claim must be filed
within 6 months from the date of the accident;
otherwise, the claim is deemed waived even if the
same is brought within 1 year from its rejection (Vda.
De Gabriel vs. CA, GR No. 103883, Nov 14, 1996).
4. The suit for damages, either with the proper court or
with the Insurance Commissioner, should be filed
within 1 year from the date of the denial of the claim
by the insurer, otherwise, claimant’s right of action
shall prescribe (IC, Sec. 397).
NOTE: Notwithstanding the fact that the case was filed
beyond the one-year prescriptive period provided for
under COGSA, the suit will not be dismissed if the delay
was not due to the claimant’s fault. The insurer therefore
should bear the loss with interest on account of such delay
(New World International Development Phils. Inc. vs. NYK-
FILJAPAN Shipping Corp., G.R. No. 171468, August 24, 2011,
in Divina, 2014).
Q. From what time shall the period of prescription be
computed in case the insured asked for
reconsideration of the denial of claim? (1996 Bar)
A: In case the claim was denied by the insurer but the
insured file a petition for reconsideration, the
prescriptive period should be counted from the date the
claim was denied at the first instance and not from the
denial of the reconsideration. To rule otherwise would
give the insured a scheme or devise to waste time until
any evidence which may be considered against him is
destroyed (Sun life Office, Ltd. vs. CA, supra).
Prescriptive period in motor vehicle insurance
It is one year from denial of the claim and not from the
date of the accident.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
SUBROGATION
Principle of Subrogation
If the plaintiff’s property has been insured, and he has
received indemnity from the insurance company for the
injury or loss arising out of wrong or breach of contract
complained of, the insurance company shall be
subrogated to the rights of the insured against the
wrongdoer or the person who has violated the contract
(NCC, Art. 2207).
The insurer, upon happening of the risk insured against
and after payment to the insured is subrogated to the
rights and cause of action of the latter. As such, the insurer
has the right to seek reimbursement for all the expenses
paid (Eastern Shipping Lines vs. Prudential Guarantee and
Assurance, Inc., G.R. No. 174116, September 1, 2009).
NOTE: The principle of subrogation inures to the insurer
without any formal assignment or any express stipulation
to that effect in the policy. Said right is not dependent
upon nor does it grow out of any private contract.
Payment to the insured makes the insurer a subrogee in
equity (Malayan Insurance Co., Inc. v. CA, G.R. No. L-36413,
Sept. 26, 1988).
Incapacity of the insured will not affect the capacity of the
subrogee because capacity is personal to the holder
(Lorenzo Shipping v. Chub and Sons, Inc., G.R. No. 147724,
June 8, 2004).
Q: ELP Insurance, Inc. issued Marine Policy No. 888 in
faor of FCL Corp. to insure the shipment of 132
bundles of electronic copper cathodes against all
risks. Subsequently, the cargoes were shipped on
board the vessel “M/V Menchu” from Leyte to Pier 1,
North Harbor, Manila.
Upon arrival, FCL Corp. engaged the services of CGM
Inc. for the release and withdrawal of the cargoes
from the pier and the subsequent delivery to its
warehouse or plants in Valenzuela City. The goods
were loaded on board twelvetrucks owned by CGM,
Inc. driven by its employed drivers and accompanied
by its employed truck helpers. Of the twelve trucks en
route to Valenzuela City, only eleven reached the
destination. One truck loaded with eleven bundles of
copper cathodes, failed to deliver its cargo.
Because of this incident, FCL Corp. filed with ELP
Insurance, Inc. a claim for insurance indemnity in the
amount of P1.5 million. After the requisite
investigation and adjustment, ELP Insurance, Inc.
paid FCL Corp. the amount of P1,350,000 as insurance
indedmnity.
ELP Insurance, Inc. thereafter filed a complaint for
damages against CGM, Inc. before the RTC, seeking
reimbursement of the amount it had paid to FCL Corp.
for the loss of the subject cargo. CGM, Inc. denied the
claim on the basis that it is not privy to the contract
entered into by and between FCL Corp. and ELP
Insurance, Inc., and hence, it is not liable thereof. If
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
90
you are the judge, how will you decide the case? (2014
Bar)
A: I will decide the case in favor of ELP Insurance. Even if
CGM, Inc. is not privy to the contract between FCL Corp.
and ELP Insurance, it is still liable for the loss of the cargo.
If the plaintiff’s property has been insured and he has
received indemnity from the insurance company for the
injury or loss arising out of the wrong or breach of the
contract complained of, the insurance company shall be
subrogated to the rights of the insured against the wrong-
doer. Since ELP Insurance is subrogated to the rights of
FCL Corp. to the extent of the amount it paid, it has the
right to seek reimbursement from CGM, Inc. (Loadmaster
Customs Serices Inc. Glodel Brokerage Corporation and
R&B Insurance Corporation, G.R. No. 179446, January 10,
2011)
Purposes of subrogation
1. To make the person who caused the loss legally
responsible for it.
2. To prevent the insured from receiving double
recovery from the wrongdoer and the insurer.
3. To prevent the tortfeasors from being free from
liability and is thus founded on consideration of
public policy.
Rules on subrogation
1. Applicable only to property insurance – the value of
human life is regarded as unlimited and therefore, no
recovery from a third party can be deemed adequate
to compensate the insured’s beneficiary.
2. The right of insurer against a third party is limited to
the amount recoverable from latter by the insured.
Rules on indemnity
1. Applies only to property insurance except when the
creditor insures the life of his debtor.
2. Insurance contracts are notwagering contracts or
gambling contracts.
NOTE: Under the collateral source rule, if an injured
person receives compensation for his injuries from a
source wholly independent of the tortfeasor, the payment
should not be deducted from the damages which he would
otherwise collect from the tortfeasor. It finds no
application to cases involving no-fault insurances under
which the insured is indemnified for losses by insurance
companies, regardless of who was at fault in the incident
generating the losses. Here, it is clear that MMPC is a no-
fault insurer. Hence, it cannot be obliged to pay
hospitalization expenses of the dependents of its
employees which had already been paid by separate
health insurance providers of said dependents.
(Mitsubishi Motors Philippines Salaried Employees Union
vs. Mitsubishi Motors Corporation G.R. No. 175773, June 17,
2013, in Divina, 2014).
When amount paid by the insurance company does
not fully cover the injury or loss
 INSURANCE LAW
The aggrieved party shall be entitled to recover the
deficiency from the person causing the loss or injury (NCC,
Art. 2207).
Instances where the right of subrogation does not
apply
1. Where the insured by his own act releases the
wrongdoer or third party liable for loss or damage
from liability
2. The insurer loses his rights against the wrongdoer
since the insurer can only be subrogated to only such
rights as the insured may have
3. Where the insurer pays the insured the value of the
loss without notifying the carrier who has in good
faith settled the insured claim for loss
4. Where the insurer pays the insured for a loss or risk
not covered by the policy
5. Life insurance
6. For recovery of loss in excess of insurance coverage
NOTE: Since the insurer can be subrogated to only such
rights as the insured may have, should the insured, after
receiving payment from the insurer, release the
wrongdoer who caused the loss, the insurer loses his
rights against the latter. But in such a case, the insurer will
be entitled to recover from the insured whatever it has
paid to the latter, unless the release was made with the
consent of the insurer (Manila Mahogany Manufacturing
Corporation v. Court of Appeals, G.R. No. L-52756, October
12, 1987).
Q: Malayan Insurance Company issued a car
insurance policy in favor of First Malayan Leasing and
Finance Corporation (First Malayan), insuring a
Mitsubishi Galant against third party liability, own
damage and theft, among others. Unfortunately, the
Galant encountered a vehicular accident at the corner
of EDSA and Ayala Avenue, Makati. The accident
involves a Nissan Bus operated by Aladdin Transit, an
Isuzu Tanker, and a Fuzo Cargo Truck. Because of this,
Malayan Insurance was constrained to pay First
Malayan of the damages sustained by it. Maintaining
that it has been subrogated to the rights and interests
of the assured, Malayan Insurance sent several
demand letters to Rodelio Alberto (Alberto) and
Enrico Alberto Reyes (Reyes), the registered owner
and the driver, respectively, of the Fuzo Cargo Truck,
requiring them to pay the amount it had paid to the
assured. No settlement of liability was made, thus,
Malayan Insurance filed a complaint for damages for
gross negligence against Alberto, et al. Is Malayan
Insurance entitled to the right of subrogation?
A: A: Yes. The payment by the insurer to the insured
operates as an equitable assignment to the insurer of all
the remedies that the insured may have against the third
party whose negligence or wrongful act caused the loss.
The right of subrogation is not dependent upon, nor does
it grow out of, any privity of contract. It accrues simply
upon payment by the insurance company of the insurance
claim. When it is not disputed that the insurance company
indeed paid, then there is valid subrogation in its favor.
(Malayan Insurance Co., Inc., vs. Rodelio Alberto, et al., G.R.
No. 194320, February 1, 2012).
91
MARINE INSURANCE
Traditionally, marine insurance includes policies that
cover risk connected with navigation to which a ship,
cargo, freightage, profits or other insurable interest in
movable property may be exposed during a certain
voyage or a fixed period of time. However, under the
present laws, it also covers inland marine insurance
(Sundiang Sr. & Aquino, 2014). Marine insurance includes:
A. Insurance against loss or damage to:
1. Vessels, craft, aircraft, vehicles, goods, freights,
cargoes, merchandise, effects, disbursements,
profits, moneys, securities, choses in action,
instruments of debts, valuable papers,
bottomry, and respondentia interests and all
other kinds of property and interests therein, in
respect to, appertaining to or in connection with
any and all risks or perils of navigation, transit
or transportation, or while being assembled,
packed, crated, baled, compressed or similarly
prepared for shipment or while awaiting
shipment, or during any delays, storage,
transshipment, or reshipment incident thereto,
including war risks, marine builder’s risks, and
all personal property floater risks;
2. Person or property in connection with or
appertaining to a marine, inland marine, transit
or transportation insurance, including liability
for loss of or damage arising out of or in
connection with the construction, repair,
operation, maintenance or use of the subject
matter of such insurance (but not including life
insurance or surety bonds nor insurance against
loss by reason of bodily injury to any person
arising out of ownership, maintenance, or use of
automobiles);
3. Precious stones, jewels, jewelry, precious
metals, whether in course of transportation or
otherwise; and
4. Bridges, tunnels and other instrumentalities of
transportation and communication (excluding
buildings, their furniture and furnishings, fixed
contents and supplies held in storage); piers,
wharves, docks and slips, and other aids to
navigation and transportation, including dry
docks and marine railways, dams and
appurtenant facilities for the control of
waterways.
B. Marine protection and indemnity insurance (IC, Sec.
101).
From the foregoing enumeration, marine insurance now
includes, not only risks connected with marine
navigation, but which are otherwise connected therewith
such as insurance of aircraft, goods while being packed or
assembled, injury to passengers, precious stones, jewels,
jewelry whether in the course of transportation or not.
(Perez, 2010).
Cargo can be the subject of marine insurance, and once it
is entered into, the implied warranty of seaworthiness
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
immediately attaches to whoever is insuring the cargo,
whether he be the ship owner or not (Roque v. IAC, GR No.
L-66935, Nov. 11, 1985).
As a general rule, the marine insurance policy needs to be
presented in evidence before the trial court or even
belatedly before the appellate court. However, as in
general rule, there are admitted exceptions. The policy
can still be considered in court as long as it has been
properly identified by testimony duly recorded and has
been incorporated in the records of the case (Asian
Terminal vs. CIR, G.R. No. 171406, April 4, 2011, in Divina
2014).
Marine protection and indemnity insurance
It is an insurance against, or against legal liability of the
insured for loss, damage, or expense incident to
ownership, operation, chartering, maintenance, use,
repair, or construction of any vessel, craft or
instrumentality in use of ocean or inland waterways,
including liability of the insured for personal injury,
illness or death or for loss of or damage to the property of
another person (IC, Sec. 101, [b]).
Major divisions of marine insurance
1. Ocean marine insurance –covers primarily sea perils
of ships and cargoes. Scope: (GELS)
a. Goods or cargoes
b. Earnings such as freight, passage money
c. Liability incurred by reason of maritime perils
d. Ships or hulls
NOTE: The insurer is liable only for such losses or
damages proximately caused by the perils insured against
(De Leon, supra).
2. Inland marine insurance – Covers primarily the land
or over the land transportation perils of property
shipped by railroads, motor trucks, airplanes, and
other means of transportation. It also covers risks of
lake, river, or the other inland waterway
transportation and other waterborne perils outside
of those risks that fall definitely within the ocean
marine category. Classes: (Pit-BaFF)
a. Property In Transit – Provides protection to the
property frequently exposed to loss while it is
being transported from one location to another.
b. Bailee liability – Provides protection to persons
who have temporary custody of the goods or
personal property of others, such as carriers,
laundrymen, warehousemen, and
garagekeepers.
c. Fixed transportation property – Covers bridges,
tunnels and other instrumentalities of
transportation and communication, although
as a matter of fact they are fixed property. They
are so insured because they are held to be an
essential part of transportation system.
d. Floater– Provides insurance to follow the
insured property wherever it may be located
subject always to the territorial limits of the
contract (De Leon, 2010).
UNIVERSITY OF SANTO TOMAS
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92
Risk insured against in marine insurance
GR: In the usual form of a marine policy, the risks insured
against are only “perils of the sea”.
XPN: When the insurance is an “all risk policy” and thus
covers even “perils of the ship”.
XPN to XPN: When the risks are expressly excepted by
the “all risk policy”.
The insured is bound to prove that the cause of the loss is
a peril of the sea. The burden rests on the insurer to prove
that the loss is caused by a risk that is excluded
“Perils of the sea or perils of navigation” (1998 Bar)
It includes only those casualties due to the (WiN):
1. Unusual violence or extraordinary action of WInd
and wave, or
2. Other extraordinary causes connected with
Navigation (De Leon, 2010).
“Perils of the ship”
It is a loss which, in the ordinary course of events, results
from the (NON):
1. Natural and inevitable action of the sea;
2. Ordinary wear and tear of the ship;
3. Negligent failure of the ship’s owner to provide the
vessel with proper equipment to convey the cargo
under ordinary conditions.
Q: Remington Industrial Sales Corporation
(Remington) shipped on board a vessel, seamless
steel pipes from Japan to the Philippines and insured
the shipment with Cathay Insurance Co. (Cathay).
Upon receipt of said shipment, losses and damages
were discovered. Upon demand under the insurance
contract, it was denied by Cathay. Remington
contends that the rust on the seamless still pipes is
not an inherent vice of the shipment, thus the same is
considered as a peril of the sea. Cathay, on the other
hand claims that the loss was occasioned by an
inherent defect or vice in the insured article. Is the
“rusting” of the seamless steel pipes considered as a
“peril of the sea”?
A: Yes. The rusting of steel pipes in the course of a voyage
is a “peril of the sea” in view of the toll onthe cargo of
wind, water, and salt conditions. Moreover, it isa cardinal
rule in the interpretation of contracts that any ambiguity
therein should be construed against the
maker/issuer/drafter thereof, namely, the insurer.
Besides the precise purpose of insuring cargo during a
voyage would be rendered fruitless (Cathay Insurance Co.,
v. CA, et. al., G.R. No. L-76145, June 30, 1987).
Q: A marine insurance policy on a cargo states that
“the insurer shall be liable for losses incident to perils
of the sea.” During the voyage, seawater entered the
compartment where the cargo was stored due to the
defective drainpipe of the ship. The insured filed an
action on the policy for recovery of the damages
 INSURANCE LAW
caused to the cargo. May the insured recover
damages? (1998 Bar)
A: No. The proximate cause of the damage to the cargo
insured was the defective drainpipe of the ship. This is
peril of the ship, and not peril of the sea. The defect in the
drainpipe was the result of the ordinary use of the ship.
To recover under a marine insurance policy, the
proximate cause of the loss or damage must be peril of the
sea.
“All risks” marine insurance policy
GR: It is that which insures against allcauses of
conceivable loss or damage.
XPNs:
1. As otherwise excluded in the policy; or
2. Due to fraud or intentional misconduct on the part
of the insured (Choa Tiek Seng v. CA, supra).
An “all risks” policy grants greater protection than that
afforded by the “perils clause” (De Leon, supra).The
insured under an "all risks insurance policy" has the initial
burden of proving that the cargo was in good condition
when the policy attached and that the cargo was damaged
when unloaded from the vessel; thereafter, the burden
then shifts to the insurer to show the exception to the
coverage (Filipino Merchants Insurance Co. vs. CA, supra).
Extent of the insurable interest
1. Ship owner
a. Over the value of the vessel, even when it has
been chartered by one who covenants to pay
him its value in case of loss. In such a case, the
insurer shall be liable for only that part of the
loss which the insured cannot recover from the
charterer (IC, Sec. 102).
b. If hypothecated by a bottomry loan, the
insurable interest is only the excess of the value
of the vessel over the amount secured by
bottomry (IC, Sec. 103).
c. He also has an insurable interest on expected
freightage (IC, Sec. 104).
2. Cargo owner – over the cargo and expected profits
(IC, Sec. 107).
3. Charterer
a. Over the vessel, to the extent of the amount he
is liable to the shipowner, if the ship is lost or
dameged during the voyage (IC, Sec. 108).
b. Over his expected profits or freightage if he
accepts cargoes from other persons for a fee
(Sundiang Sr. & Aquino, 2014).
c. Over his own cargo or his client’s cargo
(Sundiang Sr. & Aquino, 2014).
4. Creditor/lender – over the amount of the loan.
Loan on bottomry or respondentia
A loan in which under any condition whatever, the
repayment of the sum loaned, and of the premium
93
stipulated, depends upon the safe arrival in port of the
goods on which it is made or of the price they may receive
in case of accident (Code of Commerce, Art. 719).
Loan on bottomry vs. Loan on respondentia
They are basically the same. The only distinction is, a loan
on bottomry involves a vessel as a security, while a
respondentia has cargo as its security (Perez, 2010).
Freightage
It signifies all the benefits derived by the owner, either
from the chartering of the ship or its employment for the
carriage of his own goods or those of others (IC, Sec. 104).
Insurable interest in expected freightage
1. In a charter party - exists from the time the vessel has
broken ground on the chartered voyage (IC, Sec. 106).
2. No charter party - If a price is to be paid for the
carriage of goods, insurable interest in expected
freightage exists when they are actually on board, or
there is some contract for putting them on board, and
both ship and goods are ready for the specified
voyage (ibid).
Instances when there is no insurable interest in
freight
1. When there is no contract and no part of the goods
expected to be carried are on board, although there
are goods ready for shipment or the master is
provided with funds for the purpose of purchasing a
cargo.
2. Where the vessel is a mere “seeking ship”, the owner
has no insurable interest in freight to be earned on
goods not loaded.
A “seeking ship” is a vessel looking for cargo to be
transported (De Leon, 2010).
Insurable interest in expected profits
Insurable interest in expected profits exists:
1. When the interest in the thing involved is based on a
legal right.
2. When the interest in thing involved is based on
valuable consideration.
Special marine insurance contracts and clauses
1. All-risks policy
2. Barratry clause –a clause which provides that there
can be no recovery on the policy in case of any willful
misconduct on the part of the master or crew in
pursuance of some unlawful or fraudulent purpose
without the consent of the owner and to the
prejudice of owner’s interest. It requires an
intentional and willful act in its commission. No
honest error or judgment or mere negligence, unless
criminally gross, can be barratry (Roque v. IAC, G.R.
No. L- 66935, Nov. 11, 1985).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
3. Inchmaree clause – a clause which makes the insurer Concealment in marine insurance vs. Concealment in
liable for loss or damage to the hull or machinery other property insurance
arising from the:
a. Negligence of the captain, engineers, etc. OTHER PROPERTY
b. Explosion, breakage of shafts; and MARINE INSURANCE
INSURANCE
c. Latent defect of machinery or hull (Thames and The information or belief
Mersey Marine Insurance Co v. Hamilton Fraser The information or the
of a 3rd party is not
and Co [1887] 12 AC 484). belief or expectation of 3rd
material and need not be
persons in reference to a
communicated, unless it
4. “Sue and labor” clause – a clause which makes the material fact is material
proceeds from an agent of
insurer liable for and must be
the insured whose duty is
a. all the expenses attendant upon a loss which communicated.
to give information.
forces the ship into port to be repaired; and The concealment of any fact
b. expenses incurred, where it is stipulated in the in relation to any of the Concealment of any
policy that the insured shall labor for the matters stated in Sec. 112 material fact will vitiate
recovery of the property (IC, Sec. 165). does not vitiate the entire the entire contract,
contract but merely whether or not the loss
Insurer is liable for such expense, in either case, being in exonerates the insurer results from the risk
addition to a total loss, if that afterwards occurs (ibid). from a risk resulting from concealed.
the fact concealed.
Concealment in marine insurance
Effect of falsity of a representation by the insured
It is the failure to disclose any material fact or
circumstance which in fact or law is within, or which 1. Promissory Representation - If a representation by
ought to be within the knowledge of one party and of the insured is intentionally false in any material
which the other has no actual or presumptive knowledge respect or in respect of any fact on which the
(De Leon, 2010). character and nature of the risk depends, the insurer
may rescind the entire contract (IC, Sec. 113).
NOTE: Information of the belief or expectation of a third 2. Representation of Expectation -The eventual falsity of
person, in reference to a material fact, is material (IC, Sec. a representation as to expectation does not, in the
110). absence of fraud, avoid a contract of marine insurance
(IC, Sec. 114).
Presumption of knowledge of prior loss in marine
insurance Implied warranties in marine insurance (SINAI)
(2000 Bar)
A person insured by a contract of marine insurance is
presumed to have knowledge, at the time of insuring, of a 1. Seaworthiness (IC, Sec. 115 to 121);
prior loss, if the information might possibly have reached 2. Non-engagement from Illegal venture;
him in the usual mode of transmission and at the usual 3. Warranty of Neutrality – The ship will carry the
rate of communication (IC, Sec. 111).The presumption, requisite documents too show the nationality or
however, is rebuttable. neutrality of the ship or its cargo and will not carry
any documents that cast reasonable suspicion on it if
Concealment in respect to any of the following the nationality or neutrality of the ship or its cargo is
matters does not vitiate the entire contract but expressly warranted (IC, Sec. 122);
merely exonerates the insurer from a loss resulting 4. Non-deviation from the Agreed voyage (IC, Secs. 125,
from the risk concealed 126, 127);
5. Presence of Insurable interest.
1. National character of the insured;
2. The liability of the thing insured to capture and Seaworthiness
detention;
3. The liability to seizure from breach of foreign laws of A ship is seaworthy when reasonably fit to perform the
trade; service and to encounter the ordinary perils of the voyage
4. The want of necessary documents; and contemplated by the parties to the policy (IC, Sec. 116).
5. The use of false and simulated papers (IC, Sec. 112).
Scope of the seaworthiness of a vessel
NOTE: Ordinarily, the matters concealed need not be the
cause of the loss. In marine insurance, the above- A warranty of seaworthiness extends not only to the
mentioned matters, although concealed, will not vitiate condition of the structure of the ship itself, but requires
the contract except when they caused the loss. that it be properly laden, and provided with a competent
master, a sufficient number of competent officers and
seamen, and the requisite appurtenances and equipment,
such as ballasts, cables and anchors, cordage and sails,
food, water, fuel and lights, and other necessary or proper
stores and implements for the voyage (IC, Sec. 118).

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 INSURANCE LAW
Compliance with the warranty of seaworthiness
GR: It is complied with if the ship is seaworthy at the time
of the commencement of the risk (IC, Sec. 117).
XPNs:
1. In the case of time policy- the ship must be seaworthy
at the commencement of every voyage it undertakes
during that time (IC, Sec. 117, [a]).
2. In the case of cargo policy- each vessel upon which
cargo is shipped or transshipped must be seaworthy
at the commencement of each particular voyage (IC,
Sec. 117, [b]).
3. In the case of voyage policy contemplating a voyage in
different stages- the ship must be seaworthy at the
commencement of each portion of the voyage (IC, Sec.
119).
Admission of seaworthiness by the insurer
Seaworthiness is admitted by the insurer when:
1. The warranty of seaworthiness is to be taken as
fulfilled; or
2. The risk of unseaworthiness is assumed by the
insurer (ibid).
Effect of the admission of seaworthiness by the
insurer
If the policy provides that the seaworthiness of the vessel
as between insured and insurer is admitted, the issue of
seaworthiness cannot be raised by the insurer without
showing concealment or misrepresentation by the
insured (Phil. American General Insurance Co. v. CA, G.R.
No. 116940, June 11, 1997).
Unseaworthiness is unknown to the owner of the
cargo
It is immaterial in ordinary marine insurance and may not
be used by him as a defense in order to recover on the
marine insurance policy. It becomes the obligation of a
cargo owner to look for a reliable common carrier, which
keeps its vessels in seaworthy conditions. The shipper
may have no control over the vessel but he has control in
the choice of the common carrier that will transport his
goods (Roque v. IAC, G.R. No. L- 66935, Nov. 11, 1985).
Payment made by the insurer to the insured for the
latter’s lost cargo in case the ship is unseaworthy
Payment made by the insurer to the insured for the
latter’s lost cargo operates as waiver of the insurer’s right
to enforce the implied warranty of seaworthiness.
However, this waiver extends only in favor of the insured.
There is no waiver in favor of the carrier that transported
the cargo. The insurer can still claim payment against the
carrier for breach of contract based on the insurer’s right
of subrogation (Sundiang Sr. & Aquino, 2014 citing Delsan
Transport Lines, Inc. v. CA, G.R. No. 127897, Nov. 15, 2001).
95
Ship becomes unseaworthy during the voyage
An unreasonable delay in repairing the defect exonerates
the insurer on ship or shipowner's interest from liability
from any loss arising therefrom (IC, Sec. 120).
Express warranty as to nationality and neutrality
1. As to nationality – imports that the vessel belongs to
the subject of a particular country.
2. As to neutrality – imports that the property insured is
neutral in fact, that is it belongs to neutrals and that
no act of insured or his agent shall be done which can
legally compromise its neutrality.
Rule regarding voyage in marine insurance
When the voyage contemplated by a marine insurance
policy is described by the places of beginning and ending,
the voyage insured is one which conforms to the course of
sailing fixed by mercantile usage between those places
(IC, Sec. 123).
NOTE: If the course of sailing is not fixed by mercantile
usage, the voyage insured is that way between the places
specified, which to a master of ordinary skill and
discretion, would mean the most natural, direct and
advantageous (IC, Sec. 124).
Deviation
It is a departure from the course of the voyage insured,
mentioned in Sec. 123 and Sec. 124, or an unreasonable
delay in pursuing the voyage or the commencement of an
entirely different voyage (IC, Sec. 125).
Instances when deviation is proper (2000, 2005 Bar)
1. When caused by circumstances over which neither
the master nor the owner of the ship has any control;
2. When necessary to comply with a warranty, or to
avoid a peril, whether or not peril is insured against;
3. When made in good faith, and upon reasonable
grounds of belief in its necessity to avoid a peril; or
4. When made in good faith, for the purpose of saving
human life or relieving another vessel in distress (IC,
Sec. 126).
Improper deviation
Every deviation not specified under Sec. 126 is improper
(IC, Sec. 127).
In improper deviation, an insurer is not liable for any loss
happening to the thing insured subsequent to an
improper deviation (IC, Sec. 128, 2005 Bar).
Kinds of losses
1. Total, which may be (1992 Bar):
a. Actual total loss
b. Constructive total loss
2. Partial
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Actual vs. Constructive loss Luckily, there was no casualties, only injured
passengers. The shipowner sent a notice of
CONSTRUCTIVE abandonment of his interest over the vessel to the
ACTUAL TOTAL LOSS insurance company which then hired professionals to
TOTAL LOSS
It is one which the loss, afloat the vessel for P900,000.00. When re-floated,
It exists when the subject the vessel needed repairs estimated at
although not actually total,
matter of the insurance is P2,000,000.00. The insurance company refused to
is of such a character that
wholly destroyed or lost pay the claim of the shipowner, stating that there was
the insured is entitled, if he
or when it is so damaged “no constructive total loss.”
thinks fit, to treat it as total
as no longer to exist in its
by abandonment (IC, Sec.
original character. a. Was there “constructive total loss” to entitle the
133).
Abandonment by the shipowner to recover from the insurance
The insured has the right company? Explain.
insured is necessary in
to claim the whole b. Was it proper for the shipowner to send a notice
order to recover for a total
insurance without notice of abandonment to the insurance company?
loss (IC, Sec. 141) in the
of abandonment (IC, Sec. Explain
absence of any provision to
137). c. When does double insurance exist?
the contrary in the policy.
d. What is the nature of liability of the several
Actual total loss (1996 Bar) insurers in double insurance? (2005 Bar)

The following constitutes actual total loss: A:

1. A total destruction of the thing insured;
2. The irretrievable loss of the thing by sinking, or by
being broken up;
3. Any damage to the thing which renders it valueless
to the owner for the purpose for which he held it; or
4. Any other event which effectively deprives the
owner of the possession, at the port of destination,
of the thing insured (IC, Sec. 132).
NOTE: Complete physical destruction is not essential to
constitute actual total loss.
An insurance confined in terms to an actual loss does not
cover a constructive total loss, but covers any loss, which
necessarily results in depriving the insured of the
possession, at the port of destination, of the entire thing
insured(IC, Sec. 139).
Constructive total loss
There is constructive total loss when:
1. More than ¾ thereof in value is actually lost, or
would have to be expended to recover it from the
peril;
2. The thing insured is injured to such extent as to
reduce its value more than ¾;
3. The thing insured is a ship, and the contemplated
voyage cannot be lawfully performed without
incurring either an expense to the insured of more
than ¾ the value of the thing abandoned or a risk
which a prudent man would not take under the
circumstances; or
4. The thing insured, being cargo or freightage, and the
voyage cannot be performed, nor another ship
procured by the master, within a reasonable time
and with reasonable diligence, to forward the cargo,
without incurring the like expense or risk mentioned
in no. (3). But freightage cannot in any case be
abandoned (and thus declared constructively lost)
unless the ship is also abandoned (IC, Sec. 141).
Q: M/V Pearly Shells, passenger and cargo vessel, was
insured for P40,000,000.00 against “constructive
total loss.” Due to a typhoon, it sank near Palawan.
a. No. A constructive total loss is one which gives the
insured the right to abandon. (Sec 131,ICP)
Abandonment of the thing insured may be availed of
if the loss is more than three-fourths of its value or
the expense to recover it from peril (Sec 139, ICP). In
this case, the constructive loss claimed by the
shipowner pertains to the vessel. The expenses for
refloating and estimated repairs did not amount to
three-fourths of the value of the vessel , hence, there
is no constructive total loss to speak of.
No. The case did not qualify as one for total
constructive loss. Deduced from the facts of the case,
the loss incurred during the peril did not amount to
three-fourths of its value. As provided in Sec. 139,
abandonment may be availed of if the loss is more
than three-fourths of its value or the expense to
recover it from peril.
b. Sec. 93 of the Insurance Code provides that double
insurance exists where the same person is insured by
several insurers separately, in respect to the same
subject and interest.
c. In double insurance, the insurers are considered as
co-insurers. Each one is bound to contribute ratably
to the loss in proportion to the amount for which he
is liable under his contract. This is known as the
“principle of contribution” or “contribution clause.”
(IC, Sec. 94 [e])
Presumption of actual loss
Actual loss may be presumed from the continued absence
of a ship without being heard of. The length of time which
is sufficient to raise his presumption depends on the
circumstances of the case (IC, Sec. 134).
Liability of the insurer as regards the cargo in case of
reshipment
When a ship is prevented, at an intermediate port, from
completing the voyage, by the perils insured against, the
liability of a marine insurer on the cargo continues after
they are thus reshipped. The insurer may, however,

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2016 GOLDEN NOTES
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 INSURANCE LAW
require additional premium if the hazard be increased by
his extension of liability (IC, Sec. 135).
Additional liabilities of the insurer of goods referred
to in the reshipment of cargo
The marine insurer is bound for:
1. Damages;
2. Expenses of discharging;
3. Storage;
4. Reshipment;
5. Extra freightage; and
6. All other expenses incurred in saving cargo
reshipped, up to the amount insured (IC, Sec. 136).
NOTE: Nothing in Sec. 136 and Sec. 135 shall render a
marine insurer liable for any amount in excess of the
insured value or, if there be none, of the insurable value.
Average
It is any extraordinary or accidental expense incurred
during the voyage for the preservation of the vessel,
cargo, or both and all damages to the vessel and cargo
from the time it is loaded and the voyage commenced
until it ends and the cargo unloaded (Code of Commerce,
Art. 806).
Kinds of average
1. Gross or general averages – damages or expenses
which are deliberately caused by the master of the
vessel or upon his authority, in order to save the
vessel, her cargo or both at the same time from a real
and known risk (Code of Commerce, Art. 811).
This kind of average must be borne equally by all of
the interests concerned in the venture (De Leon,
2010).
2. Simple or particular averages – they include all
damages and expenses caused to the vessel or to her
cargo which have not inured to the common benefit
and profit of all the persons interested in the vessel
and her cargo (Code of Commerce, Art. 809).
This kind of average is suffered by and borne alone
by the owner of the cargo or of the vessel, as the case
may be (De Leon, 2010).
Requisites to the right to claim general average
contribution
1. There must be a common danger to the vessel or
cargo;
2. Part of the vessel or cargo was sacrificed
deliberately;
3. The sacrifice must be for the common safety or for
the benefit of all;
4. It must be made by the master or upon his authority;
5. It must be successful, i.e. Resulted in the saving of the
vessel or cargo; and
6. It must be necessary (Sundiang Sr. & Aquino, 2014).
97
Liability of the insurer as to averages
GR: The marine insurer is liable both for general average
and particular average loss.
XPN: When there is “Free From Particular Average”
Clause in the policy making the insurer liable only for
general average.
Free From Particular Average Clause (FFPA Clause) - A
clause agreed upon in a policy of marine insurance in
which it is stated that the insurer shall not be liable for a
particular average.
XPN to XPN: When particular average loss has the effect
of depriving the insured of the possession at the port of
destination of the whole of the thing insured (IC, Sec. 138).
Abandonment
It is the act of the insured by which, after a constructive
total loss he declared the relinquishment to the insurer of
his interest in the thing insured (Sec. 140, ibid).
Effect of a valid abandonment
It is equivalent to a transfer by the insured of his interest,
to the insurer, with all the chances of recovery and
indemnity (Sec. 148, ibid).
Requisites of valid abandonment
1. There must be an actual relinquishment by the
person insured of his interest in the thing insured
(Sec. 140, ibid).
2. There must be a constructive total loss (Sec. 141,
ibid).
3. The abandonment must neither be partial nor
conditional (Sec. 142, ibid).
4. It must be made within a reasonable time after
receipt of reliable information of the loss (Sec. 143,
ibid).
5. It must be factual (Sec. 144, ibid).
6. It must be made by giving notice thereof to the
insurer which may be done orally or in writing;
Provided, that if the notice be done orally, a written
notice of such abandonment shall be submitted
within 7 days from such oral notice (Sec. 145, ibid).
7. The notice of abandonment must be explicit and
must specify the particular cause of abandonment
(Sec. 146, ibid).
Such notice must state only enough to show that
there is probable cause for abandonment, but need
not be accompanied with proof of interest or of loss.
Person who may make notice of abandonment
The abandonment need not necessarily be made by the
insured but may be made by an authorized agent, and an
agent having an authority to insure has prima facie an
authority to abandon (De Leon, 2010).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Person to whom notice of abandonment may be made
To the insurer or his authorized agent or the broker who
is the agent for both parties (ibid).
Acceptance of abandonment may either be express or
implied from the conduct of the insurer. Mere silence of
the insurer for unreasonable length of time after notice
shall be construed as an acceptance (IC, Sec. 152).
Effects of acceptance of abandonment
1. The insurer becomes at once liable for the whole
amount of the insurance and also becomes entitled to
all rights which insured possessed in the thing
insured (Sec. 148, ibid).
2. GR: It fixes the rights of the parties; whether express
or implied, it is conclusive upon them, (Sec. 153, ibid.)
and irrevocable (Sec. 154, ibid).
XPN: Where the ground upon which it was made
proves to be unfounded (Sec. 154, ibid).Under Sec.
147, abandonment can be sustained only upon the
ground specified in the notice thereof.
3. It stops the insurer to rely on any insufficiency in the
form, time, or right, of abandonment(Sec. 145, 143,
141, ibid).Whether the insured has a right to abandon
is immaterial where the abandonment is accepted
and there is no fraud (New Orleans Ins. Co. vs. Piaggio,
16 Wall. [US] 378).
4. On accepted abandonment of a ship, freightage
earned previous to the loss belongs to the insurer of
said freightage; but freightage subsequently earned
belongs to the insurer of the ship (Sec. 155, ibid).
Effect of the insurer’s refusal to accept a valid
abandonment
If the insurer refuses to accept a valid abandonment, he is
liable as upon an actual total loss, deducting from the
amount any proceeds of the thing insured which may have
come to the hands of the insured (Sec. 156, ibid).
However, if the abandonment was improper, the insured
may nevertheless recover to the extent of the damage
proved (De Leon, 2010).
Effect of insured’s failure to make abandonment
The insured has an election to abandon or not, and cannot
be compelled to abandon although abandonment is
proper. If the insured fails to abandon, he may
nevertheless recover his actual loss (IC, Sec. 157).
Measure of indemnity
1. Valued policy – the parties are bound by the
valuation, if the insured had some interest at risk and
there is no fraud (Sec. 158, ibid).
Overvaluation of property by the insured may take
place either at the time of making the contract or at
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
98
the time of submission of the proof of loss. In either
event, such overvaluation, if fraudulent, entirely
avoids the insurance. However, such fraudulent
intent must be alleged and clearly proven by the
insurer (Perez, 2006).
2. Open policy – the following rules shall apply in
estimating a loss:
a. Value of the ship – value at the beginning of the
risk.
b. Value of the cargo – actual cost to the insured,
when laden on board, or where that cost cannot
be ascertained, its market value at the time and
place of lading, adding the charges incurred in
purchasing and placing it on board, but without
reference to any loss incurred in raising money
for its purchase, or to any drawback on its
exportation, or to the fluctuation of the market
at the port of destination, or to expenses
incurred on the way or on arrival.
c. Value of freightage – gross freightage exclusive
of primage, which is a small compensation paid
by a shipper to the master of the vessel for his
care and trouble bestowed on the shipper’s
goods and which the master is entitled to retain
in the absence of an agreement to the contrary
with the owners of the vessels.
d. Cost of insurance – the cost of insurance is
always added in calculating the value of the ship,
cargo, or freightage or other subject matter in an
open policy (De Leon, 2010).
Drawback
It is an allowance made by the government upon the
duties due on imported merchandise when the importer,
instead of selling there, re-exports it; or the refunding of
such duties if already paid (Perez, 2006).
Primage
It is a small allowance or compensation payable to the
master or owner of the vessel for the use of his cables and
ropes to discharge the goods, and to the mariners for
lading and unlading in any port (Perez, 2006).
NOTE: Drawback and primage are not included in
determining the loss in a marine open policy.
Co-Insurance
Co-insurance is a form of insurance in which the person
who insures his property for less than the entire value is
understood to be his own insurer for the difference which
exists between the true value of the property and the
amount of insurance.
In such a case, a marine insurer is liable upon a partial loss
only for such proportion of the amount insured by him as
the loss bears to the value of the whole interest of the
insured in the property insured (IC, Sec. 159).

Requisites for co-insurance
There is co-insurance when the following requisites
concur:
1. The loss is partial; and
2. The amount of insurance is less than the value of the
property insured (Sundiang Sr. & Aquino, 2014).
Co-insurance in marine insurance vs. Co-insurance in
fire insurance
CO-INSURANCE IN
MARINE INSURANCE
There is co-insurance by
virtue of Section 159 of the
Insurance Code, as long as
the above-enumerated
requisites are present.
Co-insurance vs. Reinsurance (1994 Bar)
CO-INSURANCE
A plan of indemnity
insurance under which the
reinsurer assumes the
obligation on the amount
reinsured, in the same
fashion as the insurer is
obligated to the insured
(excluding policy loans).
For this risk, the insurer
the insurer usually pays to
the reinsurer the gross
premium (less
commissions and expense,
allowances) it has
collected from the insured
on the amount insured (it
should be noted that the
insurer has no relationship
with the insured or
beneficiary).
CO-INSURANCE
The insurer remains as the
insurer of the original
insured
The subject of insurance is
the property
An insurance of the same
interest
The insured party is the
party in interest in all
contracts
The insured has to give
consent
INSURANCE LAW
CO-INSURANCE IN FIRE
INSURANCE
There has to be an express
stipulation to that effect.
REINSURANCE
It is a contract through
which the insurer
procures a third person
to isnure him against loss
or liability by reason of
such original insurance.
In every reinsurance, the
original contract of
insurance and the
contract of reinsurance
are separate and distict
from each other and
covered by separate
policies. (Diaz, et. al.
2014)
REINSURANCE
The insurer becomes the
insured, insofar as the
reinsurer is concerned
The subject is the original
insurer’s risk
Insurance of a different
interest
The original insured has
no interest in the contract
of reinsurance which is
independent of the
original contract of
insrurance
Consent of the original
insured (who is hardly
even aware of the
99
reinsurance transaction)
is not necessary. (De Leon,
2014)
Formula to determine the amount recoverable in co-
insurance
Illustration
(Partial) Loss X Amount of = Amount of recovery
Insurance
(Insurer’s Liability)
Value of thing Insured
If a vessel valued at P1M is insured for only P800, 000 and
is damaged to the extent of P400, 000, the insurer will be
required to pay only 80% of the loss suffered, or
P320,000; the other 20% or P80,000 being borne by the
insured himself.
P400,000 or 2/5 X P800,000 = P320, 000
P1M
The insured is considered a co-insurer as to the uninsured
portion of P200,000. (1M – 800,000).
If the loss is total, the insurer is liable for the full amount
of P800,000. On the other hand, if the property is insured
to its full value, the insured is entitled to recover the full
amount of the partial loss of P400,000.
Amount the insured is entitled to recover in case of
loss if profits to be realized are separately insured
Where profits are separately insured in a contract of
marine insurance, the insured is entitled to recover, in
case of loss, a proportion of such profits equivalent to the
proportion which the value of the property lost bears to
the value of the whole (IC, Sec. 160).
Conclusive presumption of loss of profits
When profits are valued and insured by a contract of
marine insurance, a loss of them is conclusively presumed
from a loss of the property out of which they were
expected to arise, and the valuation fixes their amount (IC,
Sec. 162).
“Port of refuge expenses”
These are the additional expenses incurred in repairing
the damages suffered by a vessel because of the perils
insured against as well as those incurred for saving the
vessel from such perils, such as the expense of launching
or raising the vessel or of towing or navigating it into port
for her safety. These are items to be borne by the insurer
in addition to a total loss if that afterwards takes place (IC,
Sec. 165).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
FIRE INSURANCE Marine Insurance Fire Insurance
Rules on constructive Not in a fire insurance
It is a contract of indemnity by which the insurer, for a total loss (IC, Secs. 133,
consideration, agrees to indemnify the insured against 141) and abandonment
loss of or damage by fire, lightning, windstorm, tornado or (IC, Sec. 140) apply
earthquake and other allied risks, when such risks are
covered by extension to fire insurance policies or under In case of partial loss of a The insured may only
separate policies(IC, Sec. 169). thing insured for less than become a co-insurer if
its actual value, the expressly agreed upon by
NOTE: The liability of an insurer is to pay for direct loss insured in a marine policy the parties (IC, Sec. 174)
only. The insurer may be liable to pay for consequential is a co-insurer of the (De Leon, 2010).
or indirect losses if covered by extension to such fire uninsured portion (IC,
policies or insured under separate policy (De Leon, 2010). Sec. 159)

Indirect losses Alteration made in the use or condition of the thing

The following are indirect losses:
1. Physical damage caused to other property.
2. Loss of earnings due to the interruption of business
by damage to the insured’s property.
3. Additional expenses incurred by the insurer
following the damage to the property or contents by
an insured peril (De Leon, 2010).
Friendly fire vs. Hostile fire
FRIENDLY FIRE HOSTILE FIRE
Fire that burns in a place Fire that escapes and
where it is supposed to burns in a place where it
burn. is not supposed to be. It
E.g. Gas stove, fire place may also refer to fire that
started out as a friendly
fire but escapes from its
original place or it
becomes too strong as it
becomes out of control
(Sundiang Sr. & Aquino,
2014).
Ocean Marine Insurance vs. Fire Insurance
OCEAN MARINE FIRE
A policy of insurance on a Where the hazard is fire
vessel engaged in alone and the subject is an
navigationis a contract of unfinished vessel, never
marine insurance afloat for a voyage, the
although it insures contract to insure is a fire
against fire risks only. risk, especially in the
absence of an express
agreement that it shall
have the incidents of
marine policy, or where it
insures materials in a
shipyard for use in
constructing vessels.
Also where a policy
insures against fire, a
vessel while moored and
in use as a hospital. (De
Leon, 2010)
Marine vs. Fire insurance
insured
Insurer may rescind a fire insurance policy on the ground
of alteration made in the use or condition of the thing
insured, following the requisites:
1. The use or condition of the thing is specially limited
or stipulated in the policy;
2. Such use or condition is altered;
3. The alteration is made without the consent of the
insurer;
4. The alteration is made by means within the control
of the insured; and
5. The alteration increases the risk (IC, Sec. 170).
6. There must be a violation of a material policy
provision (Sundiang Sr. & Aquino, 2014).
NOTE: A contract of fire insurance is not affected by any
act of the insured subsequent to the execution of the
policy, which does not violate its provisions even though
it increases the risk and is the cause of the loss (IC, Sec.
172).
Q: United Merchants Corporation (UMC)’s General
Manager Alfredo Tan insured UMC’s stocks in trade of
Christmas lights against fire with Country Bankers
Insurance Corporation (CBIC). Unfortunately, a fire
gutted the warehouse rented by UMC. When UMC
demanded for payment under the insurance policy,
CBIC rejected its claim due to breach of Condition No.
15 of the policy which states that if the claim be in any
respect fraudulent, or if any false declaration be made
or used in support thereof, all the benefits under the
policy shall be forfeited.CBIC contends that because
arson and fraud attended the claim, UMC is not
entitled to recover under Condition No. 15 of the
insurance policy. Is UMC is entitled to claim from CBIC
the full coverage of its fire insurance policy?
A: No. The Insurance Code provides that a policy may
declare that a violation of specified provisions thereof
shall avoid it. Thus, in fire insurance policies, which
contain provisions such as Condition No. 15 of
theinsurance policy, a fraudulent discrepancy between
the actual loss and that claimed in the proof of loss voids
the insurance policy. Mere filing of such a claim will
exonerate the insurer (United Merchants Corporation v.
Country Bankers Insurance Corporation, G.R. No. 198588,
July 11, 2012).

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 INSURANCE LAW
Q: On May 13, 2014, Freedom Insurance Company
(Freedom) issued Fire Insurance Policy to BCP
Corporation for the latter’s machineries and
equipment located at Tower 1 Building located in
Concepcion, Tarlac which was used as a factory for
automotive parts. The insurance, which was for 10
million and effective for a period of one year, was
procured by BCP Corporation for Rizal Commercial
Banking Corporation (RCBC), the mortgagee of the
insured machineries and equipment. On October 12,
2014, the insured machineries were totally lost by
fire. BCP Corporation filed a fire insurance claim with
Freedom which denied the claim upon the ground
that at the time of loss, the insured machineries and
equipment were transferred by BCP Corporation to a
location different from that indicated in the policy.
The insured machineries were transferred from the
Tower 1 Buiding to the Tower 2 Building also found in
Concepcion, Tarlac which was used as a warehouse
for storing old and unused machineries of the
corporation. Was the refusal of Freedom justified?
A: Yes. The policy stipulated that the insured properties
were located at the Tower1 Building but BCP Corporation
transferred the machineries without the consent of
Freedom. The alteration of the location increased the risk
of loss. The transfer affected Freedom’s ability to control
the risk by guarding against the risk brought about by the
change in condition, specifically the change in the location
of the risk. Tower 2 Building was not the location
stipulated in the policy. There being an unconsented
removal, the transfer was at BCP’s own risk and it must
suffer the consequences of the fire (Malayan Insurance
Company, Inc. v. PAP Co., Ltd. G.R. No. 200784, August 7,
2013).
Effect when the insured has no control or knowledge
of the alteration
GR: The insurer is not relieved from liability if the acts or
circumstances by which the risk is increased are
occasioned by accident, or a cause over which the insured
has no control.
XPNs:
1. Actually known to the insured or
2. Insured is presumed to know of the alteration when
the acts or circumstances, permanently and
substantially affects the conditions of the property so
as to constitute an increase in risk (De Leon, supra,
2010).
Measure of indemnity in open and valued policies in
fire insurance
OPEN POLICIES VALUED POLICIES
The expense it would be to The parties are bound by
the insured at the time of the valuation, in the
the commencement of the absence of fraud.
fire to replace the thing lost (Sundiang Sr. & Aquino
or injured in the condition 2014, citing Development
in which it was at the time of Insurance Corporation v.
the injury. IAC, G.R. No. 713610, July
19, 1986).
101
In an open policy, the actual
loss, as determined, will
represent the total
indemnity due the insured
except only that the total
indemnity shall not exceed
the total value of the policy
Co-insurance clause in fire policies
The co-insurance clause is a clause requiring the insured
to maintain insurance to an amount equal to the value or
specified percentage of the value of the insured property
under penalty of becoming co-insurer to the extent of
such deficiency. This is to prevent the property owners
from taking out such small amount of insurance, and
thereby reducing the premium payments and thereby
increasing the rates of premium for all (De Leon, 2010).
NOTE: A co-insurance cannot exist in fire insurance if
there is no stipulation to that effect.
Option to rebuild clause
It gives the insurer the option to rebuild the destroyed
property instead of paying the amount of the loss or
damage, notwithstanding a fixed valuation in the policy
(IC, Sec. 174). This clause serves to protect the insurer
against unfairness in the appraisal and award rendered
by a packed board of arbitrators, or in the proof of loss.
NOTE: The insurer must exercise his option to rebuild
within the time stipulated in the policy, or in the absence
of stipulation, within a reasonable time. The choice by the
insurer shall produce no effect except from the time it has
been communicated to the insured (Article 1201, NCC).
Unless the policy has limited the cost of rebuilding to the
amount of the insurance, the insurer, after electing to
rebuild, can be compelled to perform his undertaking,
even though the cost may exceed the original amount of
insurance (De Leon, 2010).
Insured can pledge, hypothecate or transfer a fire
insurance policy or rights thereunder
He may do so after a loss has occurred and even without
the consent of, or notice to, the insurer. In such a case, it is
not the personal contract which is being assigned, but a
claim under or a right of action on the policy against the
insurer (De Leon, 2010).
Limitation to the right of the insured in pledging,
hypothecating or transferring his right under a fire
insurance policy
Section 175 of the Insurance Code prohibits the exercise
of this right in the case where the pledging, hypothecating,
or transferring is made to any person, firm or company
who acts as agent for or otherwise represents the insurer.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
NOTE: Any such pledge, etc. shall be void and of no effect “Accidental” vs. “Intentional” as used in insurance
insofar as it may affect other creditors of the insured
(ibid). ACCIDENTAL INTENTIONAL

CASUALTY INSURANCE The terms “accident” Intentional as used in an

and “accidental” have accident policy
It is an insurance covering loss or liability arising from been taken to mean that excepting intentional
accident or mishap, excluding certain types of loss which which happens by injuries inflicted by the
by law or custom are considered as falling exclusively chance or fortuitously, insured or any other
within the scope of other types of insurance such as fire without intention or person, implies the
or marine (IC, Sec. 176). design, which is exercise of the reasoning
unexpected, unusual or faculties, consciousness,
Coverage of casualty insurance unforeseen. The term and volition. Where a
does not, without provision of the policy
1. Employer's liability and workmen’s insurance – the qualification, exclude excludes intentional
events resulting in injury, it is the intention
risk insured against is the liability of the assured to
damage or loss due to of the person inflicting
make compensation or pay damages for an accident,
injury, or death, occurring to a servant or other fault, recklessness or the injury that is
employee, in the course of his employment under negligence of third controlling. If the
statutes imposing such liability on employers. parties (Sundiang Sr. & injuries suffered by the
2. Public utility insurance – indemnifies against liability Aquino, 2014 citing Pan insured clearly resulted
on account of injuries to the person or property of Malayan Insurance Corp. from the intentional act
another. It may extend to automobiles, elevators, fly V. CA, G.R. No. 81026, of a third person, the
wheels, libel, theaters, and vessels. April 3, 1990). insurer is relieved from
3. Motor vehicle liability insurance – is a contract of liability as stipulated
insurance against passenger and third-party liability (Sundiang Sr. & Aquino,
for death or bodily injuries and damage to property 2014 citing Biagtan v.
arising from, motor vehicle accidents. The Insular Life
4. Plate glass insurance – an insurance against loss from Assurance Co. Ltd, G.R.
No. L-25579, March 29,
accidental breaking of plate-glass windows, doors,
showcases, etc. 1972).
5. Burglary and theft insurance – an insurance against
loss of property by the depredations of burglars and Rules on Third party liability insurance
thieves.
6. Personal accident insurance – a form of insurance 1. Insurable interest is based on the interest of the
which undertakes to indemnify the assured against insured in the safety of the persons, and their
the expense, loss of time, and suffering resulting from property, who may maintain an action against him in
accidents causing him physical injury, usually by case of their injury or destruction respectively (De
payment at a fixed rate per week while the Leon, 2010).
consequent disability lasts, and sometimes including 2. In a TPL insurance contract, the insurer assumes the
the payment of a fixed sum to his heirs in case of his obligation by paying the injured third party to whom
death by accident within the term of the policy. the insured is liable. Prior payment by the insured to
7. Health insurance – an indemnity to persons for the injured third person is not necessary in order
expense and loss of time occasioned by disease. that the obligation of the insurer may arise. The
8. Other substantially similar kinds of insurance (Perez, moment the insured becomes liable to third persons,
2006). the insured acquires an interest in the insurance
contract which may be garnished like any other
Two divisions of casualty insurance credit (Perla Compania de Seguros, Inc. vs. Ramolete,
G.R. No. L-60887, November 13, 1991).
1. Accident or health insurance – Insurance against 3. In burglary, robbery and theft insurance, the
specified perils which may affect the person and/or opportunity to defraud the insurer (moral hazard) is
property of the insured. (E.g. personal accident, so great that insurer have found it necessary to fill up
robbery/theft insurance) the policies with many restrictions designed to
2. Third party liability insurance (TPL) – Insurance reduce the hazard. The purpose of the exception is to
against specified perils which may give rise to guard against liability should theft be committed by
liability on the part of the insured of claims for one having unrestricted access to the property
injuries or damage to property of others (De Leon, (Fortune Insurance & Surety Co. vs. CA, G.R. No.
2010). 115278, May 23, 1995)
4. The right of the person injured to sue the insurer of
the party at fault (insured), depends on whether the
contract of insurance is intended to benefit third
persons also or only the insured (Eulogio vs. Del
Monte, GR No. L-22042, August 17, 1967). If the
contract provides for:
a. Indemnity against third party liability – The third
persons to whom the insured is liable, can sue

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 INSURANCE LAW
directly the insurer upon the occurrence of the
injury or event upon which the liability
depends.The purpose is to protect the injured
person against the insolvency of the insured
who causes such injury and to give him a certain
beneficial interest in the proceeds of the policy.
It is as if the injured person were especially
named in the policy (Shafer vs. RTC Judge, G.R.
No. 78848, November 14, 1988, 1996 Bar).
b. Indemnity against actual loss or payment –The
third persons cannot proceed against the
insurer, the contract being solely to reimburse
the insured for liability actually discharged by
him through payment to third persons, said
third person’s recourse being thus limited to the
insured alone (Guingon vs. Del Monte, G.R. No. L-
22042, August 17, 1967) Prior payment by the
insured is necessary to give rise to the obligation
of the insurer.
Source of liability of third party liability insurance
(1996, 2000 Bar)
The direct liability of the insurer under indemnity
contract against third party liability does not mean that
the insurer can be held solidarily liable with the insured.
The insurer’s liability is based on contract; that of the
insured is based on tort. (Figuracion vda. De Maglana, et.
al. v. Hon. Francisco Consolacion, G.R. No. 60506, August 6,
1992).
Q: Lawrence, a boxer, is a holder of an accident
insurance policy. In a boxing match, he died after
being knocked out by the opponent. Can his father
who is a beneficiary under said insurance policy
successfully claim indemnity from the insurance
company? (1990 Bar)
A: Yes. Clearly, the proximate cause of death was the
boxing contest. Death sustained in a boxing contest is an
accident (De la Cruz v. Capital Insurance & Surety Co., G.R.
No. L-21574, June 30, 1966).
Liability of the insurer vs. Liability of the insured
INSURER INSURED
The liability is direct but Liability is direct and can
the insurer cannot be held be held liable with all the
solidarily liable with the parties at fault.
insured and other parties
at fault.
Liability is based on Liability is based on tort.
contract
The third-party liability is The liability extends to
only up to the extent of the the amount of actual and
insurance policy and that other damages. (Heirs
required by law Poe v. Malayan Insurance,
G.R. No. 156302, April 7,
2009)
Q: While driving his car along EDSA, Cesar sideswiped
Roberto, causing injuries to the latter, Roberto sued
Cesar and the third party liability insurer for damages
103
and/or insurance proceeds. The insurance company
moved to dismiss the complaint, contending that the
liability of Cesar has not yet been determined with
finality. Is the contention of the insurer correct?
(1996 Bar)
A: No, the contention of the insurer is not correct. There
is no need to wait for the decision of the court determining
Cesar’s liability with finality before the third party
liability insurer could be sued. The occurrence of the
injury to Roberto immediately gave rise to the liability of
the insurer under its policy. Where an insurance policy
insures directly against liability, the insurer’s liability
accrues immediately upon the occurrence of the injury or
event upon which the liability depends (Shafer vs. RTC
Judge, supra).
Liability of insurer if the insured was committing a
felony
Liabilities arising out of acts of negligence, which are
also criminal, are also insurable on the ground that such
acts are accidental. Thus, a motor insurance policy
covering the insured’s liability for accidental injury
caused by his negligence, even though gross and attended
by criminal consequences such as homicide through
reckless imprudence, will not be void as against public
policy. But liability consequences of deliberate criminal
acts are not insurable (Sundiang Sr. & Aquino, 2014).
“No action” clause
It is a requirement in a policy of liability insurance which
provides that suit and final judgment be first obtained
against the insured, that only thereafter can the person
injured recover on the policy. It expressly disallows suing
the insurer as co-defendant (Guingon v. Del Monte, supra).
A “no action” clause must yield to the provisions of the
Rules of Court regarding multiplicity of suits (Shafer v.
RTC Judge, supra.).
Rules in accident insurance
1. For death or injury to be covered by the policy, such
should not be the natural or probable result of the
insured’s voluntary act, or if something unforeseen
occurs in the doing of the act which produces the
injury, which may result to death (Dela Cruz vs.
Capitol Insurance & Surety Co., supra).
2. Suicide and willful exposure to needless peril are in
pari matere because they both signify a disregard for
one’s life. Voluntary exposure to a known danger is
generally held to negate the accidental character of
whatever followed from the known danger (De Leon,
2010).
3. The insured’s beneficiary has the burden of proof in
demonstrating that the cause of death is due to the
covered peril. Once that fact is established, the
burden shifts to the insurer to show any excepted
peril that may have been stipulated by the parties
(Vda. De Gabriel vs. CA, G.R. No. 103883, Novembber
14, 1996).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
SURETYSHIP A risk-shifting device, the A risk-distributing device,
premium paid being in the the premium paid being
Contract of suretyship nature of a service fee. considered a ratable
contribution to a common
It is an agreement whereby a party called the “surety” fund. (De Leon, 2010)
guarantees the performance by another party called the
“principal or obligor” of an obligation or undertaking in Rules of payment of premiums in suretyship
favor of a third party called the “obligee”. It includes
official recognizances, stipulations bonds or undertakings 1. The premium becomes a debt as soon as the contract
issued by any company by virtue and under the of suretyship or bond is perfected and delivered to
provisions of Act No. 536, as amended by Act No. 2206 (IC, the obligor (IC, Sec. 77);
Sec. 177). 2. The contract of suretyship or bonding shall not be
valid and binding unless and until the premium
The extent of surety’s liability is determined by the therefor has been paid;
language of the suretyship contract or bond itself. It 3. Where the obligee has accepted the bond, it shall be
cannot be extended y implications beyond the terms of valid and enforceable notwithstanding that the
the contract. Having accepted the bond, the creditor is premium has not been paid (Philippine Pryce
bound by the recital in the surety bond that the terms and Assurance Corp. v. CA, G.R.No. 107062, February 21,
conditions of distributorship contract be reduced in 1994);
writing or at the very least communicated in writing to 4. If the contract of suretyship or bond is not accepted
the surety. Such non-compliance by the creditor impacts by, or filed with the obligee, the surety shall collect
not on the validity or legality of the surety-contract but on only a reasonable amount;
the creditor’s right to demand performance. (First 5. If the non-acceptance of the bond be due to the fault
Lepanto–Taisho Insurance Corporation vs. Chevron or negligence of the surety, no service fee, stamps, or
Philippines, G.R. No. 177839, January 18, 2012). taxes imposed shall be collected by the surety; and
6. In the case of continuing bond (for a term longer than
Nature of liability of surety one year or with no fixed expiration date), the obligor
shall pay the subsequent annual premium as it falls
The liability of the surety or sureties shall be: due until the contract is canceled (IC, Sec. 179) (De
Leon, 2010).
1. Solidary – Joint and several with the obligor and
2. Limited or fixed – Limited to the amount of the bond By law and by the specific contract involved in this case,
(It cannot be extended by implication). the effectivity of the bond required for the obtention of a
3. Contractual – It is determined strictly by the terms of license to engage in the business of receiving rice for
the contract of suretyship in relation to the principal storage is determined not alone by the payment of
contract between the obligor and the obligee (IC, Sec. premiums but principally by the Administrator of the
178). NFA. A continuing bond, as in this case where, there is no
fixed expiration date, may be cancelled only by the
Suretyship vs. Property Insurance obligee, which is the NFA, by the Insurance
Commissioner, and by the court. (Country Bankers
SURETYSHIP PROPERTY INSURANCE Insurance Corporation vs. Lagman, G.R. No. 165487, July 13,
It is an accessory contract. The principal contract 2011, in Divina, 2014).
itself.
There are three parties: There are only two parties: Types of surety bonds
the surety, obligor/debtor, insurer and insured
and the obligee/creditor. 1. Contract bonds – These are connected with
More of a credit Generally a contract of construction and supply contracts. They are for the
accommodation with the indemnity protection of the owner against a possible default by
surety assuming primary the contractor or his possible failure to pay materials,
liability men, laborers and sub-contractors.The position of
Surety is entitled to No right of recovery for the surety, therefore, is to answer for a failure of the
reimbursement from the loss the insurer may principal to perform in accordance with the terms
principal and his sustain except when the and specifications of the contract. There may be two
guarantors for the loss it insurer is entitled to bonds:
may suffer under the subrogation. a. Performance bond – One covering the faithful
contract. performance of the contract; and
A bond may be canceled by May be canceled b. Payment bond – One covering the payment of
or with the consent of the unilaterally either by the laborers and material men.
obligee or by the insured or by the insurer on
commissioner or by the grounds provided by law. 2. Fidelity bonds –They pay an employer for loss
court. growing out of a dishonest act of his employee. For
Requires acceptance of the Does not need acceptance the purposes of underwriting, they are classified as:
obligee before it becomes of any third party. a. Industrial bond – One required by private
valid and enforceable. employers to cover loss through dishonesty of
employees; and

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 INSURANCE LAW
b. Public official bond – One required of public
officers for the faithful performances of their
duties and as a condition of entering upon the
duties of their offices.
3. Judicial bonds – They are those which are required in
connection with judicial proceedings (ibid).
Q: Fumitechniks Corporation, represented by Ma.
Lourdes Apostol, had applied for and was issued a
surety bond by First Lepanto-Taisho Insurance
Corporation (First Lepanto-Taisho) for the amount of
P15,700,000.00. As stated in the attached rider, the
bond was in compliance with the requirement for the
grant of a credit line with the Chevron Philippines,
Inc. (Chevron) to guarantee payment of the cost of fuel
products withdrawn within the stipulated time in
accordance with the terms and conditions of
agreement between Chevron and Fumitechniks.
When Fumitechniks defaulted on its obligation,
Chevron notified First Lepanto-Taisho of
Fumitechniks’ unpaid purchases. First Lepanto-
Taisho thereafter demanded to Fumitechniks the
submission of a copy of the agreement secured by the
bond, together with copies of documents such as
delivery receipts. Fumitechniks, however, denied that
it executed such an agreement with Chevron, thus no
copy of such agreement could be submitted. Because
of this, Chevron Philippines, Inc. sued First Lepanto-
Taisho for the payment of unpaid oil and petroleum
purchases made by Fumitechniks. Is the surety liable
to the creditor in absence of a written contract with
the principal?
A: No. Section 176 of the Insurance Code is clear that a
surety contract should be read and interpreted together
with the contract entered into between the creditor and
the principal.A surety contract is merely a collateral one,
its basis is the principal contract or undertaking which it
secures. Necessarily, the stipulations in such principal
agreement must at least be communicated or made
known to the surety. Having accepted the bond, Chevron
as creditor must be held bound by the recital in the surety
bond that the terms and conditions of its distributorship
contract be reduced in writing or at the very least
communicated in writing to the surety. Such non-
compliance by the Chevron impacts not on the validity or
legality of the surety contract but on the creditor’s right to
demand performance (First Lepanto-Taisho Insurance v.
Chevron Philippines, Inc., G.R. No. 177839, January 18,
2012).
LIFE INSURANCE
It is insurance on human lives and insurance appertaining
thereto or connected therewith (Sec. 181, Insurance Code).
It is made payable on the death of the person, or on his
surviving a specified period, or otherwise contingently on
the continuance or cessation of life (IC, Sec. 182).
NOTE: Every contract or undertaking for the payment of
annuities including contracts for the payment of lump
sums under a retirement program where a life insurance
company manages or acts as a trustee for such retirement
105
program shall be considered a life insurance contract for
purposes of the Insurance Code (IC, Sec. 181).
Every contract or pledge for the payment of endowments
or annuities shall also be considered a life insurance
contract under the Insurance Code (IC, Sec. 182).
Who may exercise any right under the policy
In the absence of a judicial guardian, the father, or in the
latter’s absence or incapacity, the mother, of any minor,
who is an insured or a beneficiary under a contract of life,
health, or accident insurance, may exercise, in behalf of
said minor, any right under the policy, without necessity
of court authority or the giving of a bond, where the
interest of the minor in the particular act involved does
not exceed Five hundred thousand pesos
(P500,000.00) or in such reasonable amount as may
be determined by the Commissioner. Such right may
include, but shall not be limited to, obtaining a policy loan,
surrendering the policy, receiving the proceeds of the
Policy, and giving the minor’s consent to any transaction
on the minor’s consent to any transaction on the policy.
In the absence or in case of the incapacity of the father
or mother, the grandparent, the eldest brother or
sister at least eighteen (18) years of age, or any
relative who has actual custody of the minor insured
or beneficiary, shall act as a guardian without need of
a court order or judicial appointment as such
guardian, as long as such person is not otherwise
disqualified or incapacitated. Payment made by the
insurer pursuant to this section shall relieve such
insurer of any liability under the contract (IC, Sec. 182).
Life insurance is also a contract of indemnity
This is because of the following reasons:
1. The liability in life insurance is absolutely certain
2. Amount of life insurance generally is without limit
3. The policy is a valued policy
4. There is no direct pecuniary loss required (De Leon,
2010).
Kinds of life insurance policies
1. Ordinary life, general life or old line policy – Insured
pays a premium every year until he dies. Cash
surrender value after 3 years.
2. Limited payment – Insured pays premium for a
limited period. If he dies within the period, his
beneficiary is paid; if he outlives the period, he does
not get anything.
3. Endowment – insured pays premium for specified
period. If he outlives the period, the face value of the
policy is paid to him; if not, his beneficiaries receive
the benefit.
4. Term insurance – insured pays premium only once,
and he is insured for a specified period. If he dies
within the period, his beneficiaries benefit. If he
outlives the period, no person benefits from the
insurance.
5. Industrial life – entitles the insured to pay premiums
weekly, or where premiums are payable monthly or
oftener (Sundiang Sr. & Aquino, 2014).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Contract of life annuity FIRE/MARINE
LIFE INSURANCE
INSURANCE
It is a contract to pay the insured, or a named person or It is a contract of investment It is a contract of
persons, a sum or sums periodically during life or certain not contract of indemnity. indemnity.
period (Perez, 2006). Always regarded as valued
May be open or valued.
policy.
Measure of indemnity under a policy of insurance May be transferred or The transferee or
upon life or health assigned to any person even assignee must have an
if he has no insurable insurable interest in the
GR: The measure of indemnity under a policy of insurance interest. thing insured.
upon life or health is the sum fixed in the policy. The consent of the insurer is
Consent, in the absence
not essential to the validity
XPN: The interest of a person insured is susceptible of of waiver by the insurer,
of the assignment of a life
exact pecuniary measurement (IC, Sec. 186). is essential in the
policy unless expressly
assignment of the policy.
required.
Liability of the insurer in case of suicide Insurable interest in the
Insurable interest in the life
property insured must
The insurer shall be liable in case of suicide by the insured or health of the person
exist not only when the
if: insured need not exist after
insurance takes effect but
1. The suicide is committed after the policy has been in the insurance takes effect or
also when the loss
force for a period of 2 years from the date of its issue when loss occurs.
occurs.
or of its last reinstatement.
Insurable interest need not Insurable interest must
2. The suicide is committed within a shorter period as have any legal basis. have a legal basis.
provided in the policy.
Contingency that is
3. The suicide is committed in the state of insanity
contemplated is a certain The contingency insured
regardless of the date of commission (IC, Sec. 183)
event, the only uncertainty against may or may not
being the time when it will occur.
Q: Sun Insurance Co. issued to Tan a life policy having
take place.
this provision: “the company shall not be liable in
The liability of the insurer to
respect of ‘bodily injury’ consequent upon the insured Liability is uncertain
make payment is certain,
person who willfully exposes himself to needless because the happening of
the only uncertain element
peril except in an attempt to save human life". Tan the peril insured against
being when such payment
designated his wife, Beverly as beneficiary. is uncertain.
must be made.
One evening, Tan, while playing with his hand gun, May be terminated by the
May be cancelled by
suddenly stood in front of his secretary and pointed insured but cannot be
either party and is
the gun at her. Startled, she pushed the gun aside and cancelled by the insurer and
usually for a term of one
said that it may be loaded. Thus, Tan, to assure her is usually a long term
year
that it was not loaded, pointed it at his temple. The contract.
next moment, there was an explosion and Tan The “loss” to the beneficiary
The reverse is generally
slumped to the floor lifeless. caused by the death of the
true of the loss of
insured can seldom be
property, i.e., it is capable
Beverly, then claimed the proceeds from Sun measured accurately in
of pecuniary estimation.
Insurance, but the latter rejected her claim on the terms of cash value.
ground that the death of Tan was not accidental. The beneficiary is under no
The insured is required
Beverly sued the insurer. Will Beverly’s claim obligation to prove actual
to submit proof of his
prosper? (1993, 1994 Bar) financial loss as a result of
actual pecuniary loss as a
the death of the insured in
condition precedent to
A: Beverly can recover the proceeds of the policy from the order to collect the
collecting the insurance.
insurer. The death of the insured was not due to suicide insurance.
or willful exposure to needless peril which are excepted
risks. The insured’s act was purely an act of negligence COMPULSORY MOTOR VEHICLE LIABILITY
which is covered by the policy and for which the insured INSURANCE
got the insurance for his protection. In fact, he removed
the magazine from the gun and when he pointed the gun Motor vehicle liability insurance
to his temple he did so because he thought that it was safe
for him to do so. He did so to assure his sister that the gun It is a protection coverage that will answer for legal
was harmless. There is none in the policy that would liability for losses and damages for bodily injuries or
relieve the insurer of liability for the death of the insured property damage that may be sustained by another
since the death was an accident (Sun Insurance v CA, G.R. arising from the use and operation of a motor vehicle by
Nos. 79937-38, February 13, 1989). its owner (Compulsory Motor Vehicle Liability Insurance,
prepared and distributed by the Insurance Commission).
Life insurance vs. Fire/Marine insurance
The Insurance Code makes it unlawful for any land
transportation operator or owner of a motor vehicle to

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 INSURANCE LAW
operate the same in public highways unless there is an
insurance or guaranty to indemnify the death or bodily
injury of a third party or passenger arising from the use
thereof (IC, Sec. 387). Registration of any vehicle will not
be made or renewed without complying with the
requirement (IC, Sec. 389).
Purpose of motor vehicle liability insurance
To give immediate financial assistance to victims of motor
vehicle accidents and/or their dependents, especially if
they are poor regardless of financial capability of motor
vehicle owners or operators responsible for the accident
sustained (First Integrated Bonding Insurance Co., Inc. v.
Hernando, G.R. No. L-51221, July 31, 1991).
NOTE: The insurer’s liability accrues immediately upon
the occurrence of the injury or event upon which the
liability depends, and does not depend on the recovery of
judgment by the injured party against the insured (Shafer
v. Judge, RTC, supra).
Definitions
1. Motor vehicle
Any vehicle propelled by any power other than muscular
power using the public highways, but excepting road
rollers, trolleys cars, street sweepers, sprinklers, lawn
mowers, bulldozers, graders, forklifts, amphibian trucks,
and cranes if not used in public highways, vehicles which
run only on rails or tracks, and tractors, trailers and
traction engines of all kinds used exclusively for
agricultural purposes (Sec. 3[a] of RA 4136).
NOTE: Trailers having any number of wheels, when
propelled or intended to be propelled by attachment to a
motor vehicle shall be classified as separate motor vehicle
with no power rating (ibid).
2. Passenger
Any fare-paying person being transported and conveyed
in and by a motor vehicle for transportation of passengers
for compensation, including persons expressly
authorized by law or by the vehicle’s operator or his
agents to ride without fare (IC, Sec. 386, [b]).
3. Third-party
Any person other than a passenger as defined in this
section (ibid.) and shall also exclude a member of the
household, or a member of the family within the second
degree of consanguinity or affinity, of a motor vehicle
owner or land transportation operator, as likewise
defined herein, or his employee in respect of death, bodily
injury, or damage to property arising out of and in the
course of employment (Sec. 386, [c], ibid).
4. Owner or Motor vehicle owner (MVO)
Actual legal owner of a motor vehicle, whose name such
vehicle is duly registered with the Land Transportation
Office (Sec. 386, [d], ibid).
107
5. Land transportation operator (LTO)
The owner or owners of motor vehicles for transportation
of passengers for compensation, including school buses
(Sec. 386, [e], ibid).
Persons required to maintain a compulsory motor
vehicle liability insurance (CMVLI) policy to operate
motor vehicle/s in public highways
1. Motor vehicle owner (MVO)
2. Land transportation operator (LTO) (Sec. 387, ibid).
Scope of coverage required for compulsory motor
vehicle liability insurance
1. For MVOs, the coverage must be comprehensive
against third party liability for death or bodily
injuries. If the private motor vehicle is being used to
transport passengers for compensation, the coverage
shall include passenger liability.
2. For LTOs, coverage must be comprehensive against
both passenger and third-party liabilities for death or
bodily injuries (Ins. Memo. Cir. No. 3-81).
Substitutes for a compulsory motor vehicle liability
insurance policy
Instead of a CMVLI policy, MVOs or LTOs may either:
1. Post a surety bond with the Insurance Commissioner
who shall be made the obligee or creditor in the bond
in such amount or amounts required as limits of
indemnity to answer for the same losses sought to be
covered by a CMLVI policy; or
2. Make a cash deposit with the Insurance Commission
in such amount or amounts required as limits of
indemnity for the same purpose. (Sec. 390, ibid).
After the cash deposit or surety bond has been proceeded
against by the Insurance Commissioner, such cash deposit
shall be replenished or such surety bond shall be restored
by the MVO or LTO in the right amount/s required as limit
of liability within 60 days after impairment or expiry,
otherwise, he shall secure a CMLVI required (ibid).
Duties of motor vehicle owner or land transportation
operator in contemplation of the cancellation of the
policy
Contemplating the cancellation of the policy, the MVO or
LTO shall:
1. Give to the insurance or surety company concerned a
written notice of his intention to cancel;
2. Secure, before the insurance policy or surety bond
ceases to be effective, another similar policy or bond
to replace that one canceled;
3. Without making any replacement, make a cash
deposit in sufficient amount with the Insurance
Commissioner and secure a certification from the
Insurance Commissioner regarding the deposit made
for presentation to and filing with the Land
Transportation Office (CMVLI, supra) (IC, Sec. 393-
394).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Effects of the cancellation of the policy
GR: Upon receipt of the notice of such cancellation, the
Land Transportation Office shall order the immediate
confiscation of the plates of the motor vehicle concerned.
XPNs: No confiscation will be ordered if said Office
receives any of the following:
1. An evidence or proof of a new and valid CMVLI cover
which may be either an insurance policy or guaranty
in cash or surety bond;
2. A signed duplicate of an endorsement or addendum
issued by the insurance company concerned showing
revival or continuance of the CMVLI cover; or
3. A certification issued by the Insurance Commissioner
to the effect that a cash deposit in the amount
required as limit of indemnity has been made with
him by the MVO or LTO (CMVLI, supra, IC, Sec. 393).
“Own damage” coverage
It simply meant that the insurer had assumed to
reimburse the costs for repairing the damage to the
insured vehicle, as opposed to damage to third party
vehicle/property. The phrase “own damage” does not
mean damage to the insured car caused by the assured
itself, instead, of third parties (Pan Malayan Insurance
Corporation v. Court of Appeals, supra)
No fault indemnity clause (1994 Bar)
It is a clause where the insurer is required to pay a third
party injured or killed in an accident without the necessity
of proving fault or negligence on the part of the insured.
There is a stipulated maximum amount to be recovered.
Rules under the “no fault indemnity clause”
1. The total indemnity in respect of any one person
shall not exceed P15,000 for all motor vehicles (Ins.
Memo. Circ. No. 4-2006).
2. Proof of loss:
a. Police report of accident
b. Death certificate and evidence sufficient to
establish proper payee
c. Medical report and evidence of medical or
hospital disbursement (IC, Sec. 391 [3]).
3. Claim may be made against one motor vehicle only
(Sec. 391 [c], ibid).
4. In case injury of an occupant of a vehicle, the claim
shall lie against the insurer of the vehicle in which the
occupant is riding, mounting or dismounting from
(ibid).
5. In any other case (not an occupant), claim shall lie
against the insurer of the directly offending vehicle
(ibid).
6. In all cases, the right of the party paying the claim to
recover against the owner of the vehicle responsible
for the accident shall be maintained (ibid).
The claimant is not free to choose from which insurer he
will claim the "no fault indemnity," as the law, by using the
word "shall”, makes it mandatory that the claim be made
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
108
against the insurer of the vehicle in which the occupant is
riding, mounting or dismounting from. That said vehicle
might not be the one that caused the accident is of no
moment since the law itself provides that the party paying
may recover against the owner of the vehicle responsible
for the accident (Perla Compania de Seguros, Inc. v.
Ancheta, G.R. No. L-49599, August 8, 1988).
This no-fault claim does NOT apply to property damage. If
the total indemnity claim exceeds P15, 000 and there is
controversy in respect thereto, the finding of fault may be
availed of by the insurer only as to the excess. The first
P15, 000 shall be paid without regard to the fault (CMVLI,
supra).
Q: X is a passenger of a jeepney for hire being driven
by Y. The jeepney collided with another passenger
jeepney being driven by Z who was driving recklessly.
As a result of the collision, X suffered injuries. Both
passenger jeepneys are covered by Comprehensive
Motor Vehicular Insurance Coverage. If X wants to
claim under the "no fault indemnity clause", his claim
will lie (2012 Bar)
A: Against the insurer of the passenger jeepney driven by
Y because X was his passenger. The Insurance Code states
that in the case of an occupant of a vehicle, the claim shall
lie against the insurer of the vehicle in which the occupant
is riding, mounting or dismounting from.
Authorized driver clause
It indemnifies the insured owner against loss or damage
to the car but limits the use of the insured vehicle to:
1. The insured himself; or
The insured need not prove that he has a driver’s
license at the time of the accident if he was the driver
(Sundiang Sr. & Aquino, 2014).
2. Any person who drives on his order or with his
permission; provided, that the person driving is
permitted to drive the motor vehicle in accordance
with the law, and is not disqualified (Villacorta v.
Insurance Commissioner, G.R. No. 54171, October 28,
1980).
The main purpose of this clause is to require a person
other than the insured, who drives the car on the
insured’s order or with his permission, to be duly
licensed drivers and have no disqualification to drive
a motor vehicle.
An Irish citizen whose 90-day tourist visa had expired,
cannot recover on his car insurance policy, not being
authorized to drive a motor vehicle without a Philippine
driver’s license (Stokes v. Malayan Insurance Co., Inc. G.R.
No. L-34768, February 24, 1984).
A driver with an expired Traffic Violation Receipt or
expired Temporary Operator’s permit is not considered
an authorized driver within the meaning of the insurance
policy. The Traffic Violation Receipt is coterminous with a
confiscated license under the Motor Vehicle Law
 INSURANCE LAW
(Gutierrez v. Capital Insurance & Surety Co., Inc., G.R. No. L-
26287, June 29, 1984)
Theft clause
It is that which includes theft as among the risks insured
against. Where a car is unlawfully and wrongfully taken
without the knowledge and consent of the owner, such
taking constitutes “theft” and it is the theft clause, not the
authorized driver clause which should apply (Perla
Compania de Seguros, Inc. v. CA, supra).
The “Theft Clause” of a comprehensive motor vehicle
insurance policy has been interpreted by the Court in
several cases to cover situations like (1) when one takes
the motor vehicle of another without the latter’s consent
even if the motor vehicle is later returned, there is theft-
there being intent to gain as the use of the thing
unlawfully taken constitutes gain or (2) when there is
taking of a vehicle by another person without the
permission or authority from the owner thereof.
(Paramount Insurance vs. Spouses Remondeulaz, G.R. No.
173773, November 28, 2012).
Theft
There is theft if the vehicle is taken with intent to gain
without the consent of the insured-owner. Thus, there is
theft even if:
1. The vehicle is returned;
2. The vehicle was stolen by the driver of the insured
(Alpha Insurance and Surety Company v. Castor, G.R.
198174, September 2, 2013);
3. The vehicle was taken to the owner of a repair shop
for the purpose of repair and in order to attach
accessories (Paramount Insurance v. Spouses
Remondeulaz, G.R. No. 173773, November 28, 2012)
(Sundiang Sr. & Aquino, 2014).
Q: On May 26, 2014, Jess insured with Jack Insurance
(Jack) his 2014 Toyota Corolla sedan under a
comprehensive motor vehicle insurance policy for
one year. On July 1, 2014, Jess’ car was unlawfully
taken. Hence, he immediately reported the theft to
the traffic Management Command (TMC) of the
Philippine National Police (PNP), which made Jess
accomplish a complaint sheet as part of its procedure.
In the complaint sheet, Jess alleged that a certain Ric
Silat (Silat) took possession of the subject vehicle to
add accessories and improvements thereon.
However, Silat failed to return the subject vehicle
within the agreed three- day period. As a result, Jess
notified Jack of his claim for reimbursement of the
value of the lost vehicle under the insurance policy.
Jack refused to pay claiming that there is no theft as
Jess gave Silat lawful possession of the car. Is Jack
correct? (2014 Bar)
A: No, Jack Insurance is not correct. Ric Silat was merely
given physical possession of the car. He did not have
juridical possession over the same. It is also apparent that
109
the taking by Silat of the car of Jess is without the consent
or authority of the latter. Thus, the act of Silat in depriving
Jess of his car, soon after the transfer of physical
possession of the same to him, constitutes theft under the
insurance policy that is compensable (Paramount
Insurance v. Spouses Remonduelaz, G.R. No. 173773,
November 8, 2012)
Q: On February 21, 2013, Barrack entered into a
contract of insurance with Matino Insurance
Company (Matino) involving a motor vehicle. The
policy obligates Matino to pay Barrack the amount of
P600,000 in case of loss or damage to said vehicle
during the period covered, which is from February
26,2013 to February 26,2014.
On April 16,2013, at about 9:00 am, Barrack
instructed his driver, JJ, to bring the motor vehicle to
a nearby auto shopfor tune-up. However, JJ no longer
despite and diligent efforts to locate the said vehicle,
the efforts proved futile. Resultantly, Barrack
promptly notified Matino of the said loss and
demanded payment of the insurance proceeds of
P600,000. In a letter dated July 5,2013, Matino
denied the claim, reasoning as stated in the contract
that “the company shall not be liable for any malicious
damage caused by the insured, any member of his
family or by a person in the insured’s service. Is
Matino correct in denying the claim? (2014 Bar)
A: Matino Insurance is not correct in denying the claim.
The loss of the motor vehicle is not excluded under the
insurance policy as the loss was due to theft, not malicious
damage. The “malicious damage” clause under the policy
is not applicable but rather the “theft” clause. Thus, the
provision under the policy that ”the company shall not be
liable for any malicious damage caused by the insured,
any member of his family or by a person in the insured’s
service” is not applicable (Alpha Insurance and Surety Co.
v. Castor, G.R. No. 198174, September 2,2003).
Limitations with respect to compulsory motor vehicle
liability insurance over solicitation
1. No government office or agency having the duty of
implementing the provisions of the Insurance Code
on CMVLI shall act as agent in procuring the
insurance policy or surety bond required;
2. No official or employee of such office or agency shall
similarly act as such agent; and
3. The commission of an agent procuring the
corresponding insurance policy or surety bond shall
in no case exceed 10% of the amount of premiums
therefore (IC, Sec. 400).
Q: When a passenger jeepney, insured but with an
authorized driver’s clause and was driven by a driver
who only holds a Traffic Violation Report (TVR)
because his license was confiscated, met an accident,
may the owner of the jeepney claim from the
insurance company? (2003 Bar)
A: Yes. The fact that the driver was merely holding a TVR
does not violate the condition that the driver should have
a valid and existing driver’s license. Besides, such a
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
condition should be disregarded because what is involved
is a passenger jeepney, and what is involved here is not
own damage insurance but third party liability where the
injured party is a third party not privy to the contract of
insurance.
MICROINSURANCE

It is a financial product or service that meets the risk

protection needs of the poor where:

The amount of contributions, premiums, fees or charges,

computed on a daily basis, does not exceed seven and a
half percent (7.5%) of the current daily minimum wage
rate for nonagricultural workers in Metro Manila; and

The maximum sum of guaranteed benefits is not more

than one thousand (1000) times of current daily minimum
wage rate for nonagricultural workers in Metro Manila
(IC, Sec. 187).
NOTE: No insurance company or mutual benefit
association shall engage in the business of microinsurance
unless it possesses all the requirements as may be
prescribed by the Commissioner. The Commissioner shall
issue such rules and regulations governing
microinsurance (IC, Sec. 188).

UNIVERSITY OF SANTO TOMAS

2016 GOLDEN NOTES
110
 TRANSPORTATION LAWS
TRANSPORTATION LAW
Laws that govern contracts of transportation
Contracts of transportation, whether by land, sea or air, if
within the Philippines or if the transportation of goods be
from a foreign country to the Philippines shall be
governed by the following laws, arranged by order of
application:
1. Provisions of the New Civil Code on “Common
Carriers”;
2. Code of Commerce; and
3. Special laws such as Carriage of Goods by the Sea
(COGSA); Salvage Law; Public Service Act; Land
Transportation and Traffic Code; Tariff and Customs
Code; and Civil Aeronautics Act (NCC, Art. 1735 and
1766; American President Lines, Ltd. vs. Klepper, GR
No. L-15671, November 29, 1960).
NOTE: In the case of international carriage in Air
Transportation, Warsaw Convention (R.A. 9497) applies.
If the goods are to be transported from the Philippines to
a foreign country, the law of the latter country shall
govern the transportation contract (CC, Art. 1753,
National Development Co. v. CA, G.R. No. L-49407, August
19, 1988).
COMMON CARRIERS
Requisites for an entity to be classified as a common
carrier (1996, 1997, 2000, 2002 Bar)
(PBL-FP)
1. Must be a Person, corporation, firm or association
2. Engaged in the Business of carrying or transporting
passengers or goods or both
3. The carriage or transport must either be by Land,
water or air
4. The service is for a Fee
5. The service is offered to the Public (NCC, Art. 1732).
NOTE: A pipeline operator who carries oil and other
petroleum products through pipes/ pipelines is a
common carrier. The law does not distinguish as to the
means by which transportation is carried out, as long as it
is by land, water or air. Neither does the law require that
transportation be through a motor vehicle (First Phil.
Industrial Corp. v. CA, G.R. 125948, December 29, 1998).
Q: The Pereñas were engaged in the business of
transporting students from their respective
residences in Parañaque City to Don Bosco in Pasong
Tamo, Makati City, and back. They employed
Clemente Alfaro as driver of the van. The Zarates
contracted the Pereñas to transport their son, Aaron,
to and from Don Bosco. However, the train hit the rear
end of the van driven by Alfaro, and the impact threw
9 students in the rear, including Aaron, out of the van.
Aaron landed in the path of the train, which dragged
his body and severed his head, instantaneously killing
him.
111
The Zarates commenced an action for damages
against Alfaro, the Pereñas, PNR and Alano. The
Zarates’ claim against the Pereñas was upon breach of
the contract of carriage and based on quasi-delict
under Article 2176, Civil Code against PNR.
The Pereñas argued that they exercised the diligence
of a good father of the family in the selection and
supervision of Alfaro, by making sure that Alfaro had
been issued a driver’s license and had not been
involved in any vehicular accident prior to the
collision.
a. Is the defense of Perenas tenable?
b. Is the operation of a school bus service
considered as a private carrier?
A:
a. No. Such defense as inappropriate in an action for
breach of contract of carriage.
b. No. The Pereñas as the operators of a school bus
service were: (a) engaged in transporting passengers
generally as a business, not just as a casual
occupation; (b) undertaking to carry passengers over
established roads by the method by which the
business was conducted; and (c) transporting
students for a fee. Despite catering to a limited
clientèle, the Pereñas operated as a common carrier
because they held themselves out as a ready
transportation indiscriminately to the students of a
particular school living within or near where they
operated the service and for a fee.
Test for determining whether or not one is a common
carrier (1996 Bar)
Whether the person or entity, for some business purpose
and with general or limited clientele, offers the service of
carrying or transporting passengers or goods or both for
compensation.
The true test for a common carrier is not the quantity or
extent of the business actually transacted, or the number
and character of the conveyances used in the activity, but
whether the undertaking is a part of the activity engaged
in by the carrier that he has held out to the general public
as his business or occupation. The question must be
determined by the character of the business actually
carried on by the carrier, not by any secret intention or
mental reservation it may entertain or assert when
charged with the duties and obligations that the law
imposes. (Sps. Teodoro and Nanette Perena v. Spouses
Teresita Philippine Nicolas and L. Zarate, G.R. No. 157917,
August 29, 2012).
Article 1732 makes no distinction between one
whose principal business activity is the carrying of
persons or goods or both, and one who does such carrying
only as an ancillary activity. Article 1732 also carefully
avoids making any distinction between a person or
enterprise offering transportation service on a regular or
scheduled basis and one offering such services on a
an occasional, episodic or unscheduled basis. Neither
does Article 1732 distinguish between a carrier offering
its services to the “general public,” i.e., the general
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
community or population, and one who offers services or
solicits business only from a narrow segment of the
general population. (Perez, 2009, citing Caltex [Phils.] vs.
CA, GR No. 131166, September 30, 1999).
Certificate of public convenience is not necessary before a
carrier can be considered a common carrier
Q: AM Trucking, a small company, operates to trucks
for hire on selective basis. It caters only to a few
customers, and its trucks do not make regular or
scheduled trips. It does not have a certificate of
public convenience.
On one occasion, Reynaldo contracted AM to
transport for a fee, 100 sacks of rice from Manila to
Tarlac. However, AM failed to deliver the cargo,
because its truck was hijacked when the driver
stopped in Bulacan to visit his girlfriend.
May Reynaldo hold AM liable as a common carrier?
A: Yes. The fact that AM Trucking operates only two
trucks for hire on a selective basis, caters only to a few
customers, does not make regular or scheduled trips,
and does not have a certificate of public convenience are
of no moment. The law does not distinguish between
one whose principal business activity is the carrying of
persons or goods or both and anyone who does such
carrying only as an ancillary activity, between a person
or enterprise offering transportation service on a
regular or scheduled basis and one on an occasional,
episodic or unscheduled basis, and between a carrier
offering its services to the general public and one who
offers services or solicits business only from a narrow
segment of the general population (Pedro de Guzman v.
CA, L-47822 Dec 27, 1988)
Q: Alejandro Camaling is engaged in buying copra,
charcoal, firewood, and used bottles and in reselling
them in Cebu City. He uses 2 big Isuzu trucks for the
purpose; however, he has no certificate of public
convenience or franchise to do business as a common
carrier. On the return trips to Alegria, he loads his
trucks with various merchandise of other merchants
Common carrier vs. Private carrier (2002 Bar)
COMMON CARRIER
To whom the Undertakes to carry passengers or goods
carrier cater its for the public
services
Governing laws Civil Provisions on Common Carriers, Public
Service Act, and other special laws relating
to transportation
Degree of Diligence Extraordinary diligence
required
Presumption of 1. If the goods are lost, destroyed or
Negligence deteriorated.
2. In case of death of or injuries to
passengers
Whether subject to Subject to regulation by a regulatory agency
regulation or not
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
112
in Alegria, and the two neighboring municipalitie. He
charges them freight rates much lower than the
regular rates. In one of the return trips, one cargo
truck was loaded with several boxes of sardines,
owned by Pedro Rabor. While passing the zigzag road
between Carcar and Barili, the truck was hijacked by
3 armed men who took all the boxes of sardines and
kidnapped the driver and his helper, releasing them
only 2 days later.
Rabor sought to recover from Alejandro the value of
the sardines. The latter argued that he is not a
common carrier. If you were the judge, would you
sustain the contention of Alejandro? (1991 Bar)
A: No. If I were the Judge, I will rule that Alejandro is a
common carrier. A person who offers his services to carry
passengers or goods for a fee is a common carrier
regardless of whether he has a certificate of public
convenience or not, whether it is his main business or
incidental to such business, whether it is scheduled or
unscheduled service, and whether he offers his services to
the general public or to a limited few (De Guzman v. CA,
G.R. 47822, December 27, 1988).
Private carrier defined
A private carrier is one who, without making the activity
a vocation, or without holding himself or itself out to the
public as ready to act for all who may desire his or its
services, undertakes, by special agreement in a particular
instance only, to transport goods or persons from one
place to another either gratuitously or for hire (Spouses
Perena vs. Spouses Zarate, GR No. 157917, August 29,
2012).
A carrier which does not qualify under the requisites of a
common carrier is deemed a private carrier (National
Steel Corporation v CA, G.R. No. 112287, December 12,
1997).
PRIVATE CARRIER
Carriage is generally undertaken by special
agreement and it does not hold itself out to carry
goods for the general public
Civil Code provisions on ordinary contracts
Ordinary diligence or diligence of a good father of
the family
No presumption as to negligence
NOT subject to regulation by a regulatory agency
 TRANSPORTATION LAWS

Exemption from A common carrier cannot stipulate that it is A private carrier may validly enter into a
liability exempt from liability for negligence of its stipulation exempting it from liability.
agents or employees. Such stipulation is
void as it is against public policy

DILIGENCE REQUIRED OF COMMON CARRIERS Continues until the goods Continues until the
are delivered, actually or passenger has been landed
The diligence required of common carriers is constructively, by the at the port of destination
extraordinary diligence (NCC, Art. 1733). The nature of the carrier to the consignee, or and has left the vessel
business of common carriers and the exigencies of public to the person who has a owner’s dock or premises
policy demand that they observe extraordinary diligence right to receive them and
(Martin, 1998). even when they are
temporarily unloaded or
It is that extreme measure of care and caution which stored in transit, unless the
persons of unusual prudence and circumspection use for shipper or owner had made
securing and preserving their own property or rights. The use of the right or stoppage
law requires common carriers to render service with the in transit
greatest skill and utmost foresight (Loadmasters Services
vs. Glodel Brokerage, G.R. 197446, January 10, 2011). It also continues even
during the time the goods
Reasons for the requirement of extra-ordinary are stored in a warehouse of
diligence the carrier at the place of
destination until the
1. Nature of the business of common carrier which is consignee has been advised
public service; of the arrival of the goods
2. Public policy, the common carriers are supposed to and has been given a
serve the public interest and therefore, they have to reasonable opportunity
exercise extra-ordinary diligence (Martin, 1989). thereafter to remove them
or otherwise dispose of
Q: Why is the defense of due diligence in the selection them.
and supervision of an employee not available to a
common carrier? (2002 Bar) When consignee failed to claim a machinery after its
arrival and the carrier deposited it in a warehouse, the
A: The defense of due diligence in the selection and carrier is not liable for the damages sustained by the
supervision of an employee is not available to a common machinery after its delivery to the warehouse (Sea-Land
carrier because the degree of diligence required of a Service, Inc. v. CA, G.R. 122605, April 30, 2001).
common carrier is not the diligence of a good father of a
family but extraordinary diligence, i.e., diligence of the The execution of a receipt or bill of lading is not
greatest skill and utmost foresight. required for the commencement of the responsibility
to observe extraordinary diligence
Q: Are common carriers liable for injuries to
passengers even if they have observed ordinary The requirement to observe extraordinary diligence
diligence and care? Explain. (2015 Bar) begins with the actual delivery of the goods for
transportation, and not merely with the formal execution
A: Yes, common carriers are liable to injuries to of a receipt or bill of lading; the issuance of a bill of lading
passengers even if the carriers observed ordinary is not necessary to complete delivery and acceptance by
diligence and care because the obligation imposed upon the carrier (Compania Maritima v. Insurance Co. of North
them by law is to exercise extra-ordinary diligence. America, G.R. No. L-18965, October 30, 1964).
Common carriers are bound to carry the passengers
safely as far as human care and foresight can provide, Q: X, while driving his Toyota Altis, tried to cross the
using the utmost diligence of very cautious persons with railway tract of PNR approached Blumentritt Avenida
a due regard for all the circumstances. Ext., applied its horn as a warning to all the vehicles
that might be crossing the railway tract, but there was
Exercise of extraordinary diligence in the carriage of really nobody manning the crossing. X was listening
goods and transport of passengers to his lpod touch, hence, he did not hear the sound of
the horn of the train and so his car was hit by the train.
EXTRAORDINARY DILIGENCE in As a result of the accident, X suffered some injuries
Carriage of Goods Transport of Passengers and his car was totally destroyed as a result of the
Commences from the time Commences from the impact. Is PNR liable? (2012 Bar)
the goods are moment the person who
unconditionally placed in purchases the ticket from A: Yes. Railroad companies owe to the public a duty of
the possession of, and the carrier presents exercising a reasonable degree of care to avoid injury to
received by the carrier for himself at the proper place person and property at railroad crossings which means a
transportation and in a proper manner to flagman or a watchman should have been posted to warn
be transported the public at all times.

UNIVERSITY OF SANTO TOMAS

113 FACULTY OF CIVIL LAW
 MERCANTILE LAW
of the plane at the time. He was allowed to fly as a co-
Causes of action for failure to observe diligence pilot because of the scarcity of pilots - Philippine
required pilots have been recruited by foreign airlines under
vastly improved flying terms and wages so that newer
PERSON WHO HAS BASIS OF CAUSE OF ACTION and less trained pilots are being locally deployed. The
CAUSE OF ACTION AGAINST THE COMMON main pilot, on the other hand, had a very high level of
CARRIER blood alcohol at the time of the crash.
Third person who Tort
suffered damages (extra-contractual negligence) You are part of the team that the victims hired to
Shipper of the goods Breach of the contract of handle the case for them as a group. In your case
damaged carriage conference, the following questions came up:
(Culpa Contractual)
Heir/s of the deceased Breach of the contract of a. Explain the causes of action legally possible
passengers or the carriage under the given facts against the airline and the
passenger himself for (Culpa Contractual) pilots; whom will you specifically implead in
the injuries sustained these causes of action?
by him b. How will you handle the cases of the passenger
run over by the ambulance and the airline
CAUSE OF ACTION OF employee allowed to hitch a free ride to Cagayan
THE INJURED BASIS OF CAUSE OF de Oro? (2013 Bar)
PASSENGER OR HIS ACTION
HEIRS, IF THE A:
PASSENGER DIES: a. A complaint for breach of contract of carriage can be
Against the negligent Culpa criminal filed against Fil-Asia Air for failure to exercise
driver extraordinary diligence in transporting the
If the driver is convicted and passengers safely from their point of embarkation to
it turns out that he is their destination (NCC, Art. 1755).
insolvent, the heirs/
passengers may run after A complaint based on a quasi-delict can be filed
the employer of the driver, against the pilots because of their fault and
pursuant to the employer’s negligence (NCC, Art. 2176). Fil-Asia Air can be
subsidiary liability under included for negligence in the selection and
Article 103, in relation to supervision of the pilots (NCC, Art. 2180).
Arts. 100 and 102, RPC.
Against the carrier and Tort A third cause of action may be a criminal prosecution
driver operating the for the reckless imprudence resulting in homicide
other vehicle at fault against two pilots. The airline will be subsidiary
liable for the civil liability, only after the pilots are
Against the common Subsidiary liability convicted and found to be insolvent.
carrier at fault
The liability of the common b. It is the driver of the ambulance and his employer
carrier and his driver as well who should be held liable for damages, because a
as the operator of the other passenger was run over. This is in accordance with
vehicle and his driver is joint Articles 2176 and 2180 of the Civil Code. There could
and several (J. Dimaampao, also be a criminal prosecution for reckless
citing Tiu vs. Arriesgado, G.R. imprudence resulting in homicide against the
No. 138060, September 1, ambulance driver and the consequent civil liability.
2004).
Since the airline employee was being transported
gratuitously, Fil-Asia Air was not required to exercise
Q: Fil-Asia Air Flight 9I6 was on a scheduled
extraordinary diligence for his safety and only
passenger flight from Manila when it crashed as it
ordinary care (Lara v. Valencia, G.R. L-9907, June 30,
landed at the Cagayan de Oro airport; the pilot
1958).
miscalculated the plane's approach and undershot
the runway. Ten passengers died at the crash scene.
LIABILITIES OF COMMON CARRIERS
One of them managed to leave the plane but was run
over by an ambulance coming to the rescue. Another Presumption of negligence in the carriage of goods
was an airline employee who hitched a free ride to (1997, 2001, 2008 Bar)
Cagayan de Oro and who was not in the passenger
manifest. GR: There is a presumption of negligence if the goods are
lost, destroyed or deteriorated
The Civil Aeronautics Authority investigation showed
XPNs:
that the co-pilot who had control of the plane's
1. Natural disaster or calamity which is the proximate
landing had less than the required flying and landing
cause of the loss (flood, storm, earthquake, lightning)
time experience, and should not have been in control

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 TRANSPORTATION LAWS
2. Acts of public enemy in war, whether international or
civil;
3. Act of omission of the shipper or passenger;
4. Character of the goods or defects in the packing or
container;
5. Order or act of competent public authority;
6. Exercise of extraordinary diligence. (NCC, Art. 1735).
Presumption of negligence in the transportation of
passengers (1990, 1994 Bar)
In case of death of or injuries to passengers, common
carriers are presumed to have been at fault or to have
acted negligently (NCC, Art. 1756). However, such
presumption may be refuted by proving observance of
extraordinary diligence as prescribed by article 1733 of
the NCC.
Though it is true that common carriers are presumed to
have been at fault or to have acted negligently if the goods
transported by them are lost, destroyed, or deteriorated,
and that the common carrier must prove that it exercised
extraordinary diligence in order to overcome the
presumption, the plaintiff must still, before the burden is
shifted to the defendant, prove that the subject shipment
suffered actual shortage. This can only be done if the
weight of the shipment at the port of origin and its
subsequent weight at the port of arrival have been proven
by a preponderance of evidence, and it can be seen that
the former weight is considerably greater than the latter
weight, taking into consideration the exceptions provided
in Article 1734 of the Civil Code. In this case, respondent
failed to prove that the subject shipment suffered
shortage, for it was not able to establish that the subject
shipment was weighed at the port of origin at Darrow,
Louisiana, U.S.A. and that the actual weight of the said
shipment was 3,300 metric tons. (Asian Terminals, Inc. v.
Simon Enterprises, Inc., G.R. No. 177116, February 27,
2013).
Q: Peter hailed a taxicab owned and operated by
Jimmy Cheng and driven by Hermie Cortez. On the
way to Malate, the taxicab collided with a passenger
jeepney, as a result of which Peter’s left leg was
fractured. Peter sued Jimmy for damages, based on
contract of carriage, and Peter won. Jimmy wanted to
challenge the decision before the SC on the ground
that the trial court erred in not making an express
finding as to whether or not Jimmy was responsible
for the collision and, hence, civilly liable to Peter. He
went to see you for advice. He went to see you for
advice. What will you tell him? Explain (1990 Bar)
A: I will advise Jimmy to desist from challenging the
decision. The action of Peter being based in culpa
contractual, the carrier’s negligence is presumed upon the
breach of contract. The burden of proof instead would lie
in Jimmy to establish that despite an exercise of utmost
diligence the collision could not have been avoided.
Q: In a court case involving claims for damages
arising from death and injury of bus passengers,
counsel for the bus operator filed a demurrer to
evidence arguing that the complaint should be
dismissed because the plaintiffs did not submit any
115
evidence that the operator or its employees were
negligent. If you were the judge, would you dismiss
the complaint? (1997 Bar)
A: No. In the carriage of passengers, the failure of the
common carrier to bring the passengers safely to their
destination immediately raises the presumption that
such failure is attributable to the carrier‘s fault or
negligence. In the case at bar, the fact of death and injury
of the bus passengers raises the presumption of fault or
negligence on the part of the carrier. The carrier must
rebut such presumption. Otherwise, the conclusion can
be properly made that the carrier failed to exercise
extraordinary diligence as required by law.
Moral damages in case of breach of contract of
transportation
GR: Moral damages are not recoverable in breach of
contract of transportation because such contract cannot
be considered included in the “analogous cases” used in
Article 2219 of the NCC. Also, Art. 2176 of the NCC
expressly excludes the cases where there is a “pre-
existing contractual relation between the parties”
(Versoza vs. Baytan, et al., G.R. L-14092, April 29, 1960).
XPNs: Moral damages may be recovered even in case of
breach of contract of transportation in the following
cases:
1. Where the mishap results in the death of the
passenger (M. Ruiz Highway Transit, Inc. vs. CA, G.R. L-
16086, May 29, 1964).
2. Where it is proved that the carrier was guilty of fraud
or bad faith, even if death does not result (Rex
Taxicab Co. vs. Bautista, GR No. L-15392, September
30, 1960).
Although the relation of passenger and carrier is
"contractual both in origin and nature" nevertheless “the
act that breaks the contract may be also a tort" when said
act is done with gross negligence or with bad faith (Air
France v Carrascoso, G.R. No. L-21438, September 28,
1966).
Q: Vivian Martin was booked by PAL, which acted as
ticketing agent of Far East Airlines, for a round trip
flight on the latter’s aircraft, from Manila–Hongkong-
Manila. The ticket was cut by an employee of PAL. The
ticket showed that Vivian was scheduled to leave
Manila at 5:30p.m. Vivian arrived at NAIA an hour
before the time scheduled in her ticket, but was told
her flight had left at 12:10p.m. It turned out that the
ticket was inadvertently cut and wrongly worded.
PAL employees nevertheless scheduled her to fly two
hours later aboard their plane. She agreed and
arrived in Hongkong safely. The aircraft used by Far
East Airlines had an engine trouble, and did not make
it to HK but returned to Manila. Vivian sued both PAL
and Far East. Could either or both airlines be held
liable to Vivian? Why? (2003 Bar)
A: The instant petition was based on breach of contract of
carriage; therefore, Vivian can only sue Far East Airlines
alone, and not PAL, since the latter was not a party to the
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
contract. However, this is not to say that PAL is relieved
from any liability due to any of its negligent acts. In China
Air Lines, Ltd. v. Court of Appeals, while not exactly in
point; however, illustrates the principle which governs
this particular situation. In that case, the carrier (PAL),
acting as an agent of another carrier, is also liable for its
own negligent acts or omission in the performance of its
duties. Far East Airline may also file a third-party
complaint against PAL for the purpose of determining
who was primarily at fault between them. It is but logical,
fair and equitable to allow BA to sue PAL for
indemnification, if it is proven that the latter’s negligence
was the proximate cause of Vivian’s unfortunate
experience, instead of totally absolving PAL from any
liability. (British Airways v. CA, G.R. 121824, January 29,
1998)
VIGILANCE OVER GOODS
EXEMPTING CAUSES
Presumption on the loss, destruction, or
deterioration of goods
GR: The common carrier is presumed to have been at fault
or to have acted negligently when the goods transported
are lost, destroyed or deteriorated (NCC, Art. 1735).
XPNs: When the same is due to any of the following causes
only: (FA2 – C O)
1. Fortuitous events (Flood, storm, earthquake,
lightning or other natural disaster or calamity).
Provided, the following conditions are present:
a. Natural disaster was the proximate and only
cause;
b. Carrier exercised due diligence to prevent or
minimize loss before, during and after the
occurrence of the natural disaster; and
c. The common carrier has not negligently
incurred delay in transporting the goods (NCC,
Art. 1739-1740).
2. Act of the public enemy in war, whether international
or civil, provided:
a. Act was the proximate and only cause; and
b. Carrier exercised due diligence to prevent or
minimize loss before, during and after the act
(NCC, Art. 1739-1740).
3. Act or omission of the shipper or owner of the goods,
provided:
a. If proximate and only cause – exempting
b. If contributory negligence – mitigating
4. The Character of the goods or defects in the packing
or in the containers; provided, carrier exercised due
diligence to forestall or prevent loss (NCC, Art 1742).
If the fact of improper packing is known to the carrier
or its servants, or apparent upon ordinary
observation, but it accepts the goods
notwithstanding such condition, it is not relieved
from responsibility for loss or injury resulting there
UNIVERSITY OF SANTO TOMAS
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116
from (Southern Lines Inc., v. CA, GR No. L-16629,
January 31, 1962).
5. Order or act of competent authority; provided, the
authority is with power to issue the order (Art. 1743).
If the officer acts without legal process, the common
carrier will be held liable (Ganzon vs. CA, GR No. L-
48757, May 30, 1988).
In all cases other than those enumerated above, there is
presumption of negligence even if there is an agreement
limiting the liability of the common carrier in the vigilance
over the goods.
REQUIREMENT OF ABSENCE OF NEGLIGENCE
Requisites of a fortuitous event (FEU-I)
1. The debtor must be Free from any participation in or
aggravation of the injury to the creditor.
2. The Event must be such as to render it impossible for
the debtor to fulfill his obligation in a normal manner.
3. The event must be Unforeseen or unavoidable.
4. The cause of the breach of obligation must be
Independent of the will of the debtor (Real v. Belo, GR
No. 146224, January 26, 2007).
Mechanical defects is not fortuitous event
Mechanical defects in the carrier are NOT considered
a caso fortuito that exempts the carrier from
responsibility (Sweet Lines, Inc. v. CA, GR No. L-46340, Apr.
29, 1983).
Tire blowout of a jeep is not a fortuitous event where
there exists a specific act of negligence by the carrier
consisting of the fact that the jeepney was overloaded and
speeding at the time of the incident (Juntilla v. Fontanar,
GR No. L-45637, May 31, 1985).
Defective brakes cannot be considered fortuitous in
character (Vergara v. CA, G.R. No. 77679, September 30,
1987).
Fire is not considered a natural disaster
Fire arises almost invariably from some act of man or by
human means. It does not fall within the category of an act
of God UNLESS caused by lightning or by other natural
disaster or calamity. It may even be caused by the actual
fault or privity of the carrier (Eastern Shipping Lines v. IAC,
GR No. L-69044, May 29, 1987).
But if the outbreak of fire is due to a crack in the auxiliary
engine fuel oil service truck, which resulted in the loss of
cargoes, that is not due to a force majeure but to
negligence (Edgar Cokaliong Shipping Lines, Inc. v. UCPB
General Insurance Company, Inc., G.R. No. 146018, June 25,
2008).
NOTE: In case that the goods have been already deposited
in the warehouse of Bureau of Customs then the goods
was destroyed by fire, the carrier is not anymore liable
(Servando vs. Philippine Steam Navigation, GR No. L-
36481-2, October 23, 1982).
 TRANSPORTATION LAWS
Typhoon as a fortuitous event
GR: If all the elements of a natural disaster or calamity
concur and there was no contributory negligence or delay,
the occurrence of a typhoon is a fortuitous event. This
holds true especially if the vessel was seaworthy at the
time it undertook that fateful voyage and that it was
confirmed with the Coast Guard that the weather
condition would permit safe travel of the vessel to its
destination (Philippine American General Insurance Co.,
Inc. v. MGG Marine Services, Inc., G.R. No. 135645, March 8,
2002).
The loss of cargoes due to the sinking of a seaworthy
tugboat which was suddenly tossed by waves of
extraordinary height is due to a force majeure (Philippine
American General Insurance Company v. PKS Shipping
Company, G.R. 149038, April 9, 2003).
XPN: If a vessel sank due to a typhoon, and there was
failure to ascertain the direction of the storm and the
weather condition of the path they would be traversing, it
constitutes lack of foresight and minimum vigilance over
its cargoes taking into account the surrounding
circumstances of the case. Thus, the common carrier will
still be liable (Arada v. CA, G.R. No. 98243, July 1, 1992).
However, where a vessel encountered stormy weather
and the coils of wire it was transporting became rusty
because rain entered the hatch of the vessel, the damage
was not due to a fortuitous event, because heavy rains are
foreseeable and rain would not have entered the hatch if
it was closed properly (Eastern Shipping Lines v. CA, G.R.
97412, July 12, 1994).
Q: On a clear weather, M/V Sundo, carrying insured
cargo, left the port of Manila bound for Cebu. While at
sea, the vessel encountered a strong typhoon forcing
the captain to steer the vessel to the nearest island
where it stayed for seven days. The vessel ran out of
provisions for its passengers. Consequently, the
vessel proceeded to Leyte to replenish its supplies.
Assuming that the cargo was damaged because of
such deviation, who between the insurance company
and the owner of the cargo bears the loss? Explain.
A: The insurance company is liable. It is an instance of a
valid deviation because the strong typhoon is a fortuitous
event over which neither the master nor the owner has
any control. Deviation is likewise proper in order to avoid
a peril. Common carriers are responsible for the loss,
destruction, deterioration of the goods unless the same is
due to any of the following causes only, among others is
when there is flood, storm, earthquake, lightning or other
natural disaster or calamities. Moreover, a common
carrier is bound to transport cargo and passengers with
extraordinary diligence. Such deviation is just proper in
its exercise of extraordinary diligence.
Common carrier’s liability for the acts of strangers or
criminals
GR: A common carrier is liable even for acts of strangers
like thieves or robbers.
117
XPN: Where such thieves or robbers acted "with grave or
irresistible threat, violence or force." The common carrier
is not liable for the value of the undelivered merchandise
which was lost because of an event that is beyond his
control (De Guzman v. CA, supra).
When an airline company was not authorized to search
passengers for firearms, the loss of the jewelry and cash
of a passenger because of an armed robbery committed
by other passengers is a force majeure, for which the
airline company is not liable (Quisumbing v. CA, G.R. No L-
50076, September 14, 1990).
A bus operator is not liable for the injury suffered by a
passenger when a bystander stoned the bus, because a
common carrier is not liable for the injury of passengers
caused by strangers over whom it had no control and the
bus operator is only responsible if the bus operator could
have prevented such injury by the exercise of the
diligence of a good father of a family, for the bus operator
is not an isurer of the absolutely safety of passengers
(Pilapil v. CA, G.R. No. 52159, December 22, 1989).
Q: M. Dizon Trucking entered into hauling contract
with Fairgoods Co whereby the former bound itself to
haul the latter’s 2000 sacks of soya bean meal from
Manila Port Area to Calamba, Laguna. To carry out
faithfully its obligation Dizon subcontracted with
Enrico Reyes the delivery of 400 sacks of the Soya
bean meal. Aside from the driver, three male
employees of Reyes rode on the truck with the cargo.
While the truck was on its way to Laguna two
strangers suddenly stopped the truck and hijacked
the cargo. Investigation by the police disclosed that
one of the hijackers was armed with a bladed weapon
while the other was unarmed. For failure to deliver
the 400 sacks, Fairgoods sued Dizon for damages.
Dizon in turn set up a third party complaint against
Reyes which the latter registered on the ground that
the loss was due to force majeure. Did the hijacking
constitute force majeure to exculpate Reyes from any
liability? (1995 Bar)
A: No. The hijacking in this case cannot be considered as
force majeure. Only one of the two hijackers was armed
with a bladed weapon. As against four male employees of
Reyes, two (2) hijackers, with only one of them being
armed with a bladed weapon, cannot be considered force
majeure. The hijackers did not act with grave or
irresistible threat, violence, or force.
ABSENCE OF DELAY
Rules regarding the time of delivery of goods and
delay
1. If there is an agreement as to time of delivery –
delivery must be within the time stipulated in the
contract or bill of lading.
2. If there is no agreement – delivery must be within a
reasonable time (Saludo, Jr. v. CA, G.R. No. 95536,
March 23, 1992).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Delay in the delivery of goods
The carrier shall be liable for damages immediately and
proximately resulting from such neglect of duty (ibid;
NCC, Art. 1170).
In the absence if a special contract, a carrier is not an
insurer against delay in the transportation of goods. The
effects of delay follow:
a. Excusable delay in carriage merely suspends and
generally does not terminate the contract of carriage.
b. The carrier shall be made liable when vessel or
vehicle is unreasonably delayed
c. Carrier remains duty bound to exercise
extraordinary diligence
d. Natural disaster shall not free the carrier from
responsibility. (Dimaampao & Dumlao-Escalante,
2014)
However, where the delay in the transportation of the
remains of a deceased person was due to the fault of the
mortuary service, who erroneously switched the casket
with that of another deceased person, the airline company
cannot be held liable for damages because of the delay
(Saludo v. CA, supra).
Although the delivery of the suitcase of a passenger was
delayed by eleven days, an airline company cannot be
held liable for moral damages, exemplary damages, and
attorney’s fees, where the airline company was not guilty
of bad faith and exerted efforts in tracing the suitcase
(Philippine Air Lines v. Miano, G.R. No. 106664, March 8,
1995).
If the common carrier, without just cause, delays the
transportation of the goods or changes the stipulated or
usual route, the contract limiting the common carrier’s
liability cannot be availed of in case of the loss,
destruction, or deterioration of the goods (NCC, Art. 1747).
An agreement limiting the common carrier’s liability for
delay on account of strikes or riots is valid (NCC, Art.
1748).
DUE DILIGENCE TO PREVENT OR LESSEN LOSS
The common carrier must exercise due diligence to
prevent or minimize loss before, during and after the
occurrence of flood, storm or other natural disaster or an
act of a public enemy in order that the common carrier
may be exempted from liability for the loss, destruction or
deterioration of the goods (NCC, Art. 1739).
This exemption from liability also requires that the
common carrier must prove that the natural disaster or
the act of the public enemy is the proximate and only
cause of the loss. Further, if the common carrier
negligently incurs delay in transporting the goods, a
natural disaster shall not free such carrier from
responsibility (NCC, Art. 1740).
If the loss, destruction, or deterioration of the goods was
caused by the character of the goods, or the faulty nature
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
118
of the packing or the containers, the common carrier must
exercise due diligence to forestall or lessen the loss.
CONTRIBUTORY NEGLIGENCE
Contributory negligence is the failure of a person who has
been exposed to injury by the fault or negligence of
another, to use such degree of care for his safety and
protection an ordinarily prudent man would use under
the circumstances (Martin, 1989, citing Rakes vs. Atlantic
Gulf Co., G.R. No. 1719, January 23, 1907).
Contributory negligence on the part of the passenger does
not justify the common carrier’s exemption from liability
(Martin, 1989).
Q: Nelson owned and controlled the Sonnel
Construction Company. Acting for the company,
Nelson contracted the construction of a building.
Without first installing a protective net atop the
sidewalks adjoining the construction site, the
company proceeded with the construction work. One
day, a heavy piece of lumber fell from the building. It
smashed a taxicab which at that time had gone
offroad and onto the sidewalk in order to avoid the
traffic. The taxicab passengers died as a result.
a. If you were the counsel for Sonnel Construction,
how would you defend you client? What would be
your theory?
b. Could the heirs hold the taxicab owner and driver
liable? Explain. (2008 Bar)
A:
a. I shall raise the affirmative defense of contributory
negligence. The proximate cause of death is the
violation of the taxi driver of traffic rules and
regulations when it drove offroad to avoid heavy
traffic. The lumber that fell from the building was
only the immediate cause of death of the victims.
Further, Sonnel Construction, exercised due
diligence in the selection and supervision of its
employees.
b. Yes. Both taxicab owner and driver may be held
liable based on breach of contract of carriage and
negligence in the selection and supervision of
employees for quasi-delict. The driver can be held
criminally liable for reckless imprudence resulting to
homicide and for damages under quasi-delict as
provided in Article 2180— an employer may be held
solidarily liable for the negligent act of his employee.
Hence, in this case, the taxicab owner is exempted
from liability while the taxi cab driver is liable solely
and personally for criminal prosecution.
Rule if there is contributory negligence on the part of
the shipper
If the shipper or owner merely contributed to the loss,
destruction or deterioration of the goods, the proximate
cause thereof being the negligence of the common carrier,
the latter shall be liable for damages, which however, shall
be equitably reduced (NCC, Art. 1741).
 TRANSPORTATION LAWS
ACTUAL OR CONSTRUCTIVE DELIVERY
Party to whom delivery should be made
It must be delivered, actually or constructively, to the
consignee or to the person who has a right to receive them
(Art.1736, NCC).
Delivery of the cargo to the customs authorities is not
delivery to the consignee, or to the person who has a right
to receive them (Lu Do & Lu Ym Corp. vs. Binamira, G.R. No.
L-9840, April 22, 1957).
Constructive delivery
There is constructive delivery when delivery is effected
not by actually transferring the possession of thing to the
vendee (in this case, the other party, either the carrier or
the consignee) but by legal formalities or by symbolic
tradition (Pineda, 2010).
Misdelivery by a carrier who was chosen by the buyer
Misdelivery of the goods is attributable to the carrier and
not to the seller. And, since the carrier was chosen and
authorized to make the delivery by the buyer itself, the
seller cannot be held responsible for such misdelivery
(Smith, Bell & Co. [Phils.] vs. Gimenez, G.R. No.L-17617, June
29, 1963).
TEMPORARY UNLOADING OR STORAGE
Right of stoppage in transitu
It is the right exercised by the seller by stopping the
delivery of the goods to a certain buyer or consignee
(because of insolvency) when such goods are already in
transit (NCC, Art. 1530).
The seller may exercise this right either by obtaining
actual possession of the goods or by giving notice of his
claim to the carrier or other bailee in whose possession
the goods are. Such notice may be given either to the
person in actual possession of the goods or to his
principal. In the latter case, the notice, to be effectual,
must be given at such time and under such circumstances
that the principal, by the exercise of reasonable diligence,
may prevent a delivery to the buyer (NCC, Art. 1532).
GR: The common carrier’s duty to observe extraordinary
diligence in the vigilance over the goods remains in full
force and effect even when they are temporarily unloaded
or stored in transit.
XPN: When the shipper or owner has made use of the
right of stoppage in transit (NCC, Art. 1737).
The diligence required is ordinary diligence because of
the following:
1. It is holding the goods in the capacity of an ordinary
bailee or warehouseman and not as a carrier
2. There is a change of contract from a contract of
carriage to a contract of deposit (NCC, Art. 1737).
119
Obligation required of the common carrier in case of
stoppage in transitu
When notice of stoppage in transitu is given by the seller
to the carrier, he must redeliver the goods to, or according
to the directions of, the seller. The expenses of such
delivery must be borne by the seller (NCC, Art. 1532).
NOTE: If the seller instructs to deliver it somewhere else,
a new contract of carriage is formed and the carrier must
be paid accordingly.
STIPULATION FOR LIMITATION OF LIABILITY
Valid stipulations that a common carrier of goods may
indicate in a contract in order to escape liability
1. A stipulation limiting the liability of the common
carrier for the loss, destruction, or deterioration of
the goods to a degree less than extraordinary
diligence, provided it be:
a. In writing, signed by the shipper or owner;
b. Supported by a valuable consideration other
than the service rendered by the common
carrier, and
c. Reasonable, just and not contrary to public
policy.
2. An agreement limiting the common carrier's liability
for delay on account of strikes or riots (NCC, Art.
1748).
3. A stipulation that the common carrier's liability is
limited to the value of the goods appearing in the bill
of lading, unless the shipper or owner declares a
greater value (NCC, Art. 1749, 1998, 2002 Bar).
4. A contract fixing the sum that may be recovered by
the owner or shipper for the loss, destruction, or
deterioration of the goods (NCC, Art. 1750).
Notwithstanding these valid stipulations, a common
carrier can be held liable for the loss, or destruction or
deterioration of the goods. If the common carrier, without
just cause, delays the transportation of the goods or
changes the stipulated or usual route, the contract
limiting the common carrier's liability cannot be availed
of in case of the loss, destruction, or deterioration of the
goods (NCC, Art. 1747).
Even if there is an agreement limiting the liability of the
common carrier in the vigilance over the goods, the
common carrier is still disputably presumed to have been
negligent in case of its loss, destruction or deterioration
(NCC, Art. 1752).
Q: X took a plane from Manila bound for Davao via
Cebu where there was a change of planes. X arrived in
Davao safely but to his dismay, his two suitcases were
left behind in Cebu. The airline company assured X
that the suitcases would come in the next flight but
they never did. X claimed P2,000.00 for the loss of
both suitcases, but the airline was willing to pay only
P500.00 because the airline ticket stipulated that
unless a higher value was declared, any claim for loss
cannot exceed P250 for each piece of luggage. X
reasoned out that he did not sign the stipulation and
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
in fact had not even read it. X did not declare a greater
value despite the fact that the clerk had called the
attention to the stipulation in the ticket. (1998 Bar)
A: X is bound by the stipulation written in the ticket
because he consented to the terms and conditions thereof
from the moment he availed the services of the carrier.
The fact that he did not sign the ticket and he was not able
to declare the true value of his luggage is not a valid claim
in order for the carrier to pay for the value of the lost
luggage. As a general rule, the liability of the common
carrier shall not exceed the stipulation in a contract of
carriage even if the loss or damage results from the
carrier’s negligence (Eastern and Australian Shipping Co.,
v. Great American Insurance Co., G.R. No. L-37604, October
23, 1981). However, it is subject to an exception as when
the shipper or owner of the goods declares a greater value
and pays corresponding freight (Art. 1749). X, therefore is
entitled to P500 for the two pieces of luggage lost.
Annulment of a stipulation limiting the common
carrier’s liability by the shipper or owner
A stipulation limiting the common carrier’s liability may
be annulled by the shipper or owner if the common
carrier refused to carry the goods unless the shipper or
owner agreed to such stipulation (NCC, Art. 1746).
However, under this provision, annulment of the
agreement limiting the carrier’s liability is still necessary
(Martin, 1989).
Defenses available to any common carrier to limit
or exempt it from liability
1. Observance of extraordinary diligence,
2. The proximate cause of the incident is a
fortuitous event or force majeure,
3. The actor’s omission of the shipper or owner of the
goods,
4. The character of the goods or defects in the
packing or in the containers, and
5. Order or act of competent public authority, with out
the common carrier being guilty of even simple
negligence (NCC, Art. 1734).
VOID STIPULATIONS
Void stipulations in a contract of carriage of goods
(CR2UELED)
1. That the common carrier need not observe any
diligence in the Custody of the goods
2. That the goods are transported at the Risk of the
owner or shipper
3. That the common carrier’s liability for acts
committed by thieves, or of Robbers who do not act
with grave or irresistible threat, violence or force, is
dispensed with or diminished
4. Any similar stipulation that is Unreasonable, unjust
and contrary to public policy
5. That the common carrier shall Exercise a degree of
diligence less than that of a good father of a family, or
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a man of ordinary prudence in the vigilance over the
movables transported
6. That the common carrier will not be liable for any
Loss, destruction, or deterioration of the goods
7. That the common carrier shall not be responsible for
the acts or omissions of his or its Employees
8. That the common carrier is not responsible for the
loss, destruction or deterioration of goods on account
of the Defective condition of the car, vehicle, ship,
airplane or other equipment used in the contract of
carriage (NCC, Art. 1745).
Q: Discuss whether or not the following stipulations
in a contract of carriage of a common carrier are
valid:
1. A stipulation limiting the sum that may be
recovered by the shipper or owner to 90% of the
value of the goods in case of loss due to theft.
2. A stipulation that in the event of loss, destruction
or deterioration of goods on account of the
defective condition of the vehicle used in the
contract of carriage, the carrier’s liability is
limited to the value of the goods appearing in the
bill of lading unless the shipper or owner
declares a higher value (2002 Bar)
A:
1. Invalid. Article 1745 provides that a stipulation
which dispenses or diminishes the common carrier’s
liability for acts committed by thieves or robbers
who do not act with grave and irresistible force,
threat or violence is unreasonable, unjust, and
contrary to public policy.
2. Valid. Article 1749 provides that a stipulation
limiting the carrier’s liability to the value of the goods
appearing in the bill of lading unless the shipper or
owner declares a higher value, is binding.
LIMITATION OF LIABILITY TO FIXED AMOUNT
A contract fixing the sum that may be recovered for the
loss, destruction, and deterioration of goods is binding
provided that it is:
1. Just and reasonable under the circumstances and
2. It has been fairly and freely agreed upon (NCC, Art.
1750).
LIMITATION OF LIABILITY IN THE ABSENCE OF
DECLARATION OF GREATER VALUE
GR: The liability of the common carrier shall not exceed
the stipulation in a contract of carriage even if the loss or
damage results from the carrier's negligence (Eastern and
Australian Shipping Co. vs. Great American Insurance Co.,
GR No. L-37604, October 23, 1981).
XPN: Common carrier’s liability may be extended beyond
the specified amount mentioned if:
1. the shipper or owner of the goods declares a greater
value and;
2. pays corresponding freight (NCC, Art. 1749).
The liability of an airline company for lost baggage is
limited to the amount stated in the ticket unless the
 TRANSPORTATION LAWS
passenger declared a higher valuation and paid additional
fare (Pan American World Airways, Inc. vs. Intermediate
Appellate Court, G.R. No. 70462, August 11, 1988).
But when the goods being shipped are packed in cartons
placed in containers supplied by the carrier and the
number of cartons is disclosed in the shipping documents,
it is the number of cartons and not of the containers that
should be used in computing the liability of the carrier for
the loss of the goods, as it is the cartons that constitute the
packages (Eastern Shipping Lines, Inc. vs. Intermediate
Appellate Court, G.R. No. L-71478, May 29, 1987).
LIABILITY FOR BAGGAGE OF PASSENGERS
CHECKED-IN BAGGAGE
The provisions of Articles 1733 to 1753, NCC shall apply
(NCC, Art. 1754).
An airline company is liable for moral damages where it
left behind the luggage of a passenger and its employees
did not assist the passenger in locating his luggage but
instead treated him boorishly (Pan American World
Airways vs. Intermediate Appellate Court, G.R. No. 68988,
June 21, 1990).
BAGGAGE IN POSSESSION OF PASSENGERS
The rules in Articles 1998 and 2000 to 2003, NCC
concerning the responsibility of hotel-keepers for
necessary deposit shall be applicable (ibid):
1. The common carrier shall be responsible for
shipper’s baggage as depositaries, provided that:
a. notice was given to them, or to their
employees, of the effects brought by the
guests and;
b. on the part of the shipper, they take the
precautions which said common carriers or
their substitutes advised relative to the
care and vigilance of their effects (NCC, Art.
1998).
2. The responsibility shall include the loss of, or injury
to the personal property of the shipper caused by the
employees of the common carrier as well as
strangers; but not that which may proceed from any
force majeure (NCC, Art. 2000).
3. The act of a thief or robber, who has entered the
carrier is not deemed force majeure, unless it is done
with the use of arms or through an irresistible force
(NCC, Art. 2001).
4. The common carrier is not liable for compensation if
the loss is due to the acts of the shipper, his family, or
servants, or if the loss arises from the character of the
things brought into the carrier (NCC, Art. 2002).
5. The common carrier cannot free himself from
responsibility by posting notices to the effect that he
is not liable for the articles brought by the passenger.
Any stipulation between the common carrier and the
shipper whereby the responsibility of the former as
121
set forth in Articles 1998 to 2001 is suppressed or
diminished shall be void (NCC, Art. 2003).
Q: Pasahero, a paying passenger, boarded a Victory
Liner bus bound for Olongapo. He chose a seat at the
front near the bus driver. Pasahero told the bus driver
that he had valuable items in his bag which was
placed near his feet. Since he had not slept 24 hours,
he requested the driver to keep an eye on the bag
should he doze off during the trip.
While Pasahero was asleep, another passenger
took the bag away and alighted at Guagua,
Pampanga. Is Victory Liner liable to Pasahero?
Explain. (1987 Bar)
A: The responsibility of common carriers in the case of
loss or damage to hand-carried baggage is governed by
the rule on necessary deposits. The common carrier is
thus liable for the loss of the personal property caused by
its employees or by strangers. In this case, the passenger
told the driver that he had valuable item placed beside the
driver’s seat. If the driver exercised due diligence, he
could have prevented the loss of the bag.
SAFETY OF PASSENGERS
A common carrier is bound to carry the passengers safely
as far as human care and foresight can provide, using the
utmost diligence of very cautious persons, with a due
regard for all the circumstances (NCC, Art. 1755).
Who are not considered passengers (WAMU)
1. One who has boarded a Wrong vehicle, has been
properly informed of such fact, and on alighting, is
injured by the carrier.
2. Invited guests and Accommodation passengers.
3. One who attempts to board a Moving vehicle,
although he has a ticket, unless the attempt be with
the knowledge and consent of the carrier.
4. One who remains on a carrier for an Unreasonable
length of time after he has been afforded every safe
opportunity to alight.
The carrier is thus NOT obliged to exercise extraordinary
diligence but only ordinary diligence in these instances.
Assumption of risk on the part of passengers
Passengers must take such risks incident to the mode of
travel. The passenger must observe the diligence of a good
father of a family to avoid injury to himself (NCC, Art.
1761).
Carriers are not insurers of any and all risks to passengers
and goods. It merely undertakes to perform certain duties
to the public as the law imposes, and holds itself liable for
any breach thereof (Pilapil v. CA, G.R. No. 52159, Dec. 22,
1989).
VOID STIPULATIONS
Stipulations limiting the liability of common carrier
in case of injury or death
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
GR: The responsibility of a common carrier for the safety
of passengers cannot be dispensed with or lessened by
stipulation, by posting of notices, by statements on tickets,
or otherwise (NCC, Art. 1757).
XPN: When a passenger is carried gratuitously, a
stipulation limiting the common carrier’s liability for
negligence is valid (NCC, Art. 1758).
The passenger must be carried gratuitously. If it is only a
reduction of fare, then any limitation of the common
carrier’s liability is not justified (2001, 2009 Bar).
XPN to the XPN: Notwithstanding the exception, common
carriers will be liable nevertheless for willful acts or gross
negligence.
DURATION OF LIABILITY
Observance of extraordinary diligence in transporation of
goods commences from the moment the person who
purchases the ticket from the carrier presents himself at
the proper place and in a proper manner to be
transported, and continues until the passenger has been
landed at the port of destination and has left the vessel
owner’s dock or premises
WAITING FOR CARRIER OR
BOARDING OF CARRIER
It is the duty of common carriers of passengers, including
common carriers by railroad train, streetcar, or motorbus,
to stop their conveyances a reasonable length of time in
order to afford passengers an opportunity to board and
enter, and they are liable for injuries suffered by boarding
passengers resulting from the sudden starting up or
jerking of their conveyances while they are doing so
(Dangwa vs. CA, G.R. No. 95582, October 7, 1991).
Q: A bus of GL Transit on its way to Davao stopped to
enable a passenger to alight. At that moment, Santiago
who had been waiting for a ride, boarded the bus.
However, the bus driver failed to notice Santiago who
was still standing on the bus platform, and stepped on
the accelerator. Because of the sudden motion,
Santiago slipped and fell down suffering serious
injuries. Is GL Transit liable? (1996 Bar)
A: Yes. Santiago may hold GL Transit liable for breach of
contract of carriage. It was the duty of the driver, when he
stopped the bus, to do no act that would have the effect of
increasing the peril to a passenger such as Santiago while
he attempting to board the same. When a bus is not in
motion there is no necessity for a person who wants to
ride the same to signal his intention to board. A public
utility bus, once it stops, is in effect making continuous
offer to bus riders. It is the duty of common carriers of
passengers to stop heir conveyances while they are doing
so. Santiago, by stepping and standing on the platform of
the bus is already considered as a passenger and is
entitled to all the rights and protection pertaining to a
contract of carriage (Dangwa Trans. Co. v. CA, G.R. 95582,
October 7, 1991).
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Q: City Railways, Inc. (CRI) provides train service, for
a fee, to commuters from Manila to Calamba, Laguna.
Commuters are required to purchase tickets and then
proceed to designated loading and unloading
facilities to board the train. Ricardo Santos purchased
the ticket for Calamba and entered the station. While
waiting, he had an altercation with the security guard
of CRI leading to a fistfight. Ricardo Santos fell on the
railway just as a train was entering the station.
Ricardo Santos was run over by the train. He died. CRI
contented that the mishap occurred before Ricardo
Santos boarded the train and that it was not guilty of
negligence. Decide. (2008 Bar)
A: The contention of CRI must fail. The duty of a common
carrier to provide safety to its passengers is not only
during the course of the trip but for so long as the
passenger are within its premises and where they ought
to be in pursuance to the contract of carriage.
Furthermore, the common carrier will still be liable even
though its employees acted beyond the scope of their
work. (Light Rail Transit Authority vs. Navidad, G.R. No.
145804 February 6, 2003)
When a Public Utility Vehicle is not in motion, it is not
necessary for a person who wants to ride the same to
signal his intention to board
When the bus is not in motion there is no necessity for a
person who wants to ride the same to signal his intention
to board. A public utility bus, once it stops, is in effect
making a continuous offer to bus riders. Hence, it becomes
the duty of the driver and the conductor, every time the
bus stops, to do no act that would have the effect of
increasing the peril to a passenger while he was
attempting to board the same. The premature
acceleration of the bus in this case was a breach of such
duty.
A person, by stepping and standing on the platform of the
bus, is already considered a passenger and is entitled all
the rights and protection pertaining to such a contractual
relation. Hence, it has been held that the duty which the
carrier owes to its patrons extends to persons boarding
cars as well as to those alighting therefrom (Dangwa
Trans. Co. v. CA, supra).
Q: P, a sales girl in a flower shop at the Ayala Station
of the MRT bought 2 tokens or tickets, one for her ride
to work and another for her ride home. She got to her
flower shop where she usually worked. While P was
attending to her duties at the flower shop, 2 crews of
the MRT got into a fight near the flower shop, causing
injuries to P in the process. Can P sue the MRT for
contractual breach as she was within the MRT
premises where she would shortly take her ride
home? (2011 Bar)
A: No, P had no intention to board an MRT train coach
when the incident occurred.
ARRIVAL AT DESTINATION
Liability for death or injury to passengers upon
arrival at destination
 TRANSPORTATION LAWS
Once created, the relationship will not ordinarily
terminate until the passenger has, after reaching his
destination, safely alighted from the carrier's conveyance
or had a reasonable opportunity to leave the carrier's
premises. All persons who remain on the premises a
reasonable time after leaving the conveyance are to be
deemed passengers, and what is a reasonable time or a
reasonable delay within this rule is to be determined from
all the circumstances, and includes a reasonable time to
see after his baggage and prepare for his departure (La
Mallorca v. CA, G.R. No. L-21486, May 14, 1966).
Carrier-passenger relationship continues until the
passenger has been landed at the port of destination and
has left the vessel-owner’s premises. The victim’s
presence in a vessel after 1 hour from his disembarkation
is not enough in order to absolve the carrier from liability
in his death. (Aboitiz Shipping Corporation v. CA, GR No.
84458, November 6, 1989).
Q: Robert De Alban and his family rode a bus owned
by Joeben Bus Company. Upon reaching their desired
destination, they alighted from the bus but Robert
returned to get their baggage. However, his youngest
daughter followed him without his knowledge. When
he stepped into the bus again, the bus accelerated that
resulting to Robert’s daughter death. The bus ran
over her. Is the bus company liable?
A: Yes. The relation of carrier and passenger does not
cease at the moment the passenger alights from the
carrier’s vehicle at a place selected by the carrier at the
point of destination, but continues until the passenger has
had a reasonable time or reasonable opportunity to leave
the current premises (La Mallorca v. CA, GR L-20761, July
27 1966).
LIABILITY FOR ACTS OF OTHERS
EMPLOYEES
Common carriers are liable for the acts of their
employees
Common carriers are liable for the death of or injuries to
passengers through the negligence or willful acts of the
former’s employees, although such employees may have
acted beyond the scope of their authority or in violation
of the orders of the common carriers. The liability of the
common carriers does not cease upon proof that they
exercised all the diligence of a good father of a family in
the selection and supervision of their employees (NCC,
Art. 1759).
The liability of the common carrier to the personal
violence of its employees or agents upon its passengers
extends only to those acts which the carrier could foresee
or avoid through the exercise of the diligence required.
Q: At around 8:45 in the morning, A, after having
alighted from a passenger bus in front of Robinsons
Galleria along the north-bound lane of EDSA, was hit
and run over by a bus driven by B, who was then
employed by C Transport Company. A was
123
immediately rushed to the hospital where she was
pronounced dead on arrival. Who should be held
liable for the death of A? B, the bus driver, C Transport
Company, or both?
A: Both B and C Transport Company should be held liable
for the death of A. Under Article 2180 of the New Civil
Code, employers are liable for the damages caused by
their employees acting within the scope of their assigned
tasks. Once negligence on the part of the employee is
established, a presumption instantly arises that the
employer was remiss in the selection and/or supervision
of the negligent employee. It is incumbent upon the
employer to rebut this presumption by presenting
adequate and convincing proof that it exercised the care
and diligence of a good father of a family in the selection
and supervision of its employees. Failure to do this, a
common carrier cannot avoid liability for the quasi-delict
committed by its negligent employee. (R Transport
Corporation vs. Luisito G. Yu, G.R. No. 174161, February 18,
2015)
Liability of the common carrier as regards to the acts
of employees may not be limited by stipulation
The common carrier’s responsibility cannot be eliminated
or limited by stipulation, by the posting of notices, by
statements on the tickets or otherwise (NCC, Art. 1760).
Rationale: The basis of the carrier's liability for assaults
on passengers committed by its drivers rests on the
principle that it is the carrier's implied duty to transport
the passenger safely. As between the carrier and the
passenger, the former must bear the risk of wrongful acts
or negligence of the carrier's employees against
passengers, since it, and not the passengers, has power to
select and remove them.
In other words, the liability of the employer is not based
on delict or quasi-delict. The liability of the common
carrier is primary and cannot be eliminated or limited by
stipulation. (Maranan vs. Perez, GR No. L-22272, June 26,
1967).
Q: The AAA Bus Company picks up passengers along
EDSA. X, the conductor, while on board the bus, drew
his gun and randomly shot the passengers inside. As a
result, Y, a passenger, was shot and died instantly. Is
AAA Bus Company liable? (2012 Bar)
A: Yes. The bus company is liable because common
carriers are liable for the negligence or willful act of its
employees even though they acted beyond the scope of
their responsibility.
OTHER PASSENGERS AND STRANGERS
Extent of liability of common carriers for acts of co-
passengers or strangers (1997, 2005 Bar)
A common carrier is responsible for injuries suffered by a
passenger on account of the willful acts or negligence of
other passengers or of strangers, if the carrier’s
employees through the exercise of the diligence of a good
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
father of a family would have prevented or stopped the act
or omission (NCC, Art. 1763).
Q: P rode a Sentinel Liner bus going to Baguio from
Manila. At a stop-over in Tarlac, the bus driver, the
conductor, and the passengers disembarked for
lunch. P decided, however, to remain in the bus, the
door of which was not locked. At this point, V, a
vendor, sneaked into the bus and offered P some
refreshments. When P rudely declined, V attacked
him, resulting in P suffering from bruises and
contusions. Does he have cause to sue Sentinel Liner?
(2011 Bar)
A: Yes, since the carrier's crew did nothing to protect a
passenger who remained in the bus during the stop-over.
Q: In a jeepney, Angela, a passenger, was injured
because of the flammable material brought by
Antonette, another passenger. Antonette denied her
baggage to be inspected invoking her right to privacy.
Should the jeepney operator be held liable for
damages?
A: No. The operator is not liable for damages. In overland
transportation, the common carrier is not bound nor
empowered to make an examination on the contents of
packages or bags, particularly those handcarried by
passengers (Nocum vs. Laguna Tayabas Bus Company, G.R.
No. L-23733, October 31, 1969).
Q: In the question above, if it were an airline company
involved, would your answer be the same? (1992 Bar)
A: No. The common carrier should be made liable. In case
of air carriers, it is unlawful to carry flammable materials
in passenger aircrafts, and airline companies may open
and investigate suspicious packages and cargoes
pursuant to Republic Act No. 6235.
Q: A passenger was injured because a bystander
outside the bus hurled a stone. Is the bus company
liable? (1994 Bar)
A: No. There is no showing that any such incident
previously happened so as to impose an obligation on the
part of the personnel of the bus company to warn the
passengers and to take the necessary precaution. Such
hurling of a stone constitutes fortuitous event in this case.
The bus company is not an insurer of the absolute safety
of its passengers.
A tort committed by a stranger, which causes injury to a
passenger, does not accord the passenger a cause of
action against the carrier (Pilapil vs. CA, G.R. No. 52159,
December 22, 1989).
The registered owner of the vehicle may be held liable
for damages suffered by a third person in the course
of the operation of the vehicle
The registered owner of a public service vehicle is
responsible for damages that may arise from
consequences incident to its operation or that may be
UNIVERSITY OF SANTO TOMAS
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124
caused to any of the passengers therein (Gelisan vs. Alday,
G.R. No. L-30212, September 30, 1987).
Also, the liability of the registered owner of a public
service vehicle for damages arising from the tortious acts
of the driver is primary, direct, and joint and several or
solidary with the driver (Philtranco Service Enterprises,
Inc. vs. CA, G.R. No. 120553, June 17, 1997).
Q: Marites, a paying bus passenger, was hit above her
left eye by a stone hurled at the bus by an unidentified
bystander as the bus was speeding through the
National Highway. The bus owner’s personnel lost no
time in bringing Marites to the provincial hospital
where she was confined and treated. Marites wants to
sue the bus company for damages and seeks your
advice whether she can legally hold the bus company
liable. What will you advise her? (1994 Bar)
A: As counsel, I will advise her that the company is not
liable. As a general rule, if the death or injury was due to a
cause beyond the control of the carrier, it will not be liable
to the passenger. However, it must do everything in its
power to try to prevent any passenger from getting hurt.
Article 1763 provides that although a common carrier is
responsible for the death or injuries suffered by a
passenger on account of the willful acts or negligence of
other passengers, such is not applicable in this case. The
driver has no control over the situation. It happened while
the bus was speeding through the national highway and
such event occurred haphazardly, without any
contributory negligence on the part of the carrier or even
if extraordinary diligence be exercised, the same would
not prevent the event from happening because such is
independent and beyond the control of the driver.
Further, the carrier cannot be faulted and be liable for
damages because it immediately responded to the injury
suffered by the passenger. As held in the case of Pilapil vs.
CA, there is no showing that any such incident previously
happened so as to impose an obligation on the part of the
personnel of the bus company to warn the passengers and
to take the necessary precaution. Such hurling of a stone
constitutes fortuitous event in this case. The bus company
is not an insurer of the absolute safety of its passengers.
Q: A was seated at the first row behind the driver and
slept during the ride. When the bus reached the
Philippine Carabao Center in Muñoz, Nueva Ecija, the
bus driver, B, stopped the bus and alighted to check
the tires. At this point, a man who was seated at the
fourth row of the bus stood up, shot A at his head and
then left with a companion. The bus conductor, C,
notified B of the incident and thereafter, brought A to
the hospital but the latter was pronounced dead on
arrival. Can the common carrier, B, and C be held
liable for the death of A?
A: No. It is imperative for a party claiming against a
common carrier to show that the injury or death of the
passenger/s arose from the negligence of the common
carrier and/or its employees in providing safe transport
to its passengers. In this case, A’s death was neither
caused by any defect in the means of transport or in the
method of transporting, or the negligent or willful acts of
the bus driver or conductor. Instead, the case involves the
 TRANSPORTATION LAWS
death of A wholly caused by the surreptitious act of a co-
passenger, who after committing such crime, hurriedly
alighted from the vehicle (G.V. Florida Transport, Inc. vs.
Heirs of Romeo Battung, Jr., represented by Romeo Battung,
Sr.; G.R. No. 208802; October 14, 2015).
EXTENT OF LIABILITY FOR DAMAGES
Kinds of damages that may be recovered in case of
death of a passenger
When there is no showing that the living expenses
constituted the smaller percentage of the gross income,
the Court fixes the living expenses at half of the gross
income.
Moral damages
GR: Moral damages are not recoverable for breach of
contract of carriage in view of Articles 2219-20 of the Civil
Code.

1. An indemnity for the Death of the victim XPNs:

2. An indemnity for loss of Earning capacity of the
deceased;
3. Moral damages;
4. Exemplary damages;
5. Attorney's fees and expenses of litigation;
6. Interest in proper cases (Briñas v. People, G.R. No. L-
30309, Nov. 25, 1983).
7. Hospital and funeral expenses
In case of death of a passenger, the common carrier is
liable to pay 50,000 pesos as indemnity for the life of a
passenger (Victory Liner vs. Gammad, G.R. No. 159636,
November 25, 2004).
Carrier is not liable for exemplary damages where there is
no proof that it acted in a wanton, fraudulent, reckless,
oppressive or malevolent manner.
Loss of earning capacity
The formula for the computation of unearned income is:
1. Net Earning Capacity = Life Expectancy x (Gross
annual income - Reasonable and necessary living
expenses).
2. Life expectancy is determined in accordance with the
formula: 2/3 x (80 – age of deceased at the time of
death) (Heirs of Ochoa vs. VS.G & S Transport
Corporation, G.R. No. 170071, March 09, 2011).
1. Where the mishap results in the death of the
passenger; and
2. Where it is proved that the common carrier was
guilty of fraud or bad faith, even if death does not
result.
The current jurisprudential award for the loss of life of a
passenger is 100,0000 pesos by way of moral damages
(Victory Liner vs. Gammad, Ibid, Heirs of Ochoa v VS.G & S
Transport Corporation, Ibid).
Defenses available in culpa contractual (FEC)
1. Exercise of extraordinary due diligence
2. Fortuitous event
3. Contributory negligence of passengers – it does not
bar recovery of damages for death or injury if the
proximate cause is the negligence of the common
carrier but the amount of damages shall be equitably
reduced (NCC, Art. 1762).
The diligence of the passenger may be considered in
determining liability in case of injury
The passenger must observe the diligence of a good father
of a family or ordinary diligence to avoid injury to himself
(NCC, Art. 1761). This means that if the proximate cause of
the passenger’s injury is his negligence, the common
carrier is not liable.

Options available to recover damages in case of death or injuries to persons, which resulted from a collision

BASIS OF CIVIL DEFENDANT OF THE CASE

LIABILITY (Damages)
Culpa Contract of carriage Filed against the common carrier wherein he is a passenger. (NCC, Art.
contractual 1733, 1755-1764)
Culpa aquiliana Quasi-delict May be filed by third persons or the passenger against the drivers (may
also be the owners) of both vehicles and the owners thereof.

If the owner is an employer of the driver, still the former has a primary
liability for an action brought on the ground of quasi delict under Art.
2180, NCC. (Carpio vs. Doroja, GR No. 84516, December 5, 1989.)
Culpa criminal Crime May be filed by the third persons or the passengers against the driver
(may also be the owner) at fault if his act amounts to a crime.

If the owner is an employer of the driver, then the former has a subsidiary
liability (Art. 103, Revised Penal Code [RPC].) for an action brought on the
ground of civil liability arising from crime under Art. 100 of the RPC.
(Carpio vs. Doroja, supra.)

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 MERCANTILE LAW
Action to enforce liability of the employer of the A: It is possible to have a contract of carriage bill of
negligent driver under Art. 103 of the RPC vs. Action lading even without a bill of lading. The shipping
based on quasi-delict receipt would be sufficient. A bill of lading is not
indispensable. For as long as there is a meeting of the
ART. 103, RPC ART. 2180, NCC (QUASI- minds of the parties, a contract of carriage exists even in
DELICT) the absence of a bill of lading (Compania Maritima vs.
Employer is only Liability is primary and Insurance Co. of NA, G.R. No. L-18965, October 30, 1964).
subsidiarily liable. direct.
There must be a judgment of Action may proceed Technical jargon
conviction against the independently from the
negligent driver otherwise criminal action. 1. On Board –states that the goods have been received
the action against the on board the vessel which is to carry the goods and is
employer would be issued when goods have been placed aboard a ship
premature. with every reasonable expectation that the shipment
The defense of due diligence The defense of due is as good as on its way.
in selection and supervision diligence in selection and 2. Received for Shipment Bill– states that the goods
of employees cannot be supervision of employees have been received for shipment with or without
invoked. may be invoked. specifying the vessel by which the goods are to be
shipped and are issued whenever conditions are not
BILL OF LADING normal and that there is insufficiency of shipping
space.
It is a written acknowledgment of receipt of goods and 3. Clean – does not contain any notation indicating
agreement to transport them to a specific place and to a defect in the goods.
named person or to his order (Unsworth Transport 4. Foul – contains a notation indicating a defect in the
International [Phils] vs. CA, G.R. No. 166520, 26 July 2010; goods.
1992, 1998 Bar). 5. Spent – if the goods were already delivered but the
bill of lading was not returned.
THREE-FOLD CHARACTER OF A 6. Through- issued by a carrier who is obliged to use
BILL OF LADING the facilities of other carriers as well as his own
facilities for the purpose of transporting the goods
1. As a receipt, it recites the date and place of shipment, from the city of the seller to the city of the buyer,
describes the goods as to quantity, weight, which bill of lading is honored by the second and
dimensions, identification marks and condition, other interested carriers who do not issue their own
quality, and value. lading.
2. As a contract, it names the contracting parties, which 7. Custody – the goods are already received by the
include the consignee, fixes the route, destination, carrier but the vessel indicated has not yet arrived in
and freight rate or charges, and stipulates the rights the port.
and obligations assumed by the parties (Phoenix 8. Port- the vessel indicated in the bill of lading that will
Assurance Co., Ltd. vs. United States Lines, G.R. No. L- transport the goods is already in the port.
24033, Feb. 22, 1968).
3. As a document of title, it regulates the relations Q: A bill of lading indicated that the contract of
between a carrier and a holder of the same. carriage was under a "said to weigh" clause. What are
(2015 Bar) the responsibilities of the shipper and the carrier?

In the absence of a bill of lading, their respective claims
may be determined by legal proofs that each of the
contracting parties may present in conformity with law.
Two types of bill of lading
1. Negotiable – If issued to the bearer or to the order of
any person named in such bill.
2. Non-negotiable – If issued to a specific person named
in such bill.
Q: X is a trader of school supplies in Calapan, Oriental
Mindoro. To bring the school supplies to Calapan, it
has to be transported by a vessel. Because there were
so many passengers, the two (2) boxes of school
supplies were loaded but the shipping company was
not able to issue the Bill of Lading. So, on board, the
Ship Captain issued instead a "shipping receipt" to X
indicating the 2 boxes of school supplies being part of
the cargo of the vessel. Is there a contract of carriage?
A: This means that the shipper was solely responsible for
the loading of the container while the carrier was
oblivious to the contents of the shipment. The arrastre
operator was, like any ordinary depositary, duty-bound to
take good care of the goods received from the vessel and
to turn the same over to the party entitled to their
possession, subject to such qualifications as may have
validly been imposed in the contract between the
parties. The arrastre operator was not required to verify
the contents of the container received and to compare
them with those declared by the shipper because, as
earlier stated, the cargo was at the shipper’s load and
count (Asian Terminals Inc. vs. Simon Enterprises, Inc., G.R.
No. 177116, February 27, 2013).
DELIVERY OF GOODS
The surrender of the bill of lading is necessary upon
delivery of the goods. If the carrier fails to require such
surrender:

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 TRANSPORTATION LAWS
1. If non-negotiable – Action against the carrier does not
lie.
2. If negotiable – Action by the shipper may lie against
the carrier
However, where the seller instructed the shipping
company to deliver the cargoes to the buyer without
requiring the presentation of the bill of lading, the
shipping company is not liable for releasing the cargoes
to the buyer (Macam vs. CA, G.R. No. 125524, August 25,
1999).
The surrender of the original bill of lading is not a
condition precedent for a common carrier to be
discharged of its contractual obligation. If surrender of
the original bill of lading is not possible, acknowledgment
of the delivery by signing the delivery receipt
suffices (National Trucking and Forwarding Corporation
vs. Lorenzo Shipping Corporation, G.R. No. 153563,
February 27, 2005).
Delivery of goods
1. Period has been fixed – It must be made within such
time, and, for failure to do so, the carrier shall pay the
indemnity stipulated in the bill of lading, neither the
shipper nor the consignee being entitled to anything
else (Code of Commerce [CC], Art. 370).
2. No period of time fixed - the carrier shall be under the
obligation to forward them with the first shipment of
the same or similar merchandise he may make to the
point where he must deliver them, and should he not
do so, the damages occasioned by the delay shall be
suffered by him (CC, Art. 358).
Determination of indemnity if the same is not
stipulated
If no indemnity has been stipulated and the delay exceeds
the time fixed in the bill of lading, the carrier shall be liable
for the damages which the delay may have caused (CC, Art.
370).
Grounds for the refusal of a consignee to take delivery
of the goods (PLD2)
1. When a Part of the goods transported are delivered
and the consignee is able to prove that he cannot
make use of the part without the others; (CC, Art. 365)
2. If the cargo consists of Liquids and they have leaked
out, nothing remaining in the containers but one-
fourth (¼) of their contents, on account of inherent
defect of cargo; (CC, Art. 687)
3. If the goods are Damaged and such damage renders
the goods useless for the particular purpose for
which there are to be used; (CC, Art. 365)
4. When there is Delay on account of the fault of the
carrier; (CC, Art. 371)
In all cases, the shipper may exercise the right of
abandonment by notifying the carrier. Ownership over
damaged goods passes to the carrier and carrier must pay
shipper the market value of the goods at point of
destination.
127
PERIOD FOR FILING CLAIMS
1. If the damage is apparent – Immediately after
delivery; or
2. If the damage is not apparent – within 24 hours from
delivery (Code of Commerce, Art. 366)
Claim for damages under Art. 366 of Code of
Commerce
It applies in case of domestic transportation (inter-island)
where there is damage to the goods transported.
The filing of claim is a condition precedent for recovery of
damages. Requisites:
1. Consignment of goods through a common carrier, by
a consignor in one place to a consignee in another
place; and
2. The delivery of the merchandise by the carrier to the
consignee at the place of destination (New Zealand
Ins. Co., Ltd. vs. Choa Joy, G.R. No. L-7311, Sept. 30,
1955).
Effect of paying the transportation charges in the
filing of an action on account of damages to goods
1. If paid before checking the goods – The right to file a
claim is not waived.
2. If paid after the goods were checked – The right to file
a claim is already waived (Southern Lines, Inc. v. CA,
G.R. No. L-16629, Jan. 31, 1962).
Doctrine of combined or connecting services
The carrier which delivered the goods to the consignee
shall assume the obligations, rights and actions of those
who preceded him in the conveyance of the goods.
The shipper or consignee should proceed against the one
who executed the contract or against the others who
received the goods without reservation. But even if there
is reservation, they are not exempted from liabilities that
they may have incurred by reason of their own acts (CC,
Art. 373).
The carrier may then file a third-party complaint against
the one who is really responsible. The carrier is an
indispensable party. But the shipper or consignee may
sue all of them as alternative defendants.
Commencement of action if delivery was made to
arrastre operator
Commencement of action should be computed from the
time of delivery to the arrastre operator. To use as basis
for computing the one year period, the delivery to the
consignee would be unrealistic and might generate
confusion between the loss or damage sustained by the
goods while in the carrier’s custody and those occurring
while in the arrastre operator’s possession (Martin,
1989).
A claim against the arrastre operator must be filed within
fifteen days from the delivery of goods (International
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Container Terminal Services, Inc. vs. Prudential Guarantee
and Assurance Company, Inc. G.R. No. L-134514, December
8, 1999).
The filing of a provisional claim is substantial compliance
with the provision in the management contract of the
arrastre operator that a formal claim for the loss of goods
must be filed within thirty days from the filing of the entry
(Metro Port Service Inc. vs. Intermediate Appellate Court,
G.R. No. 66253, August 31, 1992).
The 1 year period of prescription is not applicable to
misdelivery or conversion of goods.
PERIOD FOR FILING ACTIONS
1. For coastwise or carriage within the Philippines,
within 6 years if no bill of lading has been issued or
within 10 years if a bill of has been issued.
2. For international carriage from foreign port to the
Philippines, within 1 year from delivery of goods or
the date when the goods have been delivered.
The compliance with a requirement in the bill of lading
that the consignee must file a claim for loss or damage to
the goods shipped within thirty days from delivery is a
condition precedent to the accrual of a right of action
against the carrier (Philippine American General Insurance
Co. v. Sweet Lines, Inc., G.R. No. 87434, August 5, 1992).
Q: Akiro of Tokyo, Japan sent various goods to his
friend Juan in Cebu City, Philippines, through one of
the vessels of Worth Well Shippers, Inc., an American
corporation. En route to Cebu City, the vessel had two
stops, first in Hong Kong, and second, in Manila. While
travelling from Tokyo to Hong Kong, the goods were
damaged. What law will govern? (2013 Bar)
A: D. Philippine Law
Q: Assuming Philippine law to be applicable and Juan
fails to file a claim with the carrier, may he still
commence an action to recover damages with the
court? (2013 Bar)
A: B. Yes, provided he files the complaint within 10 years
from delivery.
MARITIME COMMERCE
Agents of maritime commerce
1. Ship-owners and ship agents
2. Captains and masters of the vessel
3. Officers and Crews of the vessel
4. Supercargoes (Sundiang, Sr. & Aquino, 2011)
Shipowner of a vessel
The person in possession, management, control over the
vessel, and the right to direct her navigation. While in
their possession, the ship owners also receive freight
earned and paid.
Ship agent
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The person entrusted with provisioning or representing
the vessel in the port in which it may be found. Hence,
whether acting as agent of the owner of the vessel or as
agent of the charterer, he will be considered as the ship
agent and may be held liable as such, as long as he is the
one that provisions or represents the vessel (Macondray
& Co., Inc. v. Provident Insurance Corp, G.R. No. 154305, Dec.
9, 2004).
Supercargoes
Persons especially employed by the owner of a cargo to
take charge of and sell to the best advantage merchandise
which has been shipped, and to purchase returning
cargoes and to receive freight, as he may be authorized.
CHARTER PARTIES
Charter party contract
A charter party is a contract by which an entire ship, or
some principal part thereof, is let by the owner to another
person for a specified time or use in consideration of the
payment of freight (Caltex vs. Sulpicio Lines, G.R. No.
131166, September. 30, 1999).
Classes of charter party
1. Bareboat or demise
2. Contract of affreightment
a. Time charter
b. Voyage charter
BAREBOAT/DEMISE CHARTER
The ship owner gives possession of the entire vessel to the
charterer. In turn, the charterer supplies, equips, and
mans the vessel. The charterer is the owner pro hac vice
(2004 Bar).
As owner pro hac vice of the vessel, the charterer assumes
the rights and liabilities of the owner to third parties who
deal with the vessel, it is the charterer and its agent who
are liable for the wages of seamen hired by the master of
the vessel, as the master of the vessel is acting in behalf of
the charterer (Litonjua Shipping Co., Inc. vs. National
Seamen Board, G.R. No. L-51910, August 10, 1989, 1991
Bar). The charterer is considered the owner of the vessel
for the voyage or service stipulated. The charterer, not the
owner of the vessel, is liable for vessel’s expenses,
including seaman’s wages.
CONTRACT OF AFFREIGHTMENT
The owner of the vessel leases a part or all of its space to
haul goods for others. It can either be:
1. Time charter– Vessel is chartered for a particular
time or duration. While the ship owner still retains
possession and control of the vessel, the charterer
has the right to use all vessel’s facilities. The
charterer may likewise designate vessel’s
destination.
 TRANSPORTATION LAWS
2. Voyage charter– Vessel is chartered for a carriage of
goods from one or more ports of loading to one or
more ports of unloading.
A voyage charter is a contract wherein the ship was
leased for a single voyage for the conveyance of
goods, in consideration of the payment of freight. An
owner who retains possession of the ship remains
liable as carrier and must answer for loss or non-
delivery of the goods received for transportation
(Cebu Salvage Corp. vs. Philippine Home Assurance
Corp., G.R. No. 150403, Jan. 25, 2007).
A written contract of affreightment may be amended
by oral agreement and since in such a case the terms
of the contract shall be those embodied in the bill of
lading, no demurrage charges can be collected where
this was not stipulated in the bill of lading (Market
Developers, Inc. vs. Intermediate Appellate Court, G.R.
No. L-47978, September 8, 1989).
Bareboat or demise charter party vs. Contract of
affreightment
BAREBOAT/DEMISE CONTRACT OF
CHARTER CONTRACT AFFREIGHTMENT
Negligence of the Ship owner remains liable
charterer gives rise to its and carrier must answer
liability to others. for any breach of duty.
Charterer is not regarded
Charterer is regarded as
as owner. Ship owner
owner pro hac vice. Ship
retains ownership over
owner temporarily
the vessel. (Coastwise
relinquishes possession
Lighterage vs. CA, G.R. No.
and ownership of the
114167, July 12, 1995)
vessel.
Q: For the transportation of its cargo from the Port of
Manila to the Port of Kobe, Japan, Osawa & Co.,
c hartered bareboat M/V Ilog of Karagatan
Corporation. M/V Ilog met a sea accident resulting in
the loss of the cargo and the death of some of the
seamen manning the vessel. Who should bear the
loss of the cargo and the death of the seamen? Why?
A: Osawa & Co. should bear the loss because it chartered
bareboat M/V Ilog which, in effect, gave it exclusive
control over the vessel. In a demise, in contrast to other
charters, the charterer is considered the owner pro hac
vice. The charterer is accordingly liable in personam for
all liabilities arising out of the operation of the vessel; he
is responsible for the actions of the master and crew
(Litonjua Shipping Company, Inc. v. National Seamen
Board and Gregorio P. Candongo, G.R. No. 51910, August
10, 1989).
Instances when a charter party may be rescinded
1. At the request of the charterer by: (FARER)
a. Failure to place vessel at charterer’s disposal
b. Abandoning the charter and paying half the
price
c. Return the vessel due to pirates, enemies, and
bad weather
d. Error in tonnage or flag
129
e. Arrival at port for Repairs - if repairs take less
than 30 days, pay full freightage; if more than,
freightage in proportion to the distance covered.
2. At the request of the ship owner: (Sa-Te)
a. If extra lay days TErminate without the cargo
being placed alongside vessel; and
b. SAle by the owner of the vessel before loading
by the charterer.
3. Due to fortuitous event: (WEB-Pro-N)
a. War – there is a governmental prohibition of
commercial intercourse, intended to bring
about an entire cessation for the time being of all
trade whatever.
b. Embargo – A proclamation or order of State,
usually issued in times of war or threatened
hostilities, prohibiting the departure of ships or
goods from some or all the ports of such State
until further order; or
c. Blockade – A sort of circumvallation around a
place by which all foreign connection and
correspondence is, as far as human power can
effect it, to be cut off.
d. PROhibition to receive cargo at port of
destination.
e. Inability of the vessel to Navigate (Code of
Commerce, Art. 640).
Q: What is a “Jason clause” in a charter party? (2015
Bar)
A: The Jason clause derives its name from The Jason 225
US 32 (1912) decided by the US Supreme Court under the
Harter Act. By the Jason clause, a shipowner ( provided he
had exercised due diligence to make the ship seaworthy
and properly manned, equipped and supplied) could
claim a general average contribution from cargo, even
where the damage was caused by faulty navigation of the
vessel, provided that the bill of lading excluded liability
for such faults.
LIABILITY OF SHIPOWNERS
AND SHIPPING AGENTS
Three-fold character of the Captain (GVG)
1. General agent of the ship owner
2. Vessel’s technical director
3. Government representative of the flag he navigates
under
Inherent powers of the Ship Captain (A2-C3-D)
1. To Appoint or make contracts with the crew in the
ship agent’s absence, and to propose said crew,
should said agent be present; but the ship agent may
not employ any member against the captain's
express refusal
2. To Command the crew and direct the vessel to the
port of its destination, in accordance with the
instructions he may have received from the ship
agent
3. To impose Correctional punishment:
a. Upon those who fail to comply with orders; or
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
b. Those wanting in discipline
4. To make Contracts for the charter of the vessel in the
absence of the ship agent or of its consignee
5. To Adopt all proper measures to keep the vessel well
supplied and equipped, purchasing all that may be
necessary for the purpose, provided there is no time
to request instruction from the ship agent
6. To make Disposition, in similar urgent cases while on
a voyage, the repairs on the hull and engines of the
vessel and in its rigging and equipment, which are
absolutely necessary to enable it to continue and
finish its voyage (Code of Commerce, Art. 610).
Obligations of the Captain
6. For those arising by reason of his going out of his
course or taking a course which he should not have
taken without sufficient cause, in the opinion of the
officers of the vessel, at a meeting with the shippers
or supercargoes who may be on board. No exceptions
whatsoever shall exempt him from this obligation;
7. For those arising by reason of his voluntarily
entering a port other than that of his destination,
outside of the cases or without the formalities
referred to in Article 612; and
8. For those arising by reason of non-observance of the
provisions contained in the regulations on situation
of lights and maneuvers for the purpose of
preventing collisions (Code of Commerce, Art. 618).

1. Inventory of equipment Ship owner/agent is not liable for the obligations

2. Keep a copy of Code of Commerce on board contracted by the captain if the latter exceeds his powers
3. Have a log book, freight book, accounting book and privileges inherent in his position of those which may
4. Conduct a marine survey of vessel before loading have been conferred upon him by the former. However, if
5. Remain on board while loading the amount claimed were used for the benefit of the
6. Demand pilot on departure and on arrival at each vessel, the ship owner or ship agent is liable.
port
7. Be on deck when sighting land Q: Under a charter party, XXO Trading Company
8. Arrivals under stress: to file marine protest in 24 shipped sugar to Coca-Cola Company through SS
hours Negros Shipping Corp., insured by Capitol Insurance
9. Record bottomry loan with Bureau of Customs Company. The cargo arrived but with shortages. Coca-
10. Keep papers and properties of crew members who Cola demanded from Capitol Insurance Co. P500.000
might die in settlement for XXO Trading. The MM Regional Trial
11. Conduct himself according to the instructions of the Court, where the civil suit was filed, "absolved the
ship agent insurance company, declaring that under the Code of
12. Report to ship agent on arrival Commerce, the shipping agent is civilly liable for
13. Observe rules on the situation of lights and damages in favor of third persons due to the conduct
maneuvers to prevent collisions of the carrier's captain, and the stipulation in the
14. Remain on board until the last hope to save the vessel charter party exempting the owner from liability is
is lost and to abide by the decision of the majority not against public policy. Coca-Cola appealed. Will
whether to abandon or not its appeal prosper? Reason briefly. (2004 Bar)
15. In case of shipwreck: file marine protest, within 24
hours A: No. The appeal of Coca-Cola will not prosper. Under
16. Comply with rules and regulation on navigation (CC, Article 587 of the Code of Commerce, the shipping agent
Art. 612). is civilly liable for damages in favor of third persons due
to the conduct of the carrier's captain, and the shipping
Failure of the Ship Captain to ascertain beforehand agent can exempt himself therefrom only by abandoning
direction of reported storm and weather conditions along the vessel with all his equipment and the freight he may
his route constitutes negligent lack of foresight (Alejandro have earned during the voyage. On the other hand,
Arada vs. CA and San Miguel Corporation, G.R. No. 98243, assuming there is bareboat charter, the stipulation in the
July 1, 1992). charter party exempting the owner from liability is not
against public policy because the public at large is not
LIABILITY FOR ACTS OF THE CAPTAIN involved (Home Insurance Co. vs. American Steamship
Agencies, Inc., G.R. No. L-25599, April 4, 1968).
Cases where the ship owner/agent shall be liable to
the damages caused by the captain Civil liabilities of ship owners and agents

1. Damages suffered by the vessel and its cargo by 1. Damages suffered by a 3rd person for tort committed
reason of want of skill or negligence on his part; by the captain;
2. Thefts committed by the crew, reserving his right of 2. Contracts entered for provisioning and repair of
action against the guilty parties; vessel;
3. Losses, fines, and confiscations imposed an account 3. Indemnities in favor of 3rd persons arising from the
of violation of customs, police, health, and navigation conduct of the captain from the care of goods;
laws and regulations; 4. Damages in case of collision due to fault or negligence
4. Losses and damages caused by mutinies on board the or want of skill of the captain; and
vessel or by reason of faults committed by the crew 5. Damages for the acts of the captain.
in the service and defense of the same, if he does not
prove that he made timely use of all his authority to
prevent or avoid them;
5. Those caused by the misuse of the powers;

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 TRANSPORTATION LAWS
EXCEPTIONS TO THE RULE
The captain shall not be liable for the loss or injury to
persons or cargo if the loss or the injury is based on the
following causes:
1. Force majeure
2. Obligations contracted for the vessel’s benefit, except
when the captain expressly agrees to be liable.
A captain may not have himself substituted in the absence
of consent from the ship agent, and should he do so he
shall be liable for all the acts of the substitute. (CC, Art.
615)
Q: T, the captain of MV Don Alan, while asleep in his
cabin, dreamt of an Intensity 8.0 earthquake along the
path of his ship. On waking up, he immediately
ordered the ship to return to port. True enough, the
earthquake and tsunami struck three days later and
his ship was saved. Was the deviation proper? (2011
Bar)
A: No, because no reasonable ground for avoiding a peril
existed at the time of the deviation.
Instances when the captain and crew members may
rescind their contractual employment
1. War
2. Outbreak of disease
3. New owner of vessel
4. Change of Destination (CC, Art. 647).
Powers, functions, and liabilities of ship agents (ID)
1. Indemnity for expenses incurred for ship’s benefit.
2. Discharge of captain and/or crew members
The following are the rules observed by the ship
agent:
a. Captain and/or crew member’s contract not for
a definite period or voyage:
i. Before vessel sets out to sea: Ship agent at
his discretion may discharge the captain
and members of the crew. Ship agent must
pay captain and/or crew members
salaries earned according to their
contracts, and without any indemnity
whatsoever, unless there is an expressed
agreement;
ii. During voyage: Captain and/or crew
member shall receive salary until return
to the port where contract was made.
Article 637 of the Code of Commerce
enumerates the just causes for discharge.
b. Where captain and members of the crew’s
contracts with ship agent be for a definite period
or voyage:
i. Captain and/or crew members may not be
discharged until after the fulfillment of
their contracts, except by reason of
insubordination in serious matters,
robbery, theft, habitual drunkenness, or
131
damage caused to the vessel or to its cargo
through malice or manifest or proven
negligence (CC, Art. 605).
ii. If the captain should be the vessel’s co-
owner, he may not be discharged unless
ship agent returns his amount of interest
therein. In the absence of agreement
between the parties, interest shall be
appraised by experts appointed in the
manner established by civil procedure.
Doctrine of inscrutable fault (1995, 1997 Bar)
Under this doctrine, where fault is established but it
cannot be determined which of the two vessels were at
fault, both shall be deemed to have been at fault.
Doctrine of limited liability (1991, 1994, 1997, 2000,
2008 Bar)
Also called the “no vessel, no liability doctrine”, it provides
that liability of ship owner is limited to ship owner’s
interest over the vessel. Consequently, in case of loss, the
ship owner’s liability is also extinguished. Limited liability
likewise extends to ship’s appurtenances, equipment,
freightage, and insurance proceeds. The ship owner’s or
agent’s liability is merely co-extensive with his interest in
the vessel, such that a total loss of the vessel results in the
liability’s extinction. The vessel’s total destruction
extinguishes maritime liens because there is no longer
any res to which they can attach (Monarch Insurance vs.
CA, G.R. No. 92735, June 8, 2000).
By necessary implication, the ship agent’s or ship owner’s
liability is confined to that which he is entitled as of right
to abandon—the vessel with all her equipment and the
freight it may have earned during the voyage and to the
insurance thereof, if any (Yango vs. Laserna, 73 Phil. 330,
1941).
Rationale of the doctrine: The Real and Hypothecary
nature of Maritime Law
To offset against innumerable hazards and perils in sea
voyage and to encourage ship building and maritime
commerce. By abandonment, the ship owner and ship
agent exempt themselves from liability, thus, avoiding the
possibility of risking his whole fortune in the business.
Person/s who can invoke the limited liability rule
The only person/s who could avail of this rule are the
shipowner and the shipping agent. He is (they are) the very
person(s) whom the Limited Liability Rule has been
conceived to protect. (Philippine Trigon Shipyard
Corporation, et al. vs. Crisostomo G. Concepcion, et al., G.R.
No. 160088, July 13, 2011).
Cases in which the Doctrine of Limited Liability is
allowed (1994, 2004 Bar) (SOLE)
1. Civil liability of the Ship agent or shipowner for the
indemnities in favor of third persons; (CC, Art. 587)
2. Civil liability of the co-Owners of the vessel for the
results of the acts of the captain; (CC, Art. 590)
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 MERCANTILE LAW
3. If the vessel and her cargo be totally Lost, by reason
of capture or shipwreck, all the rights shall be
extinguished, both as regards the right of the crew to
demand wages and the right of the ship agent to
recover the advances made; (CC, Art. 643) or
4. Extinction of civil liability incurred by the shipowner
or agent in cases of maritime collisions (CC, Art. 837).
Instances where Doctrine of Limited Liability shall
not apply
1. Repairs and provisioning of the vessel before the loss
of the vessel; (CC, Art. 586)
2. Insurance proceeds. If the vessel is insured, the
proceeds will go to the persons entitled to claim from
the shipowner; (Vasquez vs. CA, G.R. No. L-42926, Sept.
13, 1985)
3. Claims of the crew under the Workmen’s
Compensation Act;
4. When the shipowner is guilty of fault or negligence;
5. When the vessel is not abandoned; and
6. When vessel is not seaworthy.
Q: On October 30, 2007, M/V Pacific, a Philippine
registered vessel owned by Cebu Shipping Company
(CSC), sank on her voyage from Hongkong to Manila.
Empire Assurance Company (Empire) is the insurer of
the lost cargoes loaded on board the vessel which
were consigned to Debenhams’ company. After it
indemnified Debenhams, Empire as subrogee filed an
action for damages against CSC.
typhoon but unfortunately, it was hit by huge waves
and sank. Since the vessel sank at no fault by CSC, it
cannot be held liable by virtue of “No vessel, no
liability rule.”
b. No. While as a rule, shipowner’s liability is limited to
the value of the vessel, the same rule has no
application when the carrier failed to overcome the
presumption of negligence. Such presumption is only
rebutted when the carrier establishes that the vessel
is seaworthy. The vessel is this case is not seaworthy,
thus, doctrine of limited liability is inapplicable.
c. Yes. The heirs of the 3 crew members who perished
can recover. This is because the heirs may file a claim
under Workmen’s Compensation Claims. The
Limited Liability Rule does not apply.
Q: A cargo ship of X Shipping, Co. ran aground off the
coast of Cebu during a storm and lost all its cargo
amounting to Php50 Million. The ship itself suffered
damages estimated at Php80 Million.
The cargo owners filed a suit against X Shipping but it
invoked the doctrine of limited liability since its
vessel suffered an Php80 Million damage, more than
the collective value of all lost cargo. Is X Shipping
correct? (2011 Bar)
A: No, since X Shipping neither incurred a total loss nor
abandoned its ship.
ACCIDENTS AND DAMAGES
IN MARITIME COMMERCE

a. Assume that the vessel was seaworthy. Before Accidents in maritime commerce (CASA)
departing, the vessel was advised by the Japanese
Meteorological Center that it was safe to travel to 1. Collision
its destination. But while at sea, the vessel 2. Averages
received a report of a typhoon moving within its 3. Shipwreck
general path. To avoid the typhoon, the vessel 4. Arrival under stress
changed its course. However, it was still at the
fringe of the typhoon when it was repeatedly hit GENERAL AVERAGE
by huge waves, foundered and eventually sank.
The captain and the crew were saved except Averages
three (3) who perished. Is CSC liable to empire?
What principle of maritime law is applicable? All extraordinary or accidental expenses which may be
Explain. incurred during the voyage for the preservation of the
b. Assume the vessel was not seaworthy as in fact its vessel or cargo or both. Average may either be general or
hull had leaked, causing flooding in the vessel, particular
will your answer be the same? Explain.
c. Assume the facts in question (b). Can the heirs of General average vs. Particular average
the three (3) crew members who perished
recover from CSC? Explain fully. (2008 Bar) GENERAL AVERAGE PARTICULAR AVERAGE

A: Damages or expenses Damages or expenses

a. No. The principle of limited liability will apply deliberately caused in order caused to the vessel or
because the exclusively real and hypothecary nature to save the vessel, its cargo cargo that did not inure
of maritime law operates to limit the liability of the or both from real and to the common benefit,
ship owner to the value of the vessel, earned known risk. and borne by respective
freightage and proceeds of the insurance, if any “No owners.
vessel, No liability,” expresses in a nutshell the Both the ship and cargo are No common danger to
limited liability rule (Monarch Insurance v. CA, G.R No. subject to the same danger both the vessel and the
92735, June 8, 2000). The total destruction of the cargo
vessel extinguishes maritime lien as there is no There is a deliberate Expenses and damages
longer any res to which it can attach. In this case, the sacrifice of part of the are not deliberately
ship was seaworthy. It exercised extraordinary vessel, cargo, or both made
diligence when it changed its course to avoid the Damage or expenses Did not inure to common

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 TRANSPORTATION LAWS
incurred to the vessel, its benefit and profit of all
cargo, or both, redounded to persons interested in the
the benefit of the respective vessel and her cargo.
owners.
All those who have Only the owner of the
benefited shall satisfy the goods benefiting from
average. the damage shall bear
the expense of average.
Requisites of general average (CD-PS)
1. Common danger present;
2. Deliberate sacrifice of part of the vessel or cargo;
3. Successful saving of vessel and/or cargo; and
4. Proper procedure and legal steps.
a. Assembly to be called by captain of all the cargo
owners and other officers of the vessel
b. Deliberation
c. Resolution of the captain
d. Entry of resolution in the logbook
e. Delivery of the minutes of the meeting to the
maritime judicial authority of the first port of
arrival within 24 hours from arrival;
f. Ratification by captain under oath. (Dimaampao
& Dumlao-Escalante, 2014)
Persons liable for the amount of loss
In general average: All persons having an interest in the
vessel and cargo therein at the time of the occurrence of
the average shall contribute (CC, Art. 812).
In particular average: The owner of the things which gave
rise to the expenses or suffered the damage shall bear the
simple or particular averages (CC, Art. 810).
Goods not covered by general average even if not
sacrificed
1. Goods not recorded in the books or records of the
vessel (CC, Art. 855[2])
2. Fuel for the vessel if there is more than sufficient fuel
for the voyage (Rule IX, York-Antwerp Rule)
Jettison (2000, 2009 Bar)
Act of throwing overboard part of a vessel’s cargo or hull
in hopes of saving a ship from sinking.
Goods jettisoned for the common safety, shall not pay
freight; but its latter amount (freight lost) shall be
considered as general average, computing the same in
proportion to the distance covered when they were
jettisoned (Code of Commerce, Art. 660).
Q: Distinguish between overseas and inter-island
trade regarding reimbursement and payment of
general averages on jettisoned deck cargo.
A:
1. In case of overseas trade, the York-Antwerp Rules
prohibit the loading of cargo on deck. In case such
cargo is jettisoned, the owner will not be entitled to
reimbursement in view of the violation. If the cargo
133
were saved, the owner must contribute to general
average.
2. In case of interisland trade, the York-Antwerp Rules
allow deck cargo. If the cargo loaded on deck is
jettisoned as a result of which the vessel was saved,
the cargo owner is entitled to reimbursement. If the
cargo is saved, the cargo owner must contribute to
the general average.
Reason: In interisland trade, voyages are usually short and
there are intervening islands and the seas are generally
not rough. In overseas trade, the vessel is exposed for
many days to the peril of the sea making deck cargo is
dangerous to navigation.
COLLISIONS
Collision is impact of two moving vessels.
Allision - impact between a moving vessel and a
stationary one.
Error in extremis- the sudden movement made by a
faultless vessel during the third zone of collision with
another vessel which is at fault under the second zone.
Even if sudden movement is wrong, no responsibility will
fall on the faultless vessel.
Rules governing liabilities of parties in case of
collision
1. One vessel at fault – The ship owner of such vessel
shall be liable for all resulting damages.
2. Both vessels at fault – Each vessel shall suffer their
respective losses but as regards the owners of the
cargoes, both vessels shall be jointly and severally
liable (1991, 1995, 1998 Bar).
3. Vessel at fault not known – Each vessel shall suffer its
own losses and both shall be solidarily liable for loses
or damages on the cargo. (Doctrine of Inscrutable
Fault)
4. Fortuitous event – Each shall bear its own damage
(1995 Bar).
5. Third vessel at fault – The third vessel shall be liable
for losses and damages sustained.
Zones of time in the collision of vessel
1. First zone – all time up to the moment when risk of
collision begins.
One vessel is a privileged vessel and the other is a
vessel required to take action to avoid collision.
2. Second zone – time between moment when risk of
collision begins and moment it becomes practically a
certainty.
In this zone, the conduct of the vessels is primordial.
It is in this zone that vessels must observe nautical
rules, unless a departure therefrom becomes
necessary to avoid imminent danger. The vessel
which does not make such strict observance is liable.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
3. Third Zone – time when collision is certain and up to
the time of impact.
An error at this point no longer bears any
consequence. Even if a collision which resulted in the
damage to the cargoes of a vessel was due to the fault
of the other vessel, the shipowner is still liable where
the vessel did not exercise due diligence to avoid
collision (Maritime Company of the Philippines vs. CA,
G.R. No 47004, March 8, 1989).
A vessel is guilty of negligence even if it correctly
navigated to the right to avoid the collision where it did
not make such maneuver at an early stage and allowed the
two vessels to come to close quarters (Mecenas vs. CA, G.R.
No. 88052, December 14, 1989).
If the collision is imputable to both vessels, each one shall
suffer her own damage, and both shall be solidarily liable
for the damages occasioned to their cargoes (CC, Art. 827).
Protest in collision (2007 Bar)
The action for recovery of damages arising from collisions
cannot be admitted if a protest or declaration is not
presented within twenty-four hours before the competent
authority of the point where the collision took place, or
that of the first port of arrival of the vessel, if in Philippine
territory, and to the Filipino consul if it occurred in a
foreign country (CC, Art. 835).
Failure to make a protest is not an impediment to the
maintenance of a civil action based on quasi-delict.
Instances when a protest is required (AS-HM)
1. Arrival under stress; (CC, Art. 612 [8])
2. Shipwreck; (CC, Arts. 601 [15], 843)
3. If the vessel has gone through a Hurricane or where
the captain believes that the cargo has suffered
damages or averages; (CC, Art. 642) and
4. Maritime collision (CC, Art. 835)
Persons who can file a maritime protest
1. In case of maritime collision, the passenger or other
persons interested who may be on board the vessel or
who were in a condition who can make known their
wishes (CC, Arts. 835-836) or the captain himself
(Verzosa and Ruiz vs. Lim, G.R. No. 20145, Nov. 15,
1923).
2. The captain in cases of:
a. Arrival under stress
b. Shipwreck; or
c. If the vessel has gone through a hurricane or
where the captain believes that the cargo has
suffered damages or averages.
Q: Two vessels figured in a collision resulting in
considerable loss of cargo. The damaged vessels were
safely conducted to a port. Kim, a passenger and Ruby,
a shipper who suffered damage to his cargo, did not
file maritime protest. Can Kim and Ruby successfully
UNIVERSITY OF SANTO TOMAS
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134
maintain an action to recover losses and damages
arising from the collision? (2007 Bar)
A: Ruby, the shipper can successfully maintain an action
to recover losses and damages arising from the collision
notwithstanding his failure to file a maritime protest since
the filing thereof is required only on the part of Kim, who,
being a passenger of the vessel at the time of the collision,
was expected to know the circumstances of the collision.
Kim's failure to file a maritime protest will therefore
prevent him from successfully maintaining an action to
recover his losses and damages (CC, Art 836).
Shipwreck
The loss of the vessel at sea as a consequence of its
grounding, or running against an object in sea or on the
coast. If the wreck was due to malice, negligence, or lack
of skill of the captain, the owner of the vessel may demand
indemnity from said captain.
Person who shall bear the losses in shipwreck
GR: The loss of a ship and her cargo shall fall upon their
respective owners (CC, Art. 840)
XPN: If the wreck was due to malice, negligence, or lack of
skill of the captain, or because the vessel put to sea was
insufficiently repaired and equipped, the ship agent or the
shippers may demand indemnity from the captain for the
damage caused to the vessel or to the cargo by the
accident (CC, Art. 841)
Arrival under stress
It is the arrival of a vessel at the nearest and most
convenient port, if during the voyage the vessel cannot
continue the trip to the port of destination on account of
the lack of provisions, well-founded fear of seizure,
privateers or pirates, or by reason of any accident of the
sea disabling it to navigate (CC, Art. 819).
NOTE: In arrival under stress, the captain must file a
protest which is merely a disclaimer for the shipowner not
to be liable.
Instances when arrival under stress is unlawful (LR-
DM)
1. Lack of provisions is due to negligence to carry
according to usage and customs
2. Risk of enemy not well known of manifest
3. Defect of vessel is due to improper repair; or
4. Malice, negligence, lack of foresight or skill of captain
(CC, Art. 820).
CARRIAGE OF GOODS BY SEA ACT (COGSA)
APPLICATION OF COGSA
It will only be applied in terms of loss or damage of goods
transported to and from Philippine ports in foreign trade.
It may also apply to domestic trade when there is a
paramount clause in the contract. Paramount Clause is a
 TRANSPORTATION LAWS
stipulation or clause either on the bill of lading or charter
party stipulating the laws that the parties agreed to be
used of that particular transport. In the event that there
will be a breach, the parties shall follow the law stipulated
in the paramount clause (Martin, 1989).
The Carriage of Goods by Sea Act applies up to the final
port of destination even if the transhipment was made on
an inter-island vessel (Sea Land Service Inc. vs. IAC, G.R. No.
75118, August 31, 1987).
Cases covered under the COGSA
It applies only in case of non-delivery or damage, and
not to misdelivery or conversion of goods (Ang vs.
American Steamship Agencies, Inc., G.R. No. L-22491, Jan.
27, 1967).
Also, the deterioration of goods due to delay in their
transportation is not covered by Sec. 6 of COGSA (Mitsui
O.S.K. Lines Ltd. vs. CA, G.R. No. 119571, March 11, 1998).
NOTICE OF LOSS OR DAMAGE
Notice is not required to be filed in case of damage to
goods under the COGSA. There is no consequence on the
right to bring suit if no notice is filed unlike under the
Code of Commerce. It only gives rise to a presumption that
the goods are delivered in the same condition as they are
shipped.
Failure to file notice of loss does not bar an action against
the carrier if the action was filed within one year (Belgian
Overseas Chartering & Shipping N.V. vs. Philippine First
Insurance Company, Inc, G.R. No. 143133, June 5, 2002).
There is also no consequence if the transportation
charges and expenses are paid unlike under the Code of
Commerce.
PERIOD OF PRESCRIPTION
The suit for loss or damage should be brought within one
year from:
1. Delivery of the goods, in case of damage; or
2. The date when the goods should have been delivered,
in case of loss.
The one-year period is computed from the delivery of
goods to the operator and not to the consignee.
The prescriptive period for an action against a broker is
ten years and not one year under the COGSA, since the
broker is not a carrier, charterer or holder of the bill of
lading (Reyma Brokerage Inc. vs. Philippine Home
Assurance Corporation, G.R. No. 93464, October 7, 1991).
The parties may agree to extend the one-year period to
file a case under the Carriage of Goods by Sea (Universal
Shipping Lines, Inc. vs. Intermediate Appellate Court, G.R.
No. 74125, July 31, 1990).
The one year period in COGSA is interrupted:
1. When an action is filed in court; or
2. When there is an agreement between the parties to
extend it.
135
Instances when the one-year period applies (AFLS)
1. Amendment of pleadings for suing the wrong party
2. Filing of third party complaint
3. Loss or damage to cargo, excluding delay or
misdelivery
4. Subrogation (NCC, Art 2207).
NOTE: Art. 1155 of the Civil Code (providing that the
prescription of actions is interrupted by the making of an
extrajudicial written demand by the creditor) is not
applicable to actions brought under the COGSA.
Written claims do not toll the running of the one-year
prescriptive period under the COGSA since matters
affecting the transportation of goods by sea must be
decided as soon as possible (Dole Philippines, Inc. vs.
Maritime Company of the Philippines, G.R. No. L-61352,
February 27, 1987).
The one-year prescriptive period within which to file a
case against the carrier also applies to a claim filed by an
insurer who stands as a subrogee to the insured. Also,
whether the insurer files a third party complaint or
maintains an independent action is of no moment
(Filipino Merchants Insurance Co., Inc. vs. Alejandro, G.R.
No. L-54140, Oct. 14, 1986).
Where an insurer was sued by the consignee of imported
goods filed a third-party complaint against the carrying
vessel more than a year after the delivery of the goods, the
third party complaint is barred by the one-year
prescriptive period under the COGSA, as otherwise the
prescriptive period can be avoided by the consignee by
filing a claim against the insurer (Filipino Merchant
Insurance Co., Inc. vs. Alejandro, ibid).
NOTE: The ruling in the above-cited case should apply
only to suits against the carrier filed either by the shipper,
the consignee or the insurer, not to suits by the insured
against the insurer. The basis of the insurer’s liability is
the insurance contract and such claim prescribes in 10
years, in accordance with Art. 1144 of the Civil Code
(Mayer Steel Pipe Corporation vs. CA, G.R. No. 124050, June
19, 1997).
Persons who can give notice to, and bring suit against
the carrier (SCA)
1. The Shipper
2. The Consignee; or
3. Any legal holder of the bill of lading like the indorsee,
subrogee, or the insurer of the goods (Kuy vs. Everett
Steamship Corporation, G.R. No. L-5554, May 27,
1953).
Q: On December 1, 2010, Kore A Corporation shipped
from South Korea to LT Corporation in Manila some
300,000 sheets of high-grade special steel. The
shipment was insured against all risk by NA
Insurance (NA). The carrying vessel arrived at the
Port of Manila on January 10, 2011. When the
shipment was discharged, it was noted that 25,000
sheets were damaged and in bad order. The entire
shipment was turned over to the custody of ATI, the
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
arrastre operator, on January 21, 2011 for storage
and safekeeping, pending its withdrawal by the
consignee’s authorized customs broker, RVM. On
January 26 and 29, 2011, the subject shipment was
withdrawn by RVM from the custody of ATI.
On January 29, 2011, prior to the withdrawal of the
last batch of the shipment, a joint inspection of the
cargo was conducted per the Request for bad Order
Survey (RBO) dated January 28, 2011. The
examination report showed that 30,000 sheets of
steel were damaged and in bad order. NA Insurance
paid LT Corporation the amount of P30 M for the
30,000 sheets that were damaged, as shown in the
Subrogation Receipt dated January 13, 2013.
Thereafter, NA Insurance demanded reparation
against ATI for the goods damaged in its custody, in
the amount of P5 M. ATI alleged that the COGSA
applies in this case since the goods were shipped from
a foreign port to the Philippines.
NA Insurance claims that the COGSA does not apply,
since ATI is not a shipper or carrier. Who is correct?
(2014 Bar)
A: NA Insurance is correct. ATI should be ordered to pay
NA Insurance notwithstanding the lapse of the one year
prescriptive period for filing a suit under the COGSA. The
term “carriage of goods” under Section 1 in COGSA, covers
the period from the time when the goods are loaded to the
time when they are discharged from the ship infer that the
period of time when the goods have been discharged from
the ship and given to the custody of the arrastre operator
is not covered by the COGSA. The COGSA does not mention
that an arrastre operator may invoke the prescriptive
period of one year; hence, it does not cover the arrastre
operator.
Q: New World bought from DMT Corp. through its
agent, Advatech Industries, Inc. 3 emergency
generator sets. DMT shipped the generator sets by
truck from Wisconsin, US to LEP Profit in Chicago,
Illinois. From there, the shipment went by train to
Oakland, California, where it was loaded on S/S
California Luna V59, owned and operated by NYK)for
delivery to petitioner New World in Manila.
NYK unloaded the shipment in Hong Kong and
transshipped it to Ruby that it also owned. On its
journey to Manila, however, ACX Ruby encountered
typhoon whose captain filed a sea protest on arrival
at the Manila South Harbor on October 5, 1993
respecting the loss and damage that the goods on
board his vessel suffered.
Since Seaboard, New World’s insurer, covered the
goods with a marine insurance policy, New World
sent it a formal claim dated November 16, 1993.
Replying on February 14, 1994, Seaboard required
New World to submit to it an itemized list of the
damaged units, parts, and accessories, with
corresponding values but New World failed to do so,
thus, Seaboard refused to process the claim.
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On October 11, 1994 New World filed an action for
specific performance and damages against all the
respondents before the RTC. On August 16, 2001 the
RTC rendered a decision absolving the various
respondents from liability with the exception of NYK.
The RTC ruled, however, that New World filed its
claim against the NYK beyond the one year provided
under the COGSA. New World filed its complaint on
October 11, 1994 when the deadline for filing the
action (on or before October 7, 1994) had already
lapsed. On appeal, the CA rendered judgment on
January 31, 2006, affirming the RTCs rulings except
with respect to Seaboards liability. Is the Decision of
CA correct?
A: No. With respect to the prescriptive period, the last day
for filing such a suit fell on October 7, 1994. The record
shows that petitioner New World filed its formal claim for
its loss with Seaboard, its insurer, a remedy it had the
right to take, as early as November 16, 1993 or about 11
months before the suit against NYK would have fallen due.
In the ordinary course, if Seaboard had processed that
claim and paid the same, Seaboard would have been
subrogated to petitioner New Worlds right to recover
from NYK. But Seaboard made an unreasonable demand
on February 14, 1994 for an itemized list of the damaged
units, parts, and accessories, with corresponding values
when it appeared settled that New Worlds loss was total
and when the insurance policy did not require the
production of such a list in the event of a claim.
Notwithstanding the fact that the case was filed beyond
the one-year prescriptive period provided for under
COGSA, the suit will not be dismissed if the delay was not
due to the claimant’s fault. Had the insurer processed and
examined New World’s claim promptly – either rejecting
or paying New World, the latter could have taken judicial
action on time. (New World International Development
Phils. Inc. v. NYK-FILJAPAN Shipping Corp., G.R. No.
171468, August 24, 2011, in Divina, 2014).
With respect to Seaboard’s liability, the marine open
policy that Seaboard issued to New World was an all-risk
policy. The policy covered all losses during the voyage
whether or not arising from a marine peril (New World
International Development Phils. Inc. v. NYK-FILJAPAN
Shipping Corp., G.R. No. 171468, August 24, 2011.)
Prescriptive period in case of misdelivery and
conversion of goods
1. If there is a written contract – 10 years (NCC, Art.
1144)
2. Oral contract – 6 years (NCC, Art. 1145)
3. For quasi-delict – 4 years (NCC, Art. 1146)
LIMITATION OF LIABILITY
Amount of the carrier’s liability under the COGSA
1. The liability limit is set at $500 per package or
customary freight unless the nature and value of such
goods is declared by the shipper.
 TRANSPORTATION LAWS
2. Shipper and carrier may agree on another maximum
amount, but not more than amount of damage
actually sustained.
NOTE: When the packages are shipped in a container
supplied by carrier and the number of such units is stated
in the bill of lading, each unit and not the container
constitute the “package.”
Instances where there is no liability under COGSA
(FDUD)
1. If the nature or value of goods knowingly and
fraudulently misstated by shipper
2. If damage resulted from Dangerous nature of
shipment loaded without consent of carrier
3. If Unseaworthiness not due to negligence
4. If Deviation was to save life or property at sea.
Q: Clause 18 of the bill of lading provides that the
owner should not be liable for loss or damage of cargo
unless written notice thereof was given to the carrier
within 30 days after receipt of the goods. However,
Section 3 of the COGSA provides that even if a notice
of loss or damage 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."
Which of these two provisions should prevail?
A: Section 3 will prevail. Sec. 3 of the COGSA provides
that any clause, covenant, or agreement in a contract of
carriage relieving the carrier or the ship from liability for
loss or damage to or in connection with the goods or
lessening such liability otherwise than as provided, shall
be null and void and of no effect (E. E. Elser, Inc. vs. CA, G.R.
No. L-6517, November 29, 1954).
THE WARSAW CONVENTION
The Warsaw Convention (WC) for Unification of Certain
Rules Relating to International Carriage by Air provides
for rules applicable to international transportation by air.
The Philippines is one of the signatories to WC (Santos III
vs. Northwest Orient Airlines, G.R. No. 101538, June 23,
1992). Hence, this has the force and effect of law in the
Philippines (Cathay Pacific Airways, Ltd. vs. CA, G.R. No.
60501, March 5, 1993).
APPLICABILITY
The WC applies to all international carriage of persons,
luggage or goods performed by aircraft for reward. It
applies equally to gratuitous carriage by aircraft
performed by an air transport undertaking (WC, Art. 1[1]).
International carriage
Any carriage in which, according to the contract made by
the parties, the place of departure and the place of
destination, whether or not there be a break in the
carriage or a transshipment, are situated either:
1. Within the territories of two High Contracting
Parties; or
137
2. Within the territory of a single High Contracting
Party, if there is an agreed stopping place within a
territory subject to the sovereignty, suzerainty,
mandate or authority of another Power, even though
that Power is not a party to the Convention (WC, Art.
1[2]).
High Contracting Parties are the signatories to the WC and
those which subsequently adhered to it. (Mapa vs. CA, G.R.
No. 122308, July 8, 1997)
Q: How should carriage performed by several
successive air carriers be treated under Warsaw
Convention?
A: A carriage to be performed by several successive air
carriers is deemed, for the purposes of WC to be one
undivided carriage, if it has been regarded by the parties
as a single operation, whether it had been agreed upon
under the form of a single contract or of a series of
contracts (WC, Art. 1 [3]).
Such carriage does not lose its international character
merely because one contract or a series of contracts is to
be performed entirely within a territory subject to the
sovereignty, suzerainty, mandate or authority of same
High Contracting Party (Ibid).
Documents of carriage issued under WC
The following are the documents of carriage:
1. Passenger Ticket
2. Luggage Ticket
3. Air Consignment note
Function of the air consignment note
It is prima facie evidence of:
1. The conclusion of the contract
2. Receipt of the goods
3. Conditions of carriage (WC, Art. 11 [1]).
Right to dispose by consignor
1. The consignor may exercise its right to dispose of the
goods by:
2. Withdrawing them at the aerodrome of departure or
destination, or
3. Stopping them in the course of the journey on any
landing, or
4. Calling for them to be delivered at the place of
destination or in the course of the journey to a person
other than the consignee named in the air
consignment note, or
5. Requiring them to be returned to the aerodrome of
departure (WC, Art. 12).
In the exercise of this right, the carrier or other consignors
must not be prejudiced. For the carrier to obey the orders
for disposition, the carrier must require the production of
the part of the air consignment note delivered to the
consignor (ibid).
Right to dispose ceases as soon as the consignee, on
arrival of the goods at the place of destination, require the
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
carrier to hand over to him the air consignment note and
to deliver the goods to him, on payment of charge due and
on complying with the conditions of carriage set out in the
air consignment note (WC, Art. 13).
Where the supervisor of the consignee signed the delivery
receipt for the goods shipped, the consignee cannot sue
the shipping company for non-delivery of the goods
(Republic vs. Lorenzo Shipping Corporation, G.R. No.
153563, Februry 7, 2005).
Liabilities under the convention:
The carrier is liable under the following instances:
1. Damage sustained in the event of the death or
wounding of a passenger taking place on board the
aircraft or in the course of any of the operations of
embarking or disembarking;
2. Loss or damage to any check baggage or goods
sustained during the transport by air;
3. Delay in the transport by air of passengers, baggage
or goods.
The list is not exclusive.
Venue in the filing of an action for violation of a
contract of international carriage
An action for damage must be brought at the option of the
plaintiff, in the territory of one of the High Contracting
Parties, either before the court:
1. of the domicile of the carrier or
2. of his principal place of business, or
3. where the ticket was purchased, or
4. at the place of destination (WC, Art. 28 [1]).
LIMITATION OF LIABILITY
Limitations to the liability of air carriers (1993 Bar)
1. In the carriage of persons – 250,000 francs for each
passenger. Nevertheless, by special contract, the
carrier and the passenger may agree to a higher limit
of liability.
2. In the carriage of registered baggage and of cargo –
Two hundred and fifty (250) francs per kilogram,
unless the passenger or consignor has made, at the
time when the package was handed over to the
carrier, a special declaration of interest in delivery at
destination and has paid a supplementary sum if the
case so requires.
3. As regards objects of which the passenger takes charge
himself – Five thousand (5,000) francs per passenger
(WC, Art. 22).
The above figures have been amended by the Guatemala
Protocol, viz:
1. Carriage of persons – One hundred thousand
dollars ($100, 000)
2. Checked-in articles – One thousand dollars
($1,000)
3. Hand-carried baggage - One thousand dollars
($1,000)
UNIVERSITY OF SANTO TOMAS
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138
Note: According to Dean Eduardo Abella, the Guatemala
Protocol has not yet been ratified, so either of the two
currencies is still correct.
Carrier is not entitled to the foregoing limit if the damage
is caused by willful misconduct or default on its part (WC,
Art. 25). Where the loss of the baggage of a passenger was
due to the fault or recklessness of an airline company, the
limitation on the liability of airline companies under the
Warsaw Convention is not applicable (Alitalia v. IAC, G.R.
No. 71929, December 4, 1990).
Stipulation relieving the carrier from or limiting its
liability is not valid
Any provision tending to relieve the carrier of liability or
to fix a lower limit than that which is laid down in this
Convention shall be null and void but the nullity of such
provision does not involve the nullity of the whole
contract (WC, Art. 23).
Prescriptive period
Claim for damages must be brought within two years
reckoned from the date of arrival at the destination, or
from the date on which the aircraft ought to have arrived,
or from the date on which the carriage stopped,
otherwise, right to damages shall be extinguished.
Despite the express mandate that an action for damages
should be filed within 2 years from the arrival at the place
of destination, such rule shall not be applied where
delaying tactics were employed by airline itself in a case
where a passenger wishes to settle his complaint out-of-
court but the airline gave him the runaround, answering
the passenger’s letters but not giving in to his demands,
hence, giving the passenger no time to institute the
complaint within the reglementary period (United
Airlines vs. Uy, G.R. No. 127768, Nov. 19, 1999).
A claim covered by the Warsaw Convention can no longer
be recovered under local law, if the statute of limitations
of two years has already lapsed (PAL. v. Savillo, G.R. No.
149547, July 4, 2008).
However, the action filed by a passenger of an airline
company for loss of his luggage is not barred by the two-
year prescriptive period under the Warsaw Convention,
where the passenger immediately made a demand upon
the airline company and the action was delayed because
of the evasion of the airline company (United Air Lines, Inc.
v. Court of Appeals, G.R. No. 124110, April 20, 2001).
Where an airline company failed to deliver the baggage of
a passenger on time, a passenger may maintain an action
for damages under the Civil Code even if he did not file a
claim with the airline company within fourteen days as
required by the Warsaw Convention, for he may still sue
under the Civil Code (Luna v. CA, G.R. No. 100374-75,
November 27, 1992).
WILLFULL MISCONDUCT
Carrier is not entitled to the limitation of liability if the
damage is caused by willful misconduct or default on its
 TRANSPORTATION LAWS
part (WC, Art. 25). The definition of "willful misconduct"
depends in some measure on which court is deciding the
issue. Some common factors that courts will consider are:
1. Knowledge that an action will probably result in
injury or damage
2. Reckless disregard of the consequences of an action,
or
3. Deliberately failing to discharge a duty related to
safety.
NOTE: Courts may also consider other factors.
public generally (Luzon Stevedoring v. PSC, G.R. L-5458,
September 16 1953).
NOTE: The terms “public utility” and “public service” are
used interchangeably (Perez, 2006).
Certificate of public convenience (CPC)
It is an authorization issued for the operation of public
services for which no franchise, either municipal or
legislative, is required by law, such as a common carrier.

The failure of the carrier to deliver the passenger’s
luggage at the designated time and place does not ipso
facto constitutes willful misconduct. There must be a
showing that the acts complained of were impelled by an
intention to violate the law, or were in persistent
disregard of one's rights. It must be evidenced by a
flagrantly or shamefully wrong or improper conduct
(Luna vs. CA, GR No. 100374-75, November 27, 1992).
The act of the carrier in guessing which luggage contained
the firearm constitutes willful misconduct. The
guessing of which luggage contained the firearms
amounted to willful misconduct under Section 25(1) of
the Warsaw Convention (Northwest Airlines vs. CA, GR No.
120334, January 20, 1998).
Certificate of public convenience is not necessary
before a carrier can be considered a common carrier
A person or entity is a common carrier even if he did not
secure CPC. Its liability as a common carrier arises as soon
as it acted as a common carrier, without regard as to
whether or not such carrier has complied with the
requirements of the applicable regulatory statute and
implementing regulations and has been granted a
certificate of public convenience or other franchise (De
Guzman v CA. G.R. No. L-47822, December 22, 1988).
Certificate of public convenience (CPC) vs. Certificate
of public convenience and necessity (CPCN)

The allegation of willful misconduct resulting in a tort is CPC CPCN

insufficient to exclude the case from the realm of Warsaw Issued whenever the Public Issued upon approval of
Convention. A cause of action based on tort did not bring Service Commission finds any franchise or privilege
the case outside the sphere of the Warsaw Convention that the operation of the granted by any political
(Lhuiller vs. British Airways, GR No. 171092, March 15, proposed public service subdivision of the
2010). will promote the public Philippines when in the
interests in a proper and judgment of the political
PUBLIC SERVICE suitable manner, for which subdivision of the
a municipal or legislative Philippines when in the
Public utility franchise is NOT necessary judgment of the
(Public Service Act, Sec. 16 Commission such franchise
A business or service engaged in supplying the public with [a]). or privilege will properly
some commodity or service of public consequence, or conserve the public
essential to the general public (Perez, 2006, citing Albano interest
vs. Reyes, G.R. 83551, July 1, 1989; KMU Labor Center vs. (Public Service Act, Sec. 16
Garcia, G.R. 115381, December 23, 1994). [b]).

Public service Instances where a certificate of public convenience is

NOT necessary
Every person that may own, operate, manage, control in
the Philippines, for hire/compensation, with (WAR-PIPA)
general/limited clientele whether permanent, occasional 1. Warehouses
or accidental, and done for general business purposes, 2. Animal-drawn vehicles or banca powered by oar or
any common carrier, with or without fixed route and by sail; tug boats and lighters
whatever may be its classification, engaged in the 3. Radio companies, except as to fixing of rates
transportation of passengers or freight or both, canal, 4. Public market
irrigation system, gas, electric light, heat and power, 5. Ice plants
water supply power, petroleum, sewerage system, wire or 6. Public utilities operated by the national government
wireless communication systems, wire or wireless or Political subdivision except as to rates.
broadcasting stations and stations and other similar 7. Airships except as to fixing rates
public services (Public Service Act, Sec. 13 [b]).
Requirements for the grant of certificate of public
A casual or incidental service devoid of public character convenience (COPS)
and interest is not brought within the category. The
question depends on such factors as the extent of services, 1. Citizen of the Philippines. If the applicant is a
whether such person or company has held himself or Corporation, 60% of its capital must be owned by
itself out as ready to serve the public or a portion of the Filipinos.

UNIVERSITY OF SANTO TOMAS

139 FACULTY OF CIVIL LAW
 MERCANTILE LAW
2. Proof that the Operation of proposed public service
will promote public interest in a proper and suitable
manner.
3. Prove Public necessity.
4. Sufficient financial capability to undertake proposed
services and meeting responsibilities incidental to its
operation (KMU Labor Center vs. Garcia, supra).
100% foreign corporation may own facilities and
equipment of a public utility such as EDSA LRT III
While the Constitution requires that a franchise is needed
for the operation of public utility and that no franchise
shall be granted to corporation without at least 60% of its
capital owned by Filipinos, it does not require however, a
franchise before one can own the facilities needed to a
public utility. The right to operate a public utility may
exist independently and separately from the ownership of
the facilities thereof. One can own facilities without
operating them as a public utility, or conversely one may
operate a public utility without owning the facilities
(Tatad, et al. vs. Sec. Garcia and EDSA LRT Corp Ltd., April
16, 1995).
Certificate of public convenience as “property”
Certificate of public convenience does not confer upon the
holder any proprietary right or interest in the route
covered thereby. However, with respect to other persons
and other public utilities, a CPC is property, which
represents the right and authority to operate its facilities
for public service, cannot be taken or interfered with
without due process of law. Appropriate actions may be
maintained in courts by the holder of the certificate
against those who have not been authorized to operate in
competition with the former and those who invade the
rights which the former has pursuant to the authority
granted by the Commission (A.L. Animen Transportation
Co. vs. Golingco, G.R. No. 17151, April 6, 1922).
Under the PSA, a CPC can be sold by the holder thereof
because it has considerable material value and is
considered a valuable asset (Raymundo vs. Luneta Motor
Co., G.R. No. 39902, November 29, 1933). It is a “property”
and it can be the subject of sale or attachment (Cogeo-
Cubao Operators and Drivers Association vs. CA, G.R. No.
100727, March 18, 1992), Raymundo v. Luneta Motor Co.,
supra)
Approval by the Commission of the sale, encumbrance
or lease of property is not a condition precedent to
the validity of a contract
While in the old law, the sale without the approval of the
Public Utility Commission was declared null and void,
under PSA, the new law, the sale may not only be
negotiated but completed before said approval. In other
words, the approval by the Commission is not a condition
precedent to the validity of the contract. The approval is
only necessary to protect public interest (Darang vs.
Belizar, G.R. No. L-19487, January 31, 1967).
However, in case the registered owner leased to another
a vehicle being used for public service, the former will still
be liable to a customer whose goods were
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
140
misappropriated by the latter if there was no approval of
the PSC since the lease is not binding upon the parties
(Galisan vs. Alday, G.R. L-30212, Septemeber 30, 1987).
Liability of a holder of Certificate of Public
Convenience
GR: The holder of the CPC (registered owner) is primarily
and vicariously liable for the negligent operation of the
vehicle (ibid., pg. 138; Art. 2176, in relation to Art. 2180,
NCC; Filcar Transport vs. Espinas, G.R. No. 174156, June 20,
2012).
XPNs: The registered owner is not liable if:
1. The vehicle was taken or stolen from his garage;
2. The vehicle was driven without his knowledge or
consent (ibid., pg. 138, citing Duavit vs. CA, G.R. No.
82318, May 8, 1989 and Duquillo vs. Bayot, G.R. L-
45080, April 3, 1939).
The registered owner cannot exculpate himself from
vicarious liability by proving who the supposed
transferee or owner is. (ibid., pg. 139, citing Orix Metro
Leasing vs. Mangalinao, G.R. 174089, January 25, 2012).
Q: Metro Manila Transit Corp. (MMTC) and Mina's
Transit Corporation (Mina's Transit) entered into an
agreement to sell whereby the latter bought several
bus units from the former. They agreed that MMTC
would retain the ownership of the buses until certain
conditions were met, but in the meantime Mina's
Transit could operate the buses within Metro Manila.
One of the buses subject of the agreement to sell, hit
and damaged a Honda Motorcycle owned by Reynaldo
and driven by Junnel. Reynaldo and Junnel sued
MMTC and Mina’s Transit for damages.
MMTC denied liability, and averred that although it
retained the ownership of the bus, the actual operator
and employer of the bus driver was Mina’s Transit;
and that, in support of its cross-claim against Mina’s
Transit, a provision in the agreement to sell
mandated Mina’s Transport to hold it free from
liability arising from the use and operation of the bus
units. Is MMTC liable?
A: Yes. The Registered owner of a motor vehicle whose
operation causes injury to another is legally liable to the
latter. MMTC could not evade liability by passing the buck
to Mina’s Transit. The stipulation in the agreement to sell
did not bind third parties who were expected to simply
rely on the data contained in the registration certificate of
the erring bus.
MMTC could however, recover from Mina’s Transit, the
actual employer of the negligent driver, under the
principle of unjust enrichment, by means of a cross-claim
seeking reimbursement of all the amounts that it could be
required to pay as damages arising from the driver’s
negligence. (Metro Manila Transit Corporation vs.
Reynaldo Cuevas and Junnel Cuevas, G.R. No. 167797, June
15, 2015)
Grounds to oppose the application for a certificate of
public convenience
 TRANSPORTATION LAWS
1. Prior operator rule - The area has already a well-
established operator (Mandbusco, Inc. vs. Francisco,
G.R. L-23688, April 30, 1970). The rule allows an
existing franchised operator to invoke a preferential
right within the authorized territory as long as he
renders satisfactory and economical service (Martin,
1989). The prior operator must first be given the
opportunity to extend its service in order to meet
public needs in the matter of transportation (ibid).
Third Operator Rule - Where two operators are more
than serving the public there is no reason to permit a
third operator to engage in competition with them.
The fact that it is only one trip and of little
consequence is not sufficient reason to grant the
application (Yangco v. Esteban, G.R. No. 38586, Aug.
18, 1933).
2. Prior applicant rule- Where there are various
applicants for a public utility over the same territory,
all conditions being equal, priority in the filing of the
application for CPC becomes a factor. It presupposes
a situation when two interested persons apply for a
certificate to operate a public utility in the same
community over which no person has as yet granted
any certificate (Martin, 1989).
3. Protection of investment rule- One of the purposes
of PSA is to protect and conserve the investments
which have already been made for that purpose by
public service operators (Batangas Trans. Co. vs.
Orlanes, G.R. L-28865, December 19, 1928).Objection
should be made if the grant of the application would
result to a ruinous competition (Halili vs. Ice and Cold
Storage Industries, Inc., G.R. L-1871, November 18,
1949).
Mere possibility of reduction in the income of an
existing operator does not, of itself, establish that
issuing a permit to another will result in ruinous
competition. It should be shown that the oppositor
will not obtain sufficient profits to pay a dividend or
reasonable interest upon invested capital (Halili vs.
Ice and Cold Storage Industries, Inc., supra).
4. Attack the citizenship of the applicant (Sec. 11, Art. XII
of the 1987 Constitution prohibits the granting of
franchise or certificate for the operation of public
utility in favor of non-Filipino citizens); or
5. The applicant does not have the necessary financial
capacity (KMU Labor Center vs. Garcia, supra).
Exceptions to the application of Prior operator rule or
Protection of investment rule
1. Where public interest would be better served by the
new operator (Intestate Estate of Teofilo Tiongson vs.
Commission, G.R. L-24701, December 16, 1970).
2. Where the old operator has failed to make an offer to
meet the increase in traffic (Manila Yellow Taxicab
Co., Inc. vs. Castelo, GR No. L-131910, May 30, 1960).
3. Where the CPC granted to the new operator is a
maiden certificate, which does not overlap with the
141
entire route of the old operator but only a short
portion thereof as a convergence point (Mandbusco,
Co. vs. Francisco, supra).
4. If the application of the rule will be conducive to
monopoly of the service, and contrary to the
principle that promotes healthy competition (Villa
Rey Transit, Inc. vs. Pangasinan Trans. Inc., G.R. L-
17684-85, May 30, 1962).
5. If the old operator unjustifiably abandoned his
service for two or three years by not registering the
necessary equipment forfeits his right to said
equipment and the service authorized to him
(Fariñas vs. Estate of Florencio Buan, GR No. 12306-7,
November 29, 1961).
6. The service of the prior operator is inefficient.
7. The prior operator denies that there is a need to
expand his service.
8. The prior operator has abandoned his service.
9. The prior operation is operating less units than he
was authorized.
10. The prior operator was given the opportunity to
expand his service and failed to do so.
Q: Bayan Bus Lines had been operating satisfactorily
a bus service over the route Manila to Tarlac and vice
versa via the McArthur Highway. With the upgrading
of the new North Expressway, Bayan Bus Lines service
became inadequate despite its efforts of improving
the same. Pasok Transportation, Inc. now applies for
the issuance to it by the Land Transportation
Franchising and Regulatory Board of a certificate of
public convenience for the same route. Could Bayan
Bus Lines, Inc. invoke the prior operator rule against
Pasok Transportation, Inc? Why? (2003 Bar)
A: No. As a general principle, public utility operators must
be protected from ruinous competition, such that before
permitting a new operator to serve in a territory already
served by another operator, the latter should first be
given an opportunity to improve his equipment and
service. This principle, however, is subject to justifiable
exceptions. The primary consideration in the grant of a
certificate of public convenience must always be public
convenience. (Fortunato F. Halili v. Ruperto Cruz, G.R. No.
L-21061, June 27, 1968).
Bayan Bus Lines had been given an opportunity to
improve its service but despite its efforts, its services still
proved inadequate which rendered the need to avail of
the services of Pasok Transportation, Inc. as the addition
would better serve public convenience, which is the
paramount consideration in the granting of a certificate of
public convenience.
Boundary system
Under this system the driver is engaged to drive the
owner/operator’s unit and pays the latter a fee commonly
called boundary for the use of the unit. Whatever he
earned in excess of that amount is his income (Paguio
Transport Corp. v. NLRC, G.R. No. 119500, August 28, 1998).
The gasoline consumed by the jeep is for the account of
the driver (National Labor Union v. Dinglasan, G.R. No. L-
14183, Nov. 4, 1993).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
The relationship between jeepney owners/ operators on
one hand and jeepney drivers on the other under the
boundary system is that of employer-employee and not of
lessor-lessee (Martinez v. NLRC, G.R. No. 117495, May 29,
1997).
The owner of the public vehicle operating under the
boundary system is not exempt from liability in a case of
injury to or death of passengers. To exempt from liability
the owner of a public vehicle who operates it under the
“boundary system” on the ground that he is a mere lessor
would be not only to abet flagrant violations of the PSA,
but also to place the riding public at the mercy of reckless
and irresponsible drivers. Moreover, due care in the
selection of employees is called for by Article 2180 of the
Civil Code. Failing on this, the owner of the vehicle, who is
likewise the employer, shall not be exempt from liability
(Hernandez vs. Dolor, G.R. 160286, July 30, 2004).
Q: Baldo is a driver of Yellow Cab Company under the
boundary system. While cruising along the South
Expressway, Baldo‘s cab figured in a collision, killing his
passenger, Pietro. The heirs of Pietro sued Yellow Cab
Company for damages, but the latter refused to pay
the heirs, insisting that it is not liable because Baldo
is not its employee. Resolve with reasons. (2005 Bar)
A: Yellow Cab is solidarily liable with Baldo. Baldo is an
employee of Yellow Cab under the boundary system. As
such, the death of passenger Pietro is a breach of contract
of carriage. (Hernandez v. Dolor, G.R. No. 160286, July 30,
2004).
Q: X owns a fleet of taxicabs. He operates it through
what is known as boundary system. Y drives one of
such taxicabs and pays X a fixed amount of Php1 ,000
daily under the boundary system. This means that
anything above Php1,000 would be the earnings of Y.
Y, driving recklessly, hit an old lady crossing the
street. Is X exempt from any liability? (2012 Bar)
A: No. X will not be exempt from liability because he
remains to be the registered owner and the boundary
system will not allow the circumvention of the law to
avoid liability.
Kabit system
The kabit system is an arrangement whereby a person
who has been granted a CPC allows other persons who
own motor vehicles to operate them under his license,
sometimes for a fee or percentage of the earnings (Lim v.
CA, G.R. No. 125817, January 16, 2002).
Although not outrightly penalized as a criminal offense,
the kabit system is invariably recognized as being
contrary to public policy and therefore, void and
inexistent under Art. 1409 of the New Civil Code. It is a
fundamental principle that the court will not aid either
party to enforce an illegal contract, but will leave them
both where it finds them (Lita Enterprises, Inc. v. IAC, G.R.
No. 64693, April 27, 1984).
Q: Discuss the “kabit system” in land transportation
and its legal consequences (2005 Bar)
UNIVERSITY OF SANTO TOMAS
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142
A: The “kabit system” is an agreement whereby a person
who has been granted a certificate of convenience allows
another person who owns motor vehicles to operate
under such franchise for a fee. It has been identified as one
of the root causes of the prevalence of graft and
corruption in the government transportation offices. It is
recognized as a contract which is against public policy and
therefore void and inexistent under Art. 1409 (Lita
Enterprises, Inc. vs. IAC, G.R. L-64693, April 27, 1984). As a
consequence, both the owner of the certificate of public
convenience and the actual owner of the motor vehicle
should be held jointly and severally liable for damages to
third persons as a consequence of the negligent operation
of the motor vehicle.
The registered owner of the vehicle may not be allowed to
prove that there is already a transfer of ownership to
another person under the kabit system. One of the
primary factors considered in the granting of a CPC for the
business of public transportation is the financial capacity
of the holder of the license, so that liabilities arising from
accidents may be duly compensated. The kabit system
renders illusory such purpose and, worse, may still be
availed of by the grantee to escape civil liability caused by
a negligent use of a vehicle owned by another and
operated under his license.
If a registered owner is allowed to escape liability by
proving who the supposed owner of the vehicle is, it
would be easy for him to transfer the subject vehicle to
another who possesses no property with which to
respond financially for the damage done (Lim v. CA,
supra).
Q: Can the grantee of CPC engaged in a “kabit system”
be held liable for damages arising from the crime of
reckless imprudence resulting to the death and
injuries to third persons, to which the driver was
convicted?
A: Yes. The driver, the operator, and the real owner of the
vehicle are jointly and severally liable for damages.
However, the registered owner or operator has the right
to be indemnified by the real or actual of the amount that
he may be required to pay as damage for the injury
caused. Recovery by the registered owner or operator
may be made in any form—either by a cross-claim, third
party complaint, or an independent action, and the result
is the same (Perez, 2009, citing Jereos v. CA, G.R. L-48747,
September 20, 1982; Zamboanga Trans. Co. v. CA, L-25292,
November 29, 1969).
Q: Johnny owns a Sarao jeepney. He asked his
neighbor Van if he could operate the said jeepney
under Van‘s certificate of public convenience. Van
agreed and, accordingly, Johnny registered his
jeepney under Van’s name. One of the passenger
jeepneys operated by Van bumped Tomas. Tomas was
injured and in due time, he filed a complaint for
damages against Van and his driver for the injuries he
suffered. The court rendered judgment in favor of
Tomas and ordered Van and his driver, jointly and
severally, to pay Tomas actual and moral damages,
attorney‘s fees, and costs.
 TRANSPORTATION LAWS

The Sheriff levied on the jeepney belonging to

Johnny but registered in the name of Van. Johnny
filed a third party claim with the Sheriff alleging
ownership of the jeepney levied upon and stating
that the jeepney was registered in the name of Van
merely to enable Johnny to make use of Van‘s
certificate of public convenience. May the Sheriff
proceed with the public auction of Johnny‘s jeepney.
Discuss with reasons. (1990 Bar)

A: Yes, the Sheriff may proceed with the auction sale of

Johnny‘s jeepney. In contemplation of law as regards the
public and third persons, the vehicle is considered the
property of the registered operator (Santos v. Sibug, G.R.
L-26815, May 26, 1981).

Q: Procopio purchased an Isuzu passenger jeepney

from Enteng, a holder of certificate of public
convenience for the operation of public utility plying
the Calamba-Los Baños route. While Procopio
continued offering the jeepney for public transport
services, he did not have the registration of the
vehicle transferred in his name. Neither did he secure
for himself a certificate of public convenience for its
operation. Thus, per the records of the Land
Transportation Franchising and Regulatory Board,
Enteng remained its registered owner and operator.
One day, while the jeepney was traveling southbound,
it collided with a ten-wheeler truck owned by
Emmanuel. The driver of the truck admitted
responsibility for the accident, explaining that the
truck lost its brakes.

Procopio sued Emmanuel for damages, but the latter

moved to dismiss the case on the ground that
Procopio is not the real party in interest since he is
not the registered owner of the jeepney. Resolve the
motion with reasons (2005 Bar)

A: The motion to dismiss should be denied. In the case of

Lim v. Court of Appeals, G.R. No. 125817, January 16, 2002,
the Supreme Court held that Procopio may sue for
damages against Emmanuel despite the existence of kabit
system because, (a) neither parties to the kabit system is
being held liable for damages; (b) the case arose from the
negligence of another vehicle using the public road to
whom no representation, or misrepresentation, as
regards ownership and operation of the passenger
jeepney was made to whom such representation, or
misrepresentation was necessary (Villanueva, 2009).

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corporation. What provision of the constitution
THE CORPORATION CODE (CC) precludes the passage of such law? (2008 Bar)

CORPORATION A: Article XII, Section 16 of the 1987 Constitution

provides that Congress shall not, except by general law,
DEFINITION provide for the formation, organization, or regulation of
private corporations. Government-owned and controlled
A corporation is an artificial being created by operation of corporations may be created or established by special
law, having the right of succession and the powers, charters in the interest of the common good and subject
attributes and properties expressly authorized by law or to the test of economic viability.
incident to its existence (CC, Sec. 2).
Private corporations owned or controlled by the
ATTRIBUTES OF A CORPORATION government can only be created by special law often
referred to as “Charters”
[ALS– PAPI]
1. It is an Artificial being Q: A corporation was created by a special law. Later,
2. It is created by operation of Law the law creating it was declared invalid. May such
3. It enjoys the right of Succession corporation claim to be a de facto corporation?
4. It has the Powers, Attributes and Properties expressly
authorized by law or Incident to its existence. A: No. A private corporation may be created only under
the Corporation Code. Only public corporations may be
created under a special law. Where a private corporation
Artificial Personality
is created under a special law, there is no attempt at a
valid incorporation and it cannot claim a de facto status.
A corporation is a legal or juridical person with a
personality separate and apart from individual
Q: A Special Audit Team from COA audited the
stockholders or members and from any other legal entity
accounts of Leyte Metropolitan Water District
into which it may be connected or related.
(LMWD). Subsequently, LMWD and received a
requested for payment of auditing fees from COA. As
Corporation as a Creation of Law or By Operation of
LMWD GM Feliciano sent a replied informing COA that
Law
the water district could not pay the auditing
fees, citing as basis for his action Presidential Decree
No corporation can exist without the consent or grant of
198 (PD 198) as well as Republic Act No. 6758 (RA
the sovereign, and that the power to create corporations
6758). Thereafter, Feliciano asked COA for refund of
is one of the attributes of sovereignty. Corporations
all auditing fees LMWD previously paid to COA. The
cannot come into existence by mere agreement of the
COA Chairman denied LMWD’s request. Feliciano
parties (De Leon, 2010).
maintains that LWDs are not GOCCs with original
charters. He argues that LWDs are private
GR: A legislative grant or authority is required for the
corporations, and thus LWDs are not subject to COA’s
creation of a corporation, either by a special
jurisdiction. Is a Local Water District created under
incorporation law or charter or by means of general
PD 198, as amended, a GOCC subject to the audit
corporation law
jurisdiction of COA?
XPN: For corporations by prescription, such authority is
A: Yes. LWDs are GOCCs subject to the audit jurisdiction
not necessary (De Leon, 2010).
of COA. The Constitution and existing laws mandate COA
to audit all government agencies, including GOCCs with
NOTE: A corporation by prescription is one which has
original charters. An LWD is a GOCC with an original
exercised powers for an indefinite period without
charter. The Constitution recognizes two classes of
interference on the part of the sovereign power and which
corporations. The first refers to private corporations
by fiction of law, is given the status of a corporation (De
created under a general law. The second refers to GOCCs
Leon, 2010).
created by special charters. Congress cannot enact a law
creating a private corporation with a special
The creation of a corporation is by operation of law
charter. Such legislation would be
unconstitutional. Private corporations may exist only
NOTE: The Philippine jurisprudence adopted the
under a general law. The Constitution authorizes
Concession or fiat theory, which states that a corporation
Congress to create GOCCs through special charters. Since
is conceived as an artificial person owing existence
private corporations cannot have special charters, it
through creation by a foreign power. Further, a
follows that Congress can create corporations with
corporation has without any existence until it has
special charters only if such corporations are
received the imprimatur of the State acting according to
government-owned or controlled. Obviously, LWDs are
law, through the SEC (Tayag v. Benguet Consolidated, Inc.,
not private corporations because they are not created
GR No. L-23145, November 29, 1968).
under the Corporation Code (Engr. Ranulfo C. Feliciano v.
COA, et al., G.R. No. 147402, January 14, 2004).
Q: Since February 8, 1935, the legislature has not
passed even a single law creating a private

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 CORPORATION CODE
Q: In Liban, et al. v. Gordon (July 15, 2009) the Court
held that Richard Gordon did not forfeit his seat in the
Senate when he accepted the chairmanship of the
Philippine National Red Cross Board of Governors, as
the office of the PNRC Chairman is neither a
government office nor an office in a government-
owned or controlled corporation for purposes of the
prohibition in Section 13, Article VI of the 1987
Constitution. However, the decision declared void the
PNRC Charter as it creates the PNRC as a private
corporation and ruled that the PNRC should
incorporate under the Corporation Code and register
with the SEC if it wants to be a private corporation. Is
PNRC a private corporation?
A: No. Although the PNRC was created by a special
charter, it cannot be considered as a GOCC in absence of
the essential elements of ownership and control by the
government. It does not have government assets and does
not receive any appropriation from the Philippine
Congress. It is a non-profit, donor-funded, voluntary
organization, whose mission is to bring timely, effective
and compassionate humanitarian assistance for the most
vulnerable without consideration of nationality, race,
religion, gender, social status or political affiliation. This
does not mean however that the charter of PNRC is
unconstitutional. PNRC is sui generis. Although it is
neither a subdivision, agency or instrumentality of the
government nor a GOCC or a subsidiary thereof, so much
so that Gordon was correctly allowed to hold his position
as Chairman thereof concurrently while he served as a
Senator, such a conclusion does not ipso facto imply that
the PNRC is a private corporation within the
contemplation of the provision of the Constitution that
must be organized under the Corporation Code. The PNRC
enjoys a special status as an important ally and auxiliary
of the government in the humanitarian field in accordance
with its commitments under international law (Dante V.
Liban, et al., v. Richard J. Gordon, G. R. No. 175352, January
18, 2011, in Divina, 2014).
Q: Benedicto was a stockholder of RPN, a private
corporation duly registered with SEC. The
Government ordered the sequestration of RPN’s
properties, assets, and business. Thereafter, PCGG
entered into a compromise agreement with
Benedicto, whereby he ceded to the Government, all
his shares of stock in RPN. Consequently, upon motion
of the PCGG, the Sandiganbayan directed the
president and corporate secretary of RPN to transfer
to the PCGG Benedicto’s shares representing 72.4% of
the total issued and outstanding capital stock of RPN.
However, Benedicto moved for reconsideration,
contending that his RPN shares ceded to the
Government, through the PCGG, represented only
32.4% of RPN’s outstanding capital stock, not 72.4%.
Benedicto’s motion for reconsideration has remained
unresolved.
Carandang assumed office as general manager and
chief operating officer of RPN. Subsequently,
Carandang and other RPN officials were charged with
grave misconduct before the Ombudsman. The charge
alleged that Carandang had entered into a contract
with AF Broadcasting Incorporated despite his being
145
an incorporator, director, and stockholder of that
corporation and thus he had held financial and
material interest in a contract that had required the
approval of his office. Carandang argues that the
Ombudsman had no jurisdiction over him because
RPN is not a GOCC. Is RPN a GOCC?
A: No. A GOCC is a stock or a non-stock corporation,
whether performing governmental or proprietary
functions, which is directly chartered by a special law or
if organized under the general corporation law is owned
or controlled by the government directly, or indirectly
through a parent corporation or subsidiary
corporation, to the extent of at least a majority of its
outstanding capital stock or of its outstanding voting
capital stock. It is vested with functions relating to public
needs whether governmental or proprietary in nature,
and owned by the government directly or indirectly
through its instrumentalities either wholly, or where
applicable as in the case of stock corporations to the
extent of at least 51% of its capital stock. Although it is
true that the Sandiganbayan ordered the transfer to the
PCGG of Benedicto’s shares that represented 72.4% of the
total issued and outstanding capital stock of RPN, such
quantification of Benedicto’s shareholding cannot be
controlling in view of Benedicto’s timely filing of a motion
for reconsideration whereby he clarified and insisted that
the shares ceded to the PCGG had accounted for only
32.4%, not 72.4%, of RPN’s outstanding capital stock.
With the extent of Benedicto’s holdings in RPN remaining
unresolved with finality, concluding that the Government
held the majority of RPN’s capital stock as to make RPN a
GOCC would be bereft of any factual and legal basis
(Antonio M. Carandang v. Aniano A. Desierto, et al., G.R. Nos.
148076& 153161, January 12, 2011).
Q: Dennis A.B. Funa requested the COA for a copy of
the latest financial and audit report of the Manila
Economic and Cultural Office (MECO). The MECO was
organized as a non-stock, non-profit corporation
under the Corporation Code, in view of the desire of
the Philippines and Taiwan to maintain an unofficial
relationship in lieu of official diplomatic ties severed
by the One-China policy. Upon receipt of COA’s reply
that it does not audit MECO, Funa filed a petition for
mandamus to compel COA to audit MECO as the latter
was a GOCC as it performs functions relating to public
needs and is controlled by the government through
the appointment of its board of directors. Is Funa
correct?
A: No. The MECO is not is not owned or controlled by the
government, hence it is not a GOCC or a government
instrumentality. GOCCs are "stock or non-stock"
corporations "vested with functions relating to public
needs" that are "owned by the Government directly or
through its instrumentalities." By definition, three
attributes thus make an entity a GOCC:
i. first, its organization as stock or non-stock
corporation;
ii. second, the public character of its function;
iii. and third, government ownership over the same
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Possession of all three attributes is necessary to deem an
entity a GOCC. In this case, there is not much dispute that
the MECO possesses the first and second attributes. It is
the third attribute, which the MECO lacks.
The MECO is not owned or controlled by the government.
Organization as a non-stock corporation and the mere
performance of functions with a public aspect, however,
are not by themselves sufficient to consider the MECO as
a GOCC. In order to qualify as a GOCC, a corporation must
also, if not more importantly, be owned by the
government.
The government owns a stock or non-stock corporation if
it has controlling interest in the corporation. In a stock
corporation, the controlling interest of the government is
assured by its ownership of at least fifty-one percent
(51%) of the corporate capital stock. In a non-stock
corporation, like the MECO, jurisprudence teaches that
the controlling interest of the government is affirmed
when "at least majority of the members are government
officials holding such membership by appointment or
designation" or there is otherwise "substantial
participation of the government in the selection" of the
corporation’s governing board.
The fact of the incorporation of the MECO under the
Corporation Code is the key. The MECO was correct in
postulating that, as a corporation organized under the
Corporation Code, it is governed by the appropriate
provisions of the said code, its articles of incorporation
and its by-laws. In this case, it is the by-laws of the MECO
that stipulates that its directors are elected by its
members; its officers are elected by its directors; and its
members, other than the original incorporators, are
admitted by way of a unanimous board resolution.
It is significant to note that none of the original
incorporators of the MECO were shown to be government
officials at the time of the corporation’s organization.
Indeed, none of the members, officers or board of
directors of the MECO, from its incorporation up to the
present day, were established as government appointees
or public officers designated by reason of their office.
There is, in fact, no law or executive order that authorizes
such an appointment or designation. Hence, from a
strictly legal perspective, it appears that the presidential
"desire letters" pointed out by Funa are, no matter how
strong its persuasive effect may be, merely
recommendatory.
It is a sui generis private entity especially entrusted by the
government with the facilitation of unofficial relations
with the people in Taiwan without jeopardizing the
country’s faithful commitment to the One China policy of
the PROC. However, despite its non-governmental
character, the MECO handles government funds in the
form of the "verification fees" it collects on behalf of the
DOLE and the "consular fees" it collects under Section
2(6) of EO No. 15, s. 2001. Hence, under existing laws, the
accounts of the MECO pertaining to its collection of such
"verification fees" and "consular fees" should be audited
by the COA (Dennis A.B. Funa v. Manila Economic and
Cultural Office and COA, G.R. No. 193462, February, 2014).
Franchise
A franchise includes any special privilege or right affected
with public interest, conferred by the State on
corporations or persons and which does not belong to the
citizens of the country, generally as a matter of common
right (De Leon, 2010, citing JRS Business Corp. v. Imperial
Insurance, Inc., G.R. No. L-19891, July 31, 1964).
Kinds of franchise
The kinds of franchise are the following:
1. Primary/ Corporate/ General Franchise – the right to
exist as a corporation.
2. Secondary/ Special Franchise – the franchise to
exercise powers and privileges granted to such
corporation to the business for which it was created,
including those conferred for purposes of public
benefit such as the power of eminent domain and
other powers and privileges enjoyed by public
utilities (De Leon, 2010).

Primary vs. Secondary Franchise

PRIMARY FRANCHISE SECONDARY FRANCHISE

The franchise or authority to exist as a
corporation
GR: Granted by the Corporation Code
XPN: In GOCC’s with a special charter, a
special law grants the franchise
Cannot be transferred without the
approval of Congress (Sundiang Sr. &
Aquino, 2011).
Special authority given to a corporation to engage in a specialized business (e.g.
banks, insurance companies, right to use the streets of a municipality to lay
pipes of tracks, erect poles, or string wires).
Certain rights and privileges conferred upon existing corporations (J.R.S.
Business Corp. v. Imperial Insurance, supra).
Granted by a Government Agency, or a Municipal Corporation
It may ordinarily be conveyed or mortgaged under a general power granted to
a corporation to dispose of its property (i.e. Through board resolution or
approval of stockholders) (Villarey v. Ferrer G.R. No. L-23893, October 29, 1968).
It can be subject to levy and sale on execution together with corporate property
(Sundiang Sr. & Aquino, 2011).

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 CORPORATION CODE
Right to succession
A corporation has a capacity of continuous existence
irrespective of the death, withdrawal, insolvency, or
incapacity of the individual stockholders or members and
regardless of the transfer of their interest or shares of
stock (De Leon, 2010). A corporation may exist up to the
period stated in the articles of incorporation not
exceeding 50 years from the date of incorporation, unless
sooner dissolved or unless said period is extended (CC,
Sec. 11).
Powers, attributes and Properties of a Corporation
The powers that a corporation can exercise are only those
which are granted by the law of its creation. All powers
which may be implied from those expressly provided by
law and those which are incidental or essential to the
corporation’s existence may also be exercised (CC, Sec.
36).
TEST: Whether the act of the corporation is in direct and
immediate furtherance of its business, fairly incidental to
the express powers and reasonably necessary to their
exercise.
The power to institute expropriation proceedings is
not granted to all corporations
Incorporation (AOI) and the nature of the business
venture to be undertaken by the partnership is in line
with the business authorized by the charter or the AOI
(SEC Opinions, Feb. 29, 1980, December 1, 1993, and
February 23, 1994).
2. The partnership must be a limited partnership and
the corporation must be a limited partner.
3. If it is a foreign corporation, it must obtain a license
to transact business in the country.
Q: May a corporation enter into a joint venture? (1996
Bar)
A: Yes. A corporation may enter into a joint venture with
another where the nature is in line with the business
authorized by its charter (Tuason v. Bolanos, G.R. L-4935,
May 28, 1954). However, in as much as the term “joint
venture” has no precise legal definition, it may take
various forms. It could take the form of a simple pooling
of resources (not involving incorporation) between two
or more corporations for a specific project, purpose or
undertaking, or for a limited time. It may involve the
creation of a more formal structure, and, hence, the
formation of a corporation. What is prohibited by law is
the creation of partnership between corporations but not
the creation of joint venture.
Advantages vs. Disadvantages of a Corporation

Only quasi-public corporations or those affected with ADVANTAGES DISADVANTAGES

public interest are given the power to institute The capacity to act as a
condemnation proceedings against owners of private legal unit
property. To grant the right of eminent domain to purely
private entities exercising functions, which are not public Limitation of, or
in nature, would be using the right to take property for exemption from liability
private use (De Leon, 2010, citing SEC Opinion, October 28, of shareholders
1968). Continuity of Existence
Transferability of shares
Rule on whether a defective incorporation result into
a partnership Centralized management
of BOD
The answer depends on whether or not there is a clear
intent to participate in the management of the business Standardized method of
affairs on the part of the investor. Parties who intends to organization and finance
participate or has actually participated in the business
affairs of the proposed corporation would be considered
as partners under a de facto partnership. On the other Joint Account vs. Partnership
hand, parties who took no part notwithstanding their
subscriptions do not become partners with other JOINT ACCOUNT
subscribers (Pioneer Insurance vs. CA, GR No. 84197, July Has no firm name and is
28, 1989). conducted in the name of
the ostensible partner.
Engagement into a contract of partnership or a joint Has no juridical
venture personality and can sue or
be sued only in the name of
GR: Corporations have no power to enter into the ostensible partner.
partnership. Has no common fund.
The ostensible partner
XPN: The SEC allowed corporations to enter into
manages its business
partnerships with other corporations and individuals
operations.
provided:
Liquidation thereof can
only be done by the
1. The authority to enter into partnership relation is
ostensible partner.
expressly conferred by the Charter or the Articles of
More complicated in
formation and
management
Higher cost of formation
and operation
Lack of personal element
Greater government
control and regulation
Management and control
are separate from
ownership
Stockholders have little
voice in the conduct of
business
PARTNERSHIP
Has a firm name.
Has juridical personality
and may sue or be sued
under its firm name
Has a common fund.
All general partners have
the right of management.
Liquidation may, by
agreement, be entrusted
to a partner or partners.

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Corporation vs. Partnership

BASIS PARTNERSHIP CORPORATION

As to creation and Created by mere agreement of the parties and Created by operation of law and governed by the
governing law governed by the Civil Code Corporation Code
From the moment of meeting of /minds of the Existence of the corporation commences from
partners the date of issuance of the Certificate of
Incorporation by the Securities and Exchange
Commencement of
The term of a partnership may be established Commission (SEC).
juridical personality
for any period of time stipulated by the
and term of
partners Existence CANNOT be for a term in excess of 50
existence
years. The term of a corporation may be
extended to not more than 50 years at any single
instance.
May be organized by at least 2 persons GR: Requires at least 5 incorporators but not
Number of
more than 15.
incorporators
XPN: Corporation sole
GR: May exercise any power authorized by the May exercise only such powers as may be
partners. granted by law and its articles of incorporation,
Powers implied therefrom or incidental thereto.
XPN: Acts which are contrary to law, morals,
good customs, public order, public policy
When management is not agreed upon, every GR: Power to do business and manage its affairs
partner is an agent of the partnership is vested in the Board of Directors (BOD) /
Board of Trustees (BOT).
XPNs:
1) Executive Committee (Sec. 35, CC)
Management
2) Management Contract (Sec. 44, CC)
3) The AOI of a close corporation may provide
that the business of the corporation shall be
managed by the stockholders of the corporation
rather than by a board of directors (Sec. 97, CC).
A partner as such can sue a co-partner who The suit against a member of the BOD or BOT
Effect of mismanages. who mismanages must be brought in the name
mismanagement of the corporation (Derivative suit).
GR: Partners are liable personally and Stockholders are liable only to the extent of the
subsidiarily (sometimes solidarily) for shares subscribed by them whether paid or not.
Extent of liability to
partnership debts to third persons
third persons
XPN: Limited partner
Right of Succession No right of succession Has right of succession
Partner cannot transfer his interest in the Stockholder has the right to transfer his shares
Transferability of
partnership without the consent of all the without prior consent of the other stockholders
Shareholder’s
other existing partners. unless the right of first refusal is embodied in
interest
the articles of incorporation.
May be dissolved any time by the will of any Can only be dissolved with the consent of the
or all of the partners. State.
Dissolution
Death, civil interdiction and insolvency of a Death or insolvency of shareholders cannot
partner dissolve the partnership. dissolve the corporation.

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 CORPORATION CODE
CLASSES OF CORPORATIONS
Classes of corporation
The following are the classes of corporation:
1. As to whether their membership is represented by
shares of stock or not:
a. Stock – one which has: (1) capital stock divided
into shares and (2) are authorized to distribute
to the holders of such shares dividends or
allotments or the surplus profits on the basis of
the shares held (Sec. 3, CC).
b. Non-Stock – is one which do not issue shares and
are created not for profit but for public good and
welfare and where no part of its income is
distributable as dividends to its members,
trustees, or officers (Sec. 87, CC).
2. As to the number of persons who compose them:
a. Corporation aggregate - corporation consisting
of more than one member or corporator. The CC
requires that these corporations must be
formed by “not less than 5 persons” (Sec. 10, CC).
b. Corporation Sole ‐ religious corporation which
consists of one member or corporator only and
his successor.
3. As to whether they are for religious purpose or not:
a. Ecclesiastical corporation ‐ one organized for
religious purpose.
b. Lay corporation ‐ one organized for a purpose
other than for religion.
4. As to whether they are for charitable purpose or
not:
a. Eleemosynary [charitable] ‐ one established for
religious purposes.
b. Civil ‐ one established for business or profit.
5. As to state or country under or by whose laws they
have been created:
a. Domestic‐ one incorporated under the laws of
the Philippines.
b. Foreign ‐ one formed, organized, or existing
under any laws other than those of the
Philippines and whose laws allow Filipino
citizens and corporations to do business in its
own country or state (Sec. 123, CC).
6. As to their legal right to corporate existence:
a. De jure ‐ one existing both in fact and in law.
b. De facto ‐ one existing in fact but not in law.
7. As to whether they are open to the public or not:
a. Close ‐ one which is limited to selected persons
or members of the family (Sec. 96‐ 105, CC).
b. Open ‐ one which is open to any person who may
wish to become a stockholder or member
thereto.
8. As to their relation to another corporation:
a. Parent or Holding ‐ one which is related to
another corporation that it has the power either,
directly or indirectly to, elect the majority of the
director of such other corporation
149
b. Subsidiary ‐ one which is so related to another
corporation that the majority of its directors can
be elected either, directly or indirectly, by such
other corporation
9. As to whether they are corporations in a true sense
or only in a limited sense:
a. True ‐ one which exists by statutory authority
b. Quasi ‐ one which exist without formal
legislative grant:
i. Corporation by prescription ‐ one which has
exercised corporate powers for an indefinite
period without interference on the part of
the sovereign power and which by fiction of
law, is given the status of a corporation;
ii. Corporation by estoppel ‐ one which in reality
is not a corporation, either de jure or de
facto, because it is so defectively formed, but
is considered a corporation in relation to
those only who, by reason of theirs acts or
admissions, are precluded from asserting
that it is not a corporation (Sec. 21, CC).
10. As to whether they are for public (government) or
private purpose: (2001, 2004 Bar)
a. Public - one formed or organized for the
government of a portion of the State (like cities
and municipalities) for the purpose of serving
the general good and welfare (Aquino, 2014). If
the corporation is created for political or public
purpose connected with the administration,
then it is public (Diaz, et al., 2014).
b. Private - one formed for some private purpose,
benefit or end. It may either be a stock or non-
stock (Aquino, 2014).
The fact that a certain juridical entity is impressed with
public interest does not, by that circumstance alone, make
the entity a public corporation, inasmuch as a corporation
may be private although its charter contains provisions of
a public character, incorporated solely for the public good.
This class of corporations may be considered quasi-public
corporations, which are private corporations that render
public service, supply public wants, or pursue other
eleemosynary objectives. While purposely organized for
the gain or benefit of its members, they are required by
law to discharge functions for the public benefit.
Examples of these corporations are utility, railroad,
warehouse, telegraph, telephone, water supply
corporations and transportation companies. It must be
stressed that a quasi-public corporation is a species of
private corporations, but the qualifying factor is the
type of service the former renders to the public: if it
performs a public service, then it becomes a quasi-public
corporation (Philippine Society for the Prevention of
Cruelty to Animals v. Commission on Audit, G.R. No. 169752,
September 25, 2007).
Requisites for the formation of a stock corporation
For a stock corporation to exist, two requisites must be
complied with, to wit:
1. A capital stock divided into shares and
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
2. An authority to distribute to the holders of such
shares, dividends or allotments of the surplus profits
on the basis of the shares held (Sec. 3, CC; Collector of
Internal Revenue vs Club Filipino de Ceb, G.R. No. L-
12719, May 31, 1962).
DE FACTO CORPORATION
A de facto corporation is one which actually exists for all
practical purposes as a corporation but which has no legal
right to corporate existence as against the State. (8
Fletcher, pp. 62-63)
Requisites of a de facto corporation (LAP)
1. Organized under a valid Law.
2. Attempt in good faith to form a corporation
according to the requirements of the law (Colorable
Compliance).
NOTE: Issuance of Certificate of Incorporation by
SEC is a minimum requirement for the formation of
the corporation in good faith (Sundiang Sr. & Aquino,
2009).
3. Use of corporate Powers - The corporation must have
performed the acts which are peculiar to a
corporation like entering into a subscription
agreement, adopting by-laws, and electing directors
(Actual User).
Defects resulting in creation of de facto corporation:
1. Articles of incorporation fails to state all the matters
required by the Code to be stated, or state some of
them incorrectly;
2. Name of the corporation closely resembles that of a
pre-existing corporation that will tend to deceive the
public;
3. Incorporators or a certain number of them are not
residents of the Philippines;
4. Acknowledgment of the articles of incorporation or
certificate of incorporation is insufficient or defective
in form, or it was acknowledged before the wrong
officer;
5. Percentage of Filipino ownership of the capital stock
required for the business is less than that prescribed
by law;
6. Minimum paid-up capital stock has not been paid to
and received by the corporate treasurer contrary to
his affidavit;
7. Failure to submit by-laws on time.
Defects precluding creation of corporation:
1. Absence of articles of incorporation;
2. Failure to file articles of incorporation with SEC;
3. Lack of certificate of incorporation from SEC.
Q: University Publishing Company (UPC), through its
president, entered into a contract with Albert to
publish the commentaries on the Revised Penal Code.
UPC published the commentaries but it did not remit
the amount due to Albert. This prompted Albert to file
a collection suit. The RTC ruled against UPC. When the
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
150
Sheriff were about to implement the writ of execution
against the company, he discovered that UPC is not a
registered corporation. Consequently, the president
of UPC was substituted in the writ of execution. The
president invoked the separate legal personality of
the corporation as his defense.
a. Is UPC a de facto corporation?
b. Can the defense that UPC is a corporation by
estoppel be invoked by the president?
c. Who is liable for the debts of the corporation?
A:
a. No. UPC cannot be a considered a de facto
corporation because it was not registered with the
SEC.
b. No. One who has induced another to act upon his
willful misrepresentation that a corporation was
duly organized and existing under the law, cannot
thereafter set up against his victim the principle of
corporation by estoppel.
c. The president who negotiated with Albert is liable. A
person acting or purporting to act on behalf of a
corporation which has no valid existence assumes
such privileges and obligations and becomes
personally liable for contracts entered into or for
other acts performed as such agent (Albert v.
University Publishing Co., G.R. No. L-19118, January 30,
1965)
.
Liabilities of officers and directors/trustees of a de
facto corporation
The liabilities and penalties attending to officers and
directors/ trustees of a de jure corporation shall be the
same as those of a de facto corporation. This includes the
liability under the criminal law.
Members of a de facto corporation cannot be held
liable as partners by third persons
The members of a de facto corporation cannot be held
liable as partners by third persons who deal with them in
their supposed corporate capacity, merely on account of a
technical defect in the formation of the corporation.
On the other hand, where an attempt to organize a
corporation fails by omission of some substantial step or
proceeding required by the law, its members or
stockholders are liable as partners (De Leon, 2010).
The existence of a de facto corporation cannot be
collaterally attacked
GR: The existence of a de facto corporation shall not be
inquired into collaterally in any private suit to which such
corporation may be a party. Such inquiry may be made by
the Solicitor General in a quo warranto proceeding (Sec.
20, CC).
XPN: Collateral attack will be permitted, however, when
the lack of right or the wrong doing of the corporation is
in issue because it is in violation of public policy or of
express or implied statutory requirement, such as denial
of its right to enforce contracts entered into without
 CORPORATION CODE
compliance with prohibitions of express or implied claimed that they were engaged in a business venture
statutory or public policy. with Lim Tong Lim, who however was not a signatory
to the agreement. The buyers failed to pay for the
Thus, the defendant may question the personality of a fishing nets and the floats; hence, Philippine Fishing
foreign corporation transacting business in the Gear filed a collection suit against Chua, Yao and Lim
Philippines to maintain a suit on the ground that it is not Tong Lim. The suit was brought against the three in
duly licensed to do business in our country (De Leon, 2010, their capacities as general partners, on the allegation
citing 18 Am. Jur. 2d 606 and Sec. 133 of the CC). that Ocean Quest Fishing Corporation was a
nonexistent corporation. The trial court ruled in
De facto Corporation vs. De jure Corporation favor of Philippine Fishing Gear and that Chua, Yao
and Lim are liable as general partners. Lim contends
DE FACTO DE JURE that the doctrine of corporation by estoppel applies
One which actually exists One created in strict or only to Yao and Chua. Lim insists that only those who
for all practical purposes substantial conformity dealt in the name of the ostensible corporation should
as a corporation but which with the mandatory be held liable. Since his name does not appear on any
has no legal right to statutory requirements for of the contracts and since he never directly
corporate existence as incorporation. transacted with the Ocean Quest Fishing Corporation,
against the State. he cannot be held liable. Is Lim jointly liable with
There is a colorable There is substantial Chua and Yao?
compliance with the compliance with the
requirements of the law requirements of the law A: Yes. Lim should be held liable jointly with Chua and
creating the corporation. creating the corporation. Yao. Unquestionably, Lim benefited from the use of the
Can be attacked directly Its right to exist as a nets found inside F/B Lourdes, the boat which has earlier
but not collaterally. corporation cannot be been proven to be an asset of the partnership. Lim, Chua
successfully attacked or and Yao decided to form a corporation. Although it was
questioned by any party never legally formed for unknown reasons, this fact alone
even in direct proceeding does not preclude the liabilities of the three as contracting
for that purpose by the parties in representation of it. Clearly, under the law on
State (De Leon, 2010). estoppel, those acting on behalf of a corporation and those
Stockholders enjoy exemption from personal liability benefited by it, knowing it to be without valid existence,
for corporate obligations are held liable as general partners. Technically, it is true
that Lim did not directly act on behalf of the
CORPORATION BY ESTOPPEL corporation. However, having reaped the benefits of the
contract entered into by persons with whom he
A corporation by estoppel has no real existence in law. It previously had an existing relationship, he is deemed to
is neither a de jure nor de facto corporation, but is a “mere be part of said association and is covered by the scope of
fiction existing for the particular case, and vanishing the doctrine of corporation by estoppel (Lim Tong Lim v.
where the element of estoppels is absent” (8 Fletcher, Philippine Fishing Gear Industries, Inc., G.R. No. 136448,
p.219). November 3, 1999).

Rules governing a corporation by estoppel
1. All persons who assume to act as a corporation
knowing it to be without authority to do so shall be
liable as general partners for all debts, liabilities and
damages incurred or arising as a result.
2. When any such ostensible corporation is sued on any
transaction entered by it as a corporation or on any
tort committed by it as such, it shall not be allowed to
use as a defense its lack of corporate personality.
3. One who assumes an obligation to an ostensible
corporation as such, cannot resist performance
thereof on the ground that there was in fact no
corporation (CC, Sec. 21).
NOTE: Where there is no third person involved and the
conflict arises only among those assuming the form of a
corporation who know that the corporation has not been
registered, there is NO corporation by estoppel (Lozano v.
Judge Delos Santos, G. R. No. 125221, June 19, 1997).
Q: On behalf of Ocean Quest Fishing Corporation,
Antonio Chua and Peter Yao entered into a contract
for the purchase of fishing nets of various sizes from
the Philippine Fishing Gear Industries, Inc. They
Q: Francisco Co, Jr. sued Abante Tonite, a daily tabloid
of general circulation, and its publisher and staff
(Macaset, et al.), claiming damages because of an
allegedly libelous article they published in an issue.
Macasaet, et al moved, among others, to drop Abante
Tonite as a defendant by virtue of its being neither a
natural nor a juridical person that could be
impleaded as a party in a civil action.
The RTC denied Macasaet, et al.’s motion, holding that
assuming “Abante Tonite” is not registered with the
SEC, it is deemed a corporation by estoppel
considering that it possesses attributes of a juridical
person, otherwise it cannot be held liable for damages
and injuries it may inflict to other persons. The CA
affirmed the RTC ruling. Was the CA correct in
upholding the inclusion of Abante Tonite as a party
defendant despite its lack of juridical personality?
A: Yes. In rejecting Macasaet et. al’s contention, the CA
categorized Abante Tonite as a corporation by estoppel as
the result of its having represented itself to the reading
public as a corporation despite its not being incorporated.
The non-incorporation of Abante Tonite with the SEC was
of no consequence, for, otherwise, whoever of the public
who would suffer any damage from the publication of

UNIVERSITY OF SANTO TOMAS

151 FACULTY OF CIVIL LAW
 MERCANTILE LAW
articles in the pages of its tabloids would be left without determined not by the nationality of its presiding elder
recourse. The SC cannot disagree with the CA, considering but by the nationality of its members, constituting the sect
that the editorial box of the daily tabloid disclosed that in the Philippines. Thus, the Roman Catholic Church can
although Monica Publishing Corporation had published acquire lands in the Philippines even if it is headed by the
the tabloid on a daily basis, nothing in the box indicated Pope (Roman Catholic Apostolic Church v. Land
that Monica Publishing Corporation had owned Abante Registration Commission, G.R. No. L-8451, December 20,
Tonite (Allen A. Macasaet, et al.v. Francisco R. Co, Jr., G.R. 1957).
No. 156759, June 5, 2013).
Acquisition of property by a corporation sole
NOTE: This case involves the legality of a court order
denying a motion to dismiss to drop as a party defendant A corporation sole may acquire property even without
Abante Tonite for not being a corporation registered with court intervention by purchase, donation and other lawful
the SEC. There is no ruling yet on the liability of such means (ibid).
corporation. It will be interesting to see how the SC will
eventually rule on how to enforce a judgment against a Q: Father X, an American priest who came from New
corporation by estoppel (independently of those who York, registered the Diocese of Bacolod of the Roman
represented themselves as a corporation, who under the Catholic Church which was incorporated as a
law, are liable as general partners) (Divina, 2014). corporation sole. There were years when the head of
the Diocese was a Filipino, but there were more years
De facto corporation vs. Corporation by estoppel when the heads were foreigners. Today, the head is an
American again. Y donated a piece of land located in
DE FACTO CORPORATION BY Bacolod City for use as a school. Which statement is
CORPORATION ESTOPPEL (2004 Bar) most accurate?
There is no existence in
There is existence in law a. The Register of Deeds of Bacolod City can refuse
law
The dealings among the The dealings among the to register and transfer the title because the
parties on a corporate parties on a corporate present head of the corporation sole is not a
basis is not required basis is required Filipino.
The State reserves the b. The nationality of a corporation sole depends
right to question its Quo warranto proceeding upon the nationality of the head at any given
existence through a quo is not applicable time.
warranto proceeding c. A corporation sole, regardless of the nationality
Stockholders in a de facto Stockholders are liable as of the head, can acquire real property either by
corporation are liable as a general partners for all sale or donation.
de jure corporation debts, liabilities and d. A corporation sole is not legally allowed to own
damages incurred real property. (2012 Bar)

SPECIAL CORPORATIONS A: C. “Any corporation sole may purchase and hold real
estate and personal property for its church, charitable,
A religious group is not required to be registered as a benevolent or educational purposes, and may receive
corporation bequests or gifts for such purposes” (Sec. 113, CC).

The Corporation Code does not require any religious
groups to be registered as a corporation but if it wants to
acquire legal personality, its members should incorporate
under the Code.
Organization of a corporation sole
A corporation sole is organized by the mere filing of the
verified articles of incorporation by the head of any
religious denomination, sect or church with the SEC
without the need of an issuance of a certificate of
incorporation. Once filed, a separate juridical character is
acquired which is separate and distinct from his natural
character.
NOTE: A corporation sole is not required to file by-laws. It
is governed by the rules, regulations and discipline of its
religious denomination, sect or church.
Nationality of a corporation sole
A corporation sole does not have any nationality but for
purposes of applying nationalization laws, nationality is
Being a mere administrator of the temporalities or
properties titled in his name, the constitutional
provisions requiring 60 (or 100) per centum Filipino
ownership are not applicable to the corporation sole. The
ownership thereof devolves upon the church or
congregation acquiring the same. To own the property,
compliance with the constitutionally required 60 (or 100)
per centum Filipino capital is determined by the
nationality of the constituents of the diocese (church or
congregation), and not the nationality of the actual
incumbent of the parish (the Corporation Sole or the head
of the church or congregation) (De Leon, 2010, citing SEC
Opinions, Nov. 6, 1990 and Sept. 21, 1993).
Alienation of properties by a corporation sole
A corporation sole may alienate properties by:
1. Obtaining an order from the RTC of the province
where the property is situated after notice of the
application for leave to sell or mortgage has been
given by publication or otherwise and by showing
that it is for the interest of the corporation that leave
to sell or mortgage should be granted.

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2016 GOLDEN NOTES
152
 CORPORATION CODE
2. In cases where the rules, regulations and discipline of
the religious denomination, sect or church, religious
society or order concerned represented by such
corporation sole regulate the method of acquiring,
holding, selling and mortgaging real estate and
personal property, such rules, regulations and
discipline shall control, and the intervention of the
courts shall not be necessary (Sec. 113, CC).
Purchase and sale of property by a corporation sole
for its church, charitable, benevolent or educational
purposes.
Any corporation sole may purchase and hold real estate
and personal property for its church, charitable,
benevolent or educational purposes, and may receive
bequests or gifts for such purposes. Such corporation may
mortgage or sell real property held by it upon obtaining
an order for that purpose from the [Regional Trial Court]
of the province where the property is situated; xxx
provided, that in cases where the rules, regulations and
discipline of the religious denomination, sect or church,
religious society or order concerned represented by such
corporation sole regulate the method of acquiring,
holding, selling and mortgaging real estate and personal
property, such rules, regulations and discipline shall
control, and the intervention of the courts shall not be
necessary (Iglesia Filipina Independiente v. Heirs of
Bernardino Tazea, G.R. No. 179597, February 3, 2014, in
Divina, 2014).
Thus, when the Canons of the Iglesia Filipino
Independiente provide that all real properties of the
church can be disposed of only with the approval and
conformity of the laymen’s committee, the parish priest,
the Diocesan Bishop, with sanction of the Supreme
Council, and finally with the approval of the Supreme
Bishop, as administrator of all the temporalities of the
Church, yet the Supreme Bishop sold motu propio a parcel
of land of the IFI despite the objection of the laymen, the
sale is void and the land must be reconveyed to IFI (Iglesia
Filipina Independiente v. Heirs of Bernardino Tazea, G.R.
No. 179597, February 3, 2014).
Dissolution of a corporation sole is not necessary for
it to become a corporation aggregate
There is no point in dissolving the corporation sole of one
member to enable the corporation aggregate to emerge
from it. The Corporation Code provides no specific
mechanism for amending the articles of incorporation of
a corporation sole but Section 109 of the Corporation
Code allows the application to religious corporations of
the general provisions governing non-stock corporations.
In non-stock corporations, 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 (Iglesia
Evangelica Metodista v. Bishop Lazaro, GR. 184088, July 6,
2010).
153
NATIONALITY OF CORPORATIONS
Tests in determining the nationality of corporations
1. Place of Incorporation test
2. Control test
3. Grandfather rule – Nationality is attributed to the
percentage of equity in the corporation used in
nationalized or partly nationalized area. This test is
an exception to the Control Test and was applied by
the SEC in several cases.
4. Domiciliary test – Determined by the principal place
of business of the corporation.
PLACE OF INCORPORATION TEST
In using the Place of Incorporation test, the nationality of
a corporation is determined by the state of incorporation,
regardless of the nationality of the stockholders.
XPN: A corporation organized/incorporated abroad and
registered as doing business in the Philippines under the
Corporation Code, of which 100% of the capital stock
outstanding and entitled to vote is wholly owned by
Filipinos, may be considered a Philippine National under
the Foreign Investments Act of 1991. This is the only
exception to the place of incorporation test (SEC Opinion
No. 04-14, March 3, 2004; De Leon, 2010).
CONTROL TEST
Control test
In determining the nationality of a corporation, the
control test uses the nationality of the controlling
stockholders or members of the corporation.
This test was adopted by the Foreign Investment Act of
1991 (RA 7042) as a general guideline in determining the
nationality of corporations engaged in a nationalized
activity (Sec Opinion No. 07-20, November 20, 2007).
Requisites of the control test (CFC)
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 such that the corporate entity as
to this transaction had at that 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 or unjust act in contravention of plaintiffs
legal right; and
3. The control and breach of duty must proximately
Cause the injury or unjust loss complained of
(Velarde v. Lopez, Inc., G.R. No. 153886, January 14,
2004; Heirs of Ramon Durano, Sr. v. Uy, G.R. No.
136456, October 24, 2000).
Who are considered as Philippine Nationals
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Under RA 7042 (Foreign Investment Act of 1991), the
following are considered Philippine Nationals:
1. Corporations organized under Philippine laws of
which 60% of the capital stock outstanding and
entitled to vote is owned and held by Filipino
citizens.
NOTE: RA 7042 provides that where a corporation
and its non-Filipino stockholders own stocks in a
SEC-registered enterprise, at least 60% of the capital
stock outstanding and entitled to vote of both
corporations and at least 60% of the members of the
board of directors of both corporations must be
Filipino citizens (DOUBLE 60% RULE).
2. Corporations organized abroad and registered as
doing business in the Philippines under the
Corporation Code of which 100% of the capital stock
entitled to vote belong to Filipinos.
Q: What is the nationality of a corporation organized
and incorporated under the laws of a foreign country,
but owned 100% by Filipinos? (1998 Bar)
A: Under the control test of corporate nationality, a
corporation organized and incorporated under the laws
of a foreign country, but owned 100% by Filipinos is
classified as a Philippine National. Where the grounds for
piercing the veil of corporate entity are present, the
corporation will follow the nationality of the controlling
members or stockholders, since the corporation will then
be considered as one and the same.
NOTE: The fact that the religious organization has no
capital stock does not suffice to escape the constitutional
inhibition, since it is admitted that its members are of
foreign nationality. The purpose of the 60% requirement
is obviously to ensure that corporations or associations
allowed to acquire agricultural land or to exploit natural
resources shall be controlled by Filipinos; and the spirit of
the Constitution demands that in the absence of capital
stock, the controlling membership should be composed of
Filipino citizens (Register of Deeds vs. Ung Sui Si Temple,
G.R. No. L-6776, May 21, 1955).
GRANDFATHER RULE
Application of the Grandfather Rule in determining
the nationality of a corporation
To ensure compliance with the constitutional
limitation(s) of corporations engaging in nationalized
activities, the nationality of a corporation must be
determined by ascertaining if 60% of the investing
corporation’s outstanding capital stock is owned by
“Filipino citizens”, or as interpreted, by natural or
individual Filipino citizens. If such investing corporation
is in turn owned to some extent by another investing
corporation, the same process must be observed
(Redmont Consolidated MinesCorporation vs. McArthur
Mining Corporation, SEC En Banc Case No. 09-09-177,
March 25, 2010).
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
154
Reason: One must not stop until the citizenships of the
individual or natural stockholders of layer after layer of
investing corporations have been established, for this is
the very essence of the Grandfather Rule (ibid).
Rules governing the application of the Grandfather
Rule
1. The grandfather rule should be used in determining
the nationality of a corporation engaged in a partly
nationalized activity (SEC-OGC Opinion No. 10-31,
December 9, 2010). This applies in cases where the
stocks of a corporation are owned by another
corporation with foreign stockholders exceeding
40% of the capital stock of the corporation.
2. The Grandfather Rule will not apply in cases where
the 60-40 Filipino-alien equity ownership in a
particular natural resource corporation is not in
doubt (DOJ Opinion No. 19, s. 1989). If the stockholder
corporation is 60% or more owned by Filipinos, all
the stock held by the stockholder corporation is
deemed to be held by Filipinos.
3. When there is doubt as to the actual extent of Filipino
equity in the investee corporation, the SEC is not
precluded from using the Grandfather Rule (SEC-OGC
Opinion No. 22-07 dated December 7, 2007).
Q: Redmont, a mining company, sought to invalidate
the Mining Production and Sharing Agreement
applications of three domestic mining companies,
namely: Narra, Tesoro and McArthur, on the ground
that at least 60% of the capital stock of Narra, et al.are
owned and controlled by MBMI, a 100% Canadian
corporation; thus they were disqualified to engage in
mining activities though MPSAs, which are reserved
only for Filipino Citizens.
Narra, et al. claimed that the issue on nationality
should not be raised since they are in fact Philippine
Nationals as 60% of their capital is owned by citizens
of the Philippines. They asserted that though MBMI
owns 40% of the shares of PLMDC (which owns
majority shares of Narra), 40% of the shares of MMC
(which owns majority shares of McArthur) and 40%
of the shares of SMMC (which, in turn, owns majority
shares of Tesoro), the shares of MBMI will not make it
the owner of at least 60% of the capital stock of each
of petitioners. They added that the best tool used in
determining the nationality of a corporation is the
“control test,” embodied in Sec. 3 of RA 7042 or the
Foreign Investments Act of 1991.
The controversy reached the CA, which used the
grandfather rule to hold that MBMI in effect owned
majority of the common stocks of Narra, et al., and
thus the latter were foreign corporations.
a. Was the CA wrong in applying the Grandfather
Rule instead of the Control Test?
b. Will the Grandfather Rule apply only when less
than 60% of the capital stock are Filipino-owned?
A:
a. No. Basically, there are two acknowledged tests in
determining the nationality of a corporation: the
 CORPORATION CODE
control test and the grandfather rule. 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 Philippines. When in the
mind of the Court there is doubt, based on the
attendant facts and circumstances 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.
Redmont Consolidated Mines,G.R. No. 195580, April
21, 2014).
b. No. The assertion of Narra, et al. that “doubt” only
exists when the stockholdings are less than 60% fails
to convince this Court. It would be ludicrous to limit
the application of the said word only to the instances
where the stockholdings of non-Filipino
stockholders are more than 40% of the total
stockholdings in a corporation. The corporations
interested in circumventing our laws would clearly
strive to have “60% Filipino Ownership” at face
value. It would be senseless for these applying
corporations to state in their respective articles of
incorporation that they have less than 60% Filipino
stockholders since the applications will be denied
instantly. Thus, various corporate schemes and
layerings are utilized to circumvent the application of
the Constitution (Narra Nickel Mining and
Development Corp., et al. v. Redmont Consolidated
Mines, supra).
A corporation that complies with the 60-40 Filipino to
foreign equity requirement can be considered a Filipino
corporation if there is no doubt as to who has the
“beneficial ownership” and “control” of the corporation.
In this case, a further investigation as to the nationality of
the personalities with the beneficial ownership and
control of the corporate shareholders in both the
investing and investee corporations is necessary. “Doubt”
refers to various indicia that the “beneficial ownership”
and “control” of the corporation do not in fact reside in
Filipino shareholders but in foreign stakeholders. Even if
at first glance the petitioners comply with the 60-40
Filipino to foreign equity ratio, doubt exists in the present
case that gives rise to a reasonable suspicion that the
Filipino shareholders do not actually have the requisite
number of control and beneficial ownership in petitioners
Narra, Tesoro, and McArthur.
Hence, the Court is correct in using the Grandfather Rule
in determining the nationality of the petitioners (Narra
Nickel Mining and Development Corp., et al. v. Redmont
Consolidated Mines, G.R. No. 195580, January 28, 2015).
NATIONALIZED ACTIVITIES RESERVED FOR
FILIPINOS UNDER THE CONSTITUTION
AND SPECIAL LAWS
100% Filipino Owned
(Zero percent (0%) foreign equity)
Code: CoFi AMMaN Co. – MiSe- US$2.5M
1. COoperatives(Art. 26, Ch. III, R.A. 6938);
155
2. Manufacture of FIrecrackers and other pyrotechnic
devices (Sec. 5, R.A. 7183).
3. Manufacture, repair, stockpiling and/or distribution
of biological, chemical and radiological weapons and
Anti-personnel mines (Various treaties to which the
Philippines is a signatory and conventions supported
by the Philippines).
4. Mass media except recording
5. Utilization of MArine resources (Sec. 2, Art. XII,
Constitution);
6. Manufacture, repair, stockpiling and/or distribution
of Nuclear weapons (Sec. 8, Art. II, Constitution);
7. COckpits (Sec. 5, P.D. 449);
8. Small-scale MIning (Sec. 3, R.A. 7076);
9. Private SEcurity agencies (Sec. 4, R.A. 5487);
10. Retail trade enterprises with paid-up capital of less
than US$2.5 M(Sec. 5, R.A. 8762);
80 % Filipino Owned
(Up to twenty percent (20%) foreign equity)
Code: Prc
1. Private Radio Communications network (R.A. 3846).
75 % Filipino Owned
(Up to twenty percent (25%) foreign equity)
Code: LoRD F
1. Contracts for the construction and repair of LOcally-
funded public works (Sec. 1, CA 541, LOI 630) except:
a. infrastructure/development projects covered in
R.A. 7718; and
b. projects which are foreign funded or assisted
and required to undergo international
competitive bidding (Sec. 2[a], R.A. 7718);
2. Private Recruitment, whether for local or overseas
employment (Art. 27, P.D. 442);
3. Contracts for the construction of Defense-related
structures (Sec. 1, CA 541);
4. Under the Flag Law, in the purchase of articles for the
Government, preference shall be given to materials
and supplies produced, made, or manufactured in the
Philippines, and to domestic entities. Domestic
entities means any citizen of the Philippines or
commercial company at least 75% of the capital of
which is owned by citizens of the Philippines (Sec. 1,
CA 138);
70 % Filipino Owned
(Up to twenty percent (30%) foreign equity)
Code: AdPawn
1. Advertising (Art. XVI, Constitution)
2. Corporations engaged in pawnshop business (Sec. 8,
P.D. 114)
60 % Filipino Owned
(Up to twenty percent (40%) foreign equity)
Code: Go LEARN CUPIDCo
1. Contracts for the supply of materials, goods and
commodities to GOCC, agency or municipal
corporation (Sec. 1, R.A. 5183);
2. Ownership of private Lands (Sec. 7, Art. XII,
Constitution; Sec. 22, Ch. 5, CA 141; Sec. 4, R.A. 9182);
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
3. Ownership/establishment and administration of
Educational institutions (Sec. 4, Art. XIV,
Constitution);
4. Adjustment Companies (Sec. 323, P.D. 613);
5. Culture, production, milling, processing, trading
excepting retailing, of rice and corn and acquiring, by
barter, purchase or otherwise, Rice and corn and the
by-products thereof (Sec. 5, P.D. 194);
6. Exploration, development and utilization of Natural
resources (Sec. 2, Art. XII, Constitution);
7. Ownership of Condominium units where the
common areas in the condominium project are co-
owned by the owners of the separate units or owned
by a corporation (Sec. 5, R.A. 4726).
8. Operation and management of public Utilities (Sec.
11, Art. XII, Constitution; Sec. 16, CA 146);
9. Project Proponent and Facility Operator of a BOT
project requiring a public utilities franchise (Sec. 11,
Art. XII, Constitution; Sec. 2a, R.A. 7718);
10. Manufacture, repair, storage and/ or distribution of
products/ Ingredients requiring PNP clearance (R.A.
7042 as amended by R.A. 8179);
11. Operation of Deep sea commercial fishing vessel (Sec.
27, R.A. 8550);
12. Corporations engaged in Coastwise shipping (Sec.
806, P.D. 1464).
40 % Filipino Owned
(Up to twenty percent (60%) foreign equity)
Code: FI [SEC]
1. Financing companies regulated by the SEC (Sec. 6,
R.A. 5980 as amended by R.A. 8556);
2. Investment houses regulated by the SEC (Sec. 5, P.D.
129 as amended by R.A. 8366).
Q: Bell Philippines, Inc. (BellPhil.) is a public utility
company, duly incorporated and registered with the
SEC. Its authorized capital stock consists of voting
common shares and non-voting preferred shares,
with equal par values of P100.00/share. Currently,
the issued and outstanding capital stock of BellPhil
consists only of common shares shared between
Bayani Cruz, a Filipino with 60% of the issued
common shares, and Bernard Fleet, a Canadian, with
40%.
To secure additional working fund, BellPhil issued
preferred shares to Bernard Fleet equivalent to the
currently outstanding common shares. A suit was
filed questioning the corporation action on the
ground that the foreign equity holdings in the
company would now exceed 40% foreign equity limit
allowed under the Constitution for public utilities.
Rule on the legality of Bernard Fleet’s current
holdings. (2013 Bar)
A: The holding of Bernard Fleet equivalent to the
outstanding common shares is illegal. His holdings of
preferred shares could not exceed 40%. Since the
constitutional requirement of 60% Filipino ownership of
the capital of public utilities applies not only to voting
control but also to beneficial ownership of the
corporation, it should also apply to the preferred shares.
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
156
Preferred shares are also entitled to vote in certain
corporate matters (Gamboa v. Teves, G.R. No. 176579, June
28, 2011). The state shall develop a self-reliant and
independent national economy effectively controlled by
Filipinos (1987 Constitution, Art. II, Sec. 19). The effective
control here should be mirrored across the board on all
kinds of shares.
CORPORATE JURIDICAL PERSONALITY
DOCTRINE OF SEPARATE JURIDICAL PERSONALITY
The doctrine of corporate juridical personality states that
a corporation is a juridical entity with legal personality
separate and distinct from those acting for and in its
behalf and, in general, from the people comprising it
(Francisco v. Mallen Jr. G.R. No. 173169, September 22,
2010).
Q: Through a writ of sequestration, the PCGG
sequestered all the assets, properties, records, and
documents of the Palm Companies. The PCGG had
relied on a letter from the Palm Companies’ Attorney-
in-Fact, specifically identifying Romualdez, a known
crony of former President Marcos, as the beneficial
owner of the Benguet Corporation shares in the Palm
Companies’ name. The Republic, represented by the
PCGG, filed a complaint with the Sandiganbayan but it
did not initially implead the Palm Companies as
defendants. However, the Sandiganbayan issued a
Resolution ordering said companies to be impleaded.
Pursuant to the said order, the Republic filed an
amended complaint and named therein the Palm
Companies as defendants. Palm Companies filed
another motion to order the PCGG to release all the
companies’ shares of stock and funds in its custody on
the ground that they were not impleaded as parties-
defendants in the Civil Case within the period
prescribed by the Constitution. The Sandiganbayan
granted the foregoing motion.
Is the suit against Romualdez, as shareholder of the
Palm Companies, considered a suit against the latter?
A: No. Under Sec. 26, Article XVIII of the 1987
Constitution, it mandates the Republic to file the
corresponding judicial action or proceedings within a six-
month period (from its ratification on February 2, 1987)
in order to maintain sequestration, non-compliance with
which would result in the automatic lifting of the
sequestration order. Hence, there is a necessity on the
part of the Republic to actually implead corporations as
defendants in the complaint, out of recognition for their
distinct and separate personalities, failure to do so would
necessarily be denying such entities their right to due
process.
Here, the writ of sequestration issued against the assets of
the Palm Companies is not valid because the suit in the
civil case against Romualdez as shareholder in the Palm
Companies is not a suit against the latter. Thus, the failure
to implead these corporations as defendants and merely
annexing a list of such corporations to the complaints is a
violation of their right to due process for it would be, in
effect, disregarding their distinct and separate
 CORPORATION CODE
personality without a hearing (Palm Avenue Holding Co.,
Inc. et. al. v. Sandiganbayan 5th Division, represented by the
PCGG, G.R. No. 173082, August 6, 2014).
Q: The Olongapo City filed a complaint for sum of
money and damages against Olongapo City Water
District (OCWD). It alleged that OCWD failed to pay its
electricity bills to Olongapo City and remit its
payment under the contract to pay, pursuant to
OCWD’s acquisition of Olongapo City’s water system.
In the interim, OCWD entered into a Joint Venture
Agreement with SBMA, Biwater and DMCI. Pursuant
to this agreement, Subic Water – a new corporate
entity – was incorporated, with the following equity
participation from its shareholders: SBMA 19.99% or
20%; OCWD 9.99% or 10%; Biwater 29.99% or 30%;
and DMCI 39.99% or 40%. Subic Water was granted
the franchise to operate and to carry on the business
of providing water and sewerage services in the Subic
Bay Free Port Zone, as well as in Olongapo City. Hence,
Subic Water took over OCWD’s water operations in
Olongapo City. To finally settle their money claims
against each other, Olongapo City and OCWD entered
into a compromise agreement.
To enforce the compromise agreement, Olongapo City
filed a motion for the issuance of a writ of execution
with the RTC. OCWD’s former counsel filed a
manifestation alleging that OCWD had already been
dissolved and that Subic Water is now the former
OCWD. Because of this assertion, Subic Water also
filed a manifestation informing the RTC that as borne
out by the articles of incorporation and general
information sheet of Subic Water, OCWD is not Subic
Water. The manifestation also indicated that OCWD
was only a ten percent (10%) shareholder of Subic
Water; and that its 10% share was already in the
process of being transferred to Olongapo City
pursuant to a Deed of Assignment.
Can Subic Water be made liable under the writ of
execution issued by RTC in favor of Olongapo City?
A: No. OCWD and Subic Water are two separate and
different entities. Subic Water clearly demonstrated that
it was a separate corporate entity from OCWD. OCWD is
just a ten percent (10%) shareholder of Subic Water. As a
mere shareholder, OCWD’s juridical personality cannot be
equated nor confused with that of Subic Water. It is basic
in Corporation Law that a corporation is a juridical entity
vested with a legal personality separate and distinct from
those acting for and in its behalf and, in general, from the
people comprising it. Under this corporate reality, Subic
Water cannot be held liable for OCWD’s corporate
obligations in the same manner that OCWD cannot be held
liable for the obligations incurred by Subic Water as a
separate entity (Olongapo City v. Subic Water and
Sewerage Co., Inc., G.R. No. 171626, August 6, 2014).
Q: Richard owns 90% of the shares of the capital stock
of GOM Co. On one occasion, GOM represented by
Richard as President and General Manager executed
a contract to sell a subdivision lot in favor of Tomas.
For failure of GOM to develop a subdivision, Tomas
filed an action for rescission and damages against
157
GOM and Richard. Will the action prosper? Explain
(1996 Bar)
A: The action will prosper against GOM Corporation but it
shall not be the same with regard to the action against
Richard. Such is the case because Richard has a separate
and distinct personality from the corporation. His mere
ownership of 90% of the shares of the capital stock of
GOM does not make him as one with the corporation.
Mere ownership by a single stockholder, or by another
corporation, of all or nearly all of the capital stock of a
corporation is not itself a sufficient ground for
disregarding the separate corporate personality. (Secosa
v. Heirs of Erwin Suarez Francisco, G.R. No. 160039, June 29,
2004).
Significance of the doctrine of separate personality
1. Liability for acts or contracts – As a general rule, the
obligation of the corporation is not the liability of the
stockholders, officers or directors (Remo vs. IAC, G.R.
No. L-67626, April 18, 1989; 1992, 1996, 2010 Bar).
A corporation may not, generally, be made to answer
for acts or liabilities of its stockholders or those of the
legal entities to which it may be connected, and vice
versa (Cease vs. CA, G.R. No. L-33172, October 18,
1979).
It can incur obligations and its obligations are not the
obligations of its stockholders, directors, and officers
(Vasquez vs. De Borja, G.R. No. L-48930, February 23,
1994).
2. Right to bring actions – may bring civil and criminal
actions in its own name in the same manner as
natural persons (Art. 46, Civil Code).
Rights belonging to the corporation cannot be
invoked by the stockholders (or directors and
officers) even if the latter owns substantial majority
of the shares of the shares in that corporation and
rights of the stockholders, directors and officers
cannot be invoked by the corporation (Stonehill vs.
Diokno, G.R. 19550, June 19, 1967).
3. Right to acquire and possess property – property
conveyed to or acquired by the corporation is in law
the property of the corporation itself as a distinct
legal entity and not that of the stockholders or
members (Art. 44[3], Civil Code).
The property of its stockholders, directors, and
officers are not the properties of the corporation. The
interest of the stockholders over the properties are
merely inchoate (Saw vs. CA, G.R. No. 90580, April 8,
1991; 1996, 2000 Bar).
4. Acquisition of jurisdiction – service of summons may
be made on the president, general manager,
corporate secretary, treasurer or in-house counsel
(Rules of Court, Rule 14, Sec. 11).
5. Changes in individual membership – corporation
remains unchanged and unaffected in its identity by
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
changes in its individual membership or ownership
of its stocks.
Q: As a result of perennial business losses, a
corporation's net worth has been wiped out. In fact, it
is now in negative territory. Nonetheless, the
stockholders did not like to give up. Creditor-banks,
however, do not share the confidence of the
stockholders and refuse to grant more loans.
a. What tools are available to the stockholders to
replenish capital?
b. Assuming that the corporation continues to
operate even with depleted capital, would the
stockholders or the managers be solidarily liable
for the obligations incurred by the corporations?
(1999 Bar)
A:
a. In the case where the creditor-banks refused to grant
more loans to the stockholders, the stockholders can
publicly sell their shares and assets. They can also
demand payment from stockholders of their unpaid
subscriptions where there is no due date inscribed in
the subscription contract.
b. No, the stockholders or managers cannot be held
solidarily liable for the obligations incurred by the
corporation. They cannot be held personally liable
for as long as their acts are for and in behalf of the
corporation, within the scope of their authority and
in good faith. Also, a corporation has a personality
separate and distinct from its individual
stockholders (Consolidated Bank and Trust Corp. v.
CA, G.R. No. 114286, April 19, 2001).
Q: Marulas Creative Technology Inc., an e-business
enterprise engaged in the manufacture of computer
media accessories, rents an office and store space at a
commercial building owned by X. Being a start-up
company, Marulas enjoyed some leniency in its rent
payments; but after three years, X put a stop to it and
asked Marulas President and General Manager, Y,
who is a stockholder, to pay back rentals amounting
to a hundred thousand pesos or to vacate the
premises at the end of the month. Marulas neither
paid its debt nor vacated the premises. X sued
Marulas and Y for collection of unpaid rentals, plus
interests and costs of litigation. Will the suit prosper
against Marulas? Against Y? (2000 Bar)
A: Yes. The suit against Marulas can prosper because
Marulas is the one renting the office and store space for
its office and business operations. While the suit against Y
cannot prosper because the corporation has a separate
and distinct personality from its officers, directors,
stockholders and members. This separate legal
personality is recognized by law. They are separate
entities and the liabilities arising from the obligation of
one cannot extend to the other, and vice versa.
Stockholders are not the owners of corporate
properties and assets
The interest of the shareholder in the properties of the
corporation is inchoate only. The interest of the
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
158
shareholder on a particular property becomes actual,
direct and existing only upon the liquidation of the assets
of the corporation and the provided that the same
property is assigned to the shareholder concerned.
Under the trust fund doctrine, the capital stock, property,
and other assets of a corporation are regarded as equity
in trust for the payment of corporate creditors which are
preferred over the stockholders in the distribution of
corporate assets. The distribution of corporate assets and
property cannot be made to depend on the whims and
caprices of the stockholders, officers, or directors of the
corporation unless the indispensable conditions and
procedures for the protection of corporate creditors are
followed (Ryuichi Yamamoto v. Nishino Leather Industries,
Inc. and Ikuo Nishino, G.R. No. 150283, April 16, 2008).
Q: RISCO ceased operation due to business reverses.
Due to Merelo, Matias III and Jose, all surnamed
Aznar, Rosario Barcenilla, Jose Enad and Ricardo
Gabuya’s desire to rehabilitate RISCO, they
contributed a total amount of P212,720.00 which was
used in the purchase of the three (3) parcels of land
located in various areas in the Cebu Province.
Pursuant to the Minutes of the Special Meeting of the
Board of Directors of RISCO, the contributed amounts
constitute liens and encumbrances on the
aforementioned properties as annotated in the titles
of the said lots. Such annotation was made.
Thereafter, various subsequent annotations were
made on the same titles in favor of PNB. As a result, a
Certificate of Sale was issued in favor of PNB, being
the lone and highest bidder of the three (3) parcels of
land and was also issued Transfer Certificate of Title
over the said parcels of land. Aznar, et. al filed a
complaint seeking the quieting of their supposed title
to the subject properties. They alleged that the
subsequent annotations on the titles are subject to
the prior annotation of their liens and encumbrances.
On the other hand, they assert that, as mere
stockholders of RISCO, they do not have any legal or
equitable right over the properties of the corporation.
The trial court declared that the Minutes of the
Special Meeting of the Board of Directors of RISCO
annotated on the titles of the subject properties is an
express trust whereby RISCO was a mere trustee and
the above-mentioned stockholders as beneficiaries
being the true and lawful owners of the subject
properties. On appeal, the CA set aside the ruling of
the trial court and ruled that there was no trust
created. The lien is merely an evidence of the loan. Do
the defendants herein (Aznar et. al.) have the legal or
equitable rights over the subject properties?
A: No. Stockholders cannot claim ownership over
corporate properties by virtue of the Minutes of a
Stockholder’s Meeting which merely evidence a loan
agreement between the stockholders and the
corporation. As such, their interest over the properties is
merely inchoate (Philippine National Bank v. Merelo B.
Aznar, et al,G.R. No. 171805, May 30, 2014).
Stockholders are not real parties in interest to claim
damages and recover compensation
 CORPORATION CODE
The personality of a corporation is distinct and separate
from the personalities of its stockholders. Hence, its
stockholders are not themselves the real parties in
interest to claim and recover compensation for the
damages arising from the wrongful attachment of
corporate assets. Only the corporation is the real party in
interest for that purpose (Stronghold Insurance Company,
Inc. v. Cuenca, G.R. No. 173297, March 6, 2013).
Q: Nine individuals formed a private corporation
pursuant to the provisions of the Corporation Code of
the Philippines. Incorporator S was elected director
and president-general manager. Part of his
emolument is a Ford Expedition, which the
corporation owns. After a few years, S lost his
corporate positions but he refused to return the
motor vehicle claiming that as stockholder with a
substantial equity share, he owns that portion of the
corporate assets in his possession. Is the contention
of S valid? Explain. (2000 Bar)
A: No. The Ford Expedition is a corporate property. A
corporation has a separate and distinct personality that
when it owns a property, it shall not be deemed to be the
property of its stockholder no matter how substantial the
ownership of his shares is. Shareholders are in no legal
sense the owners of corporate property owned by the
corporation as a distinct legal personality. (Concepcion
Magsaysay-Labrador v. CA, G.R. No. 58168, December 19,
1989)
Q: Ronald Sham doing business under the name of
SHAMRON Machineries (Shamron) sold to Turtle
Mercantile (Turtle) a diesel farm tractor. In payment,
Turtle’s President and Manager Dick Seldon issued a
check for P50,000 in favor of Shamron. A week later,
Turtle sold the tractor to Briccio Industries (Briccio)
for P 60,000. Briccio discovered that the engine of the
tractor was reconditioned so he refused to pay Turtle.
As a result, Dick Seldon ordered “Stop Payment” of the
check issued to Shamron. Shamron sued Turtle and
Dick Seldon. Shamron obtained a favourable
judgment holding co-defendants Turtle and Dick
Seldon jointly and severally liable. Comment on the
decision of the trial court. Discuss fully. (1995 Bar)
A: I disagree with the trial court’s ruling. Dick Seldon
should not be solidarily liable with Turtle because of his
position as President and Manager of the corporation.
Turtle Corporation has a separate juridical personality
from its officers. Corporate officers cannot be personally
liable for the consequences of their acts, for as long as
these are for and behalf of the corporation, within the
scope of their authority and in good faith (Consolidated
Bank and Trust Corp. v. CA, G.R. No. 114286, April 19, 2001).
Circumstances that are not enough to warrant
disregard of the separate juridical personality of the
corporation:
1. ownership of controlling shares;
2. common directors and similarity of business.
Q: Rufina Lim is the surviving spouse of the late Pastor
Lim whose estate is the subject of probate
159
proceedings in another case. In the inventory of the
estate of Pastor Lim, the properties registered in the
names of Auto Truck Corporation, et al., were
included. Auto Truck Corporation, et al., thereafter
filed a motion for exclusion of certain properties from
the estate of Pastor Lim. The Probate Court granted
the same.
Subsequently, Rufina Lim filed an amended
petition which averred that Auto Truck Corporation,
et al.’s capital, assets and equity were personally
owned by Pastor Lim and that the alleged
stockholders and officers appearing in the AOI of Auto
Truck Corporation, et al., were mere dummies of
Pastor Y. Lim, and they were listed therein only for
purposes of registration with the SEC. Because of this,
the Probate Court reversed its earlier order and held
that the subject properties should be included in the
estate of Pastor Lim. The Probate court held that the
corporations were mere alter egos or
instrumentalities of Pastor Lim and that the issue
involves the piercing of the corporate veil. Should the
subject properties registered in the name of Auto
Truck Corporation, et al. be included in the estate of
Pastor Lim?
A: No. The real properties included in the inventory of the
estate of the late Pastor Y. Lim are in the possession of and
are registered in the name of Auto Truck Corporation,
which under the law, possesses a personality separate
and distinct from its stockholders, and in the absence of
any cogency to shred the veil of corporate fiction, the
presumption of conclusiveness of said titles in favor of
Auto Truck Corporation should stand undisturbed. A
corporation is vested by law 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 character alien to the persons comprising it.
Furthermore, mere ownership by a single stockholder or
by another corporation of all or nearly all of the capital
stock of a corporation is not of itself a sufficient reason for
disregarding the fiction of separate corporate
personalities (Rufina Luy Lim v. CA, G.R. No. 124715,
January 24, 2000).
Q: Equitable PCI Bank (the Bank) filed a petition for
extrajudicial foreclosure of the real estate mortgages
executed by Spouses Nicse to secure their promissory
note obligations to the Bank. Days before the public
auction, the Sps. Nicse filed a complaint for the nullity
of the suretyship agreement and alleged that they
have previously requested the bank to set off the peso
equivalent of their obligation against their US Dollar
account with PCI Capital Asia Limited (Hong Kong), a
subsidiary of the Bank.
The spouses Nisce likewise alleged that since they and
the Bank were creditors and debtors with respect to
each other, their obligations should have been offset
by legal compensation to the extent of their account
with the Bank. The Bank retorted that the Sps. Nicse
had no cause of action for legal compensation since
PCI Capital was a different corporation with a
separate and distinct personality; if at all, offsetting
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
may occur only with respect to the spouses’ (Indophil Textile Mill Workers Union-PTGWO, v. Voluntary
US$500.00 deposit account in its Paseo de Roxas Arbitrator Teodorico P. Calica, G.R. No. 96490, February 3,
branch. 1992).

Are the Sps. Nicse and the Bank mutual debtors and Entitlement of corporations to Constitutional rights
creditors?
Corporations are entitled to the following rights under the
A: No. Admittedly, PCI Capital is a subsidiary of the Bank. constitution:
Even then, PCI Capital has an independent and separate
1. Right to Due Process (Sec. 1, Art. III, Constitution).
juridical personality from that of the Bank, its parent
2. Right against unreasonable searches and seizures
company; hence, any claim against the subsidiary is not a
(Sec. 2, ibid).
claim against the parent company and vice-versa. The
evidence on record shows that PCIB, which had been
However, the corporation is not entitled to the right
merged with Equitable Bank, owns almost all of the stocks
against self-incrimination, being a mere creature of law.
of PCI Capital. However, the fact that a corporation owns
(Bataan Shipyard & Engineering v. PCGG, G.R. No. 75885,
all of the stocks of another corporation, taken alone, is not
May 27, 1987).
sufficient to justify their being treated as one entity. If
used to perform legitimate functions, a subsidiary’s
LIABILITY FOR TORTS AND CRIMES
separate existence shall be respected, and the liability of
the parent corporation, as well as the subsidiary shall be
A corporation may be held liable for torts
confined to those arising in their respective business. A
corporation has a separate personality distinct from its
The corporation is liable for every tort which it expressly
stockholders and from other corporations to which it may
directs or authorizes (PNB v. CA, G.R. No. L-27155, May 18,
be conducted. This separate and distinct personality of a
1978).
corporation is a fiction created by law for convenience
and to prevent injustice (Spouses Ramon M. Nicse and
Reason for liability in cases of torts
Natividad Paras-Nicse v. Equitable PCI Bank, Inc., G.R. no.
167434, February 19, 2007).
A corporation is civilly liable in the same manner as
natural persons for torts, because generally speaking, the
Q: Indophil Union is a legitimate labor organization
rules governing the liability of a principal or master for a
and the exclusive bargaining agent of all the rank-
tort committed by an agent or servant are the same,
and-file employees of Indophil Textile. Indophil
whether the servant or agent is a natural or artificial
Union and Indophil Textile executed a CBA. After
person (ibid).
some time, Indophil Acrylic was formed. Acrylic
became operational and hired workers according to
Corporations incapable of intent
its own criteria and standards. Subsequently, the
workers of Acrylic unionized and a duly certified CBA
Corporations are incapable of intent, hence they cannot
was executed.
commit felonies that are punishable under the Revised
Penal Code. They cannot commit crimes that are
A year after, Indophil Union claimed that the plant
punishable under special laws because crimes are
facilities built and set up by Acrylic should be
personal in nature. In addition, the penalty of
considered as an extension or expansion of the
imprisonment cannot be imposed. However, the
facilities of Indophil Textile. In other words, Acrylic is
corporation may be dissolved for violations of the
part of Indophil Textile bargaining unit. On the other
Corporation Code (CC, Sec. 144).
hand, Indophil Textile submits that it is a juridical
entity separate and distinct from Acrylic and hence Liability of a corporation in cases of crimes
Acrylic is not part of its bargaining unit. Are the rank-
and-file employees working at Indophil Acrylic a part GR: A corporation is not liable in cases of crimes. Since a
of, and/or within the scope of the bargaining unit of corporation is a mere creation of legal fiction, it cannot be
Indophil Textile? held liable for a crime committed by its officers, since it
does not have the essential element of malice; in such case
A: No. The rank-and-file employees of Acrylic are not the responsible officers would be criminally liable (People
within the scope of the bargaining unit of Indophil Textile. v. Tan Boon Kong, G.R. No. L-32066, March 15, 1930).
The fact that the businesses of Indophil Textile and Acrylic
are related, that some of the employees of Indophil Textile XPN: If the penalty of the crime is only fine or forfeiture
are the same persons manning and providing for auxiliary of license or franchise (Ching v Secretary of Justice, supra).
services to the units of Acrylic, and that the physical
plants, offices and facilities are situated in the same RECOVERY OF MORAL DAMAGES
compound, are of no moment. These facts are not
sufficient to justify the piercing of the corporate veil of Recovery of moral damages
Acrylic. It must be emphasized that the legal corporate
entity is disregarded only if it is sought to hold the officers GR: A corporation is not entitled to moral damages
and stockholders directly liable for a corporate debt or because it has no feelings, no emotions, no senses (ABS-
obligation. In the instant case, Indophil Union does not CBN Broadcasting Corporation v. CA, G.R. No. 128690
seek to impose a claim against the members of the Acrylic

UNIVERSITY OF SANTO TOMAS

2016 GOLDEN NOTES
160
 CORPORATION CODE
January 21, 1999 and Phillip Brothers Oceanic, Inc, G.R. No.
126204, November 20, 2001).
XPNs:
1. The corporation may recover moral damages under
item 7 of Article 2219 of the New Civil Code because
said provision expressly authorizes the recovery of
moral damages in cases of libel, slander, or any other
form of defamation.
Article 2219(7) does not qualify whether the injured
party is a natural or juridical person. Therefore, a
corporation, as a juridical person, can validly
complain for libel or any other form of defamation
and claim for moral damages (Filipinas Broadcasting
Network, Inc. v. AMEC-BCCM, G.R. No. 141994, January
17, 2005).
2. When the corporation has a reputation that is
debased, resulting in its humiliation in the business
realm (Manila Electric Company v. T.E.A.M.
Electronics Corporation, et. al., G.R. No. 131723,
December 13, 2007).
Q: "Exposé" is a radio documentary program hosted
by Rima and Alegre. It is aired every morning over
DZRC-AM which is owned by FBNI. One morning, Rima
and Alegre exposed various alleged complaints from
students, teachers and parents against AMEC and its
administrators. Claiming that the broadcasts were
defamatory, AMEC and Ago, as Dean of AMEC’s College
of Medicine, filed a complaint for damages against
FBNI, Rima and Alegre. The trial court ruled in favor
of AMEC and Ago. The CA affirmed. Among others,
FBNI claims that AMEC is not entitled to moral
damages because it is a corporation. Is AMEC is
entitled to moral damages?
A: Yes. AMEC is entitled to moral damages. A juridical
person is generally not entitled to moral damages
because, unlike a natural person, it cannot experience
physical suffering or such sentiments as wounded
feelings, serious anxiety, mental anguish or moral
shock. Nevertheless, AMEC’s claim for moral damages
falls under item 7 of Article 2219 of the Civil Code. This
provision expressly authorizes the recovery of moral
damages in cases of libel, slander or any other form of
defamation. Article 2219(7) does not qualify whether the
plaintiff is a natural or juridical person. Therefore, a
juridical person such as a corporation can validly
complain for libel or any other form of defamation and
claim for moral damages (Filipinas Broadcasting Network,
Inc., v. AMEC-BCCM, G.R. No. 141994, January 17, 2005).
Q: Meralco and T.E.A.M. Electronics Corporation
(TEC) were parties to two separate contracts for the
sale of electric energy. Meralco undertook to supply
TEC’s building known as DCIM with electric
power. One day, Meralco conducted a surprise
inspection of the electric meters installed at the DCIM
building. Two meters were found to be allegedly
tampered with and did not register the actual power
consumption in the building. Meralco informed TEC
of the results of the inspection and demanded from
161
the latter the payment of its unregistered
consumption. TEC failed to pay the same.
For failure to pay, Meralco disconnected the
electricity supply to the DCIM building. TEC
demanded from Meralco the reconnection of
electrical service, claiming that it had nothing to do
with the alleged tampering but the latter refused to
heed the demand. The ERB immediately ordered the
reconnection of the service but Meralco did not
immediately comply. After this, a second and third
inspection was conducted by Meralco, and the same
yielded to same result as the first inspection. Thus,
Meralco demanded payment with a warning of
disconnection if TEC will refuse to pay. TEC filed a
complaint for damages against Meralco before the
RTC. The RTC ruled in favor of TEC and it awarded,
among others, moral damages. Is TEC entitled to
moral damages?
A: No. TEC is not entitled to moral damages. TEC’s claim
was premised allegedly on the damage to its goodwill and
reputation. As a rule, a corporation is not entitled to moral
damages because, not being a natural person, it cannot
experience physical suffering or sentiments like wounded
feelings, serious anxiety, mental anguish and moral
shock. The only exception to this rule is when the
corporation has a reputation that is debased, resulting in
its humiliation in the business realm. But in such a case, it
is imperative for the claimant to present proof to justify
the award. It is essential to prove the existence of the
factual basis of the damage and its causal relation to
Meralco’s acts. In the present case, the records are bereft
of any evidence that the name or reputation of TEC/TPC
has been debased as a result of Meralco’s acts (Manila
Electric Company v. T.E.A.M. Electronics Corporation, et al.,
G.R. No. 131723, December 13, 2007).
Q: Salve Dealca Latosa filed before the RTC a
Complaint for the recovery of ownership of a portion
of her residential land located at Our Lady’s Village,
Bibincahan, Sorsogon. According to her, Atty. Henry
Amado Roxas encroached on a quarter of her
property by arbitrarily extending his concrete fence
beyond the correct limits.
In his Answer, Roxas imputed the blame to Our Lady’s
Foundation, Inc. (OLFI). He then filed a Third-Party
Complaint against OLFI and claimed that he only
occupied the adjoining portion in order to get the
equivalent area of what he had lost when OLFI
trimmed his property for the subdivision road. The
trial court held that Latosa had established her claim
of encroachment by a preponderance of evidence. It
found that Roxas occupied a total of 112 square
meters of Latosa’s lots, and that, in turn, OLFI
trimmed his property by 92 square meters. Hence,
OLFI was made to pay Roxas the value of the 92 square
meters.
To collect the aforementioned amount, Notices of
Garnishment were then issued by the sheriff to the
managers of the Development Bank of the Philippines
and the United Coconut Planters Bank for them to
garnish the account of Bishop Robert Arcilla-Maullon,
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
OLFI’s general manager. Is the general manager of
OLFI liable for the debts of the latter?
A: No. In order for the Court to hold the officer of the
corporation personally liable alone for the debts of the
corporation and thus pierce the veil of corporate fiction,
the Court has required that the bad faith of the officer
must first be established clearly and convincingly. Roxas,
however, has failed to include any submission pertaining
to any wrongdoing of the general manager. Necessarily, it
would be unjust to hold the latter personally liable.
Moreso, if the general manager was never impleaded as a
party to the case (Mercy Vda. de Roxas, represented by
Arlene C. Roxas-Cruz, in her capacity as substitute
appellant-petitioner v. Our Lady's Foundation, Inc. G.R. No.
182378, March 6, 2013).
NOTE: While the court may allow the grant of moral
damages to corporation, it is not automatically granted;
there must still be proof of the existence of the factual
basis of the damage and its causal relation to the
defendant’s acts. Moral damages is designed to
compensate the claimant for actual injury suffered and
not to impose a penalty on the wrongdoer. (Herman C.
Crystal, et. al. vs. Bank of the Philippine Islands, G.R. No.
172428, November 28, 2008)
DOCTRINE OF PIERCING THE CORPORATE VEIL
The doctrine of piercing the corporate veil is the doctrine
that allows the State to disregard for certain justifiable
reasons the notion that a corporation has a personality
separate and distinct from the persons composing it.
NOTE: This is an exception to the Doctrine of Separate
Corporate Entity.
Requirement to justify the piercing of the corporate
veil
In order to justify the piercing of the corporate veil,
allegation or proof of fraud or other public policy
considerations is needed (Hacienda Luisita Incorporated
vs. Presidential Agrarian Reform Council, G.R. No. 171101,
November 22, 2011).
An 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 corporate 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
(Pacific Rehouse Corporation v. Export Industry Bank, G.R.
No. 201537, March 24, 2014).
Effect of piercing the corporate veil
1. The corporation will be treated merely as an
association or collection of persons or individuals
undertaking business as a group and the
stockholders or members will be considered as a
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
162
corporation, that is, liability will attach personally or
directly to the officers and stockholders.
2. Where there are two (2) corporations, they will be
merged into one, the one being merely regarded as
the instrumentality, agency, conduit or adjunct of the
other.
3. The corporation continues for other legitimate
objectives, the corporate character not necessarily
abrogated (Reynoso IV vs. CA, G.R. Nos. 116124-25,
November 22, 2000).
GROUNDS FOR APPLICATION OF DOCTRINE
It applies upon the following circumstances: (FACO)
a. if the fiction is used to perpetrate fraud (Fraud Test);
b. the complete control of one corporate entity to
another which perpetuated the wrong is the
proximate cause of the injury (Control Test);
c. if a certain corporation is only an adjunct or an
extension of the personality of the corporation (Alter
ego or Instrumentality Test); and
d. if the fiction is pierced to make the stockholders liable
for the obligation of the corporation (Objective Test)
Q: WPM International Trading, Inc. (WPM) is engaged
in the restaurant business, with Warlito P. Manlapaz as
its president. WPM entered into a management
agreement with Fe Labayen, by virtue of which she was
authorized to operate, manage and rehabilitate
Quickbite, a restaurant owned and operated by WPM.
Labayen contracted CLN to renovate the two existing
Quickbite outlets. However, the remaining balance was
not paid to CLN. It then filed a complaint for sum of
money and damages against Labayen. The RTC found
the latter liable to pay CLN. As a result, Labayen
instituted a complaint for damages against WPM and
Manlapaz. She alleged that she should be entitled to
reimbursement. The RTC found that there is a clear
indication that WPM is a mere instrumentality or
business conduit of Manlapaz and as such, WPM and
Manlapaz are considered one and the same. It also
found that Manlapaz had complete control over WPM
considering that he is its chairman, president and
treasurer at the same time. It further held that
Manlapaz is personally liable to reimburse Labayen
the amount she paid to CLN. CA affirmed the decision of
the RTC applying the principle of piercing the veil of
corporate fiction. Is the CA correct in applying the
principle of piercing the veil of corporate fiction?
A: No. In the present case, the attendant circumstances do
not establish that WPM is a mere alter ego of Manlapaz.
Aside from the fact that Manlapaz was the principal
stockholder of WPM, records do not show that WPM was
organized and controlled, and its affairs conducted in a
manner that made it merely an instrumentality, agency,
conduit or adjunct of Manlapaz. Mere ownership by a single
stockholder of even all or nearly all of the capital stocks of
a corporation is not by itself a sufficient ground to
disregard the separate corporate personality. To disregard
the separate juridical personality of a corporation, the
wrongdoing must be clearly and convincingly established
(WPM International Trading, Inc. et. al. v. Labayen, G.R. No.
182770, September 17, 2014).
 CORPORATION CODE
Q: Lim delivered scrap papers to Arco Pulp and Paper
Company, Inc. through its CEO and President, Santos.
The parties agreed that Arco Pulp and Paper would
either pay Lim the value of the raw materials or
deliver to him their finished products of equivalent
value. Arco Pulp and Paper issued a post-dated check
as partial payment. When Lim deposited the check, it
was dishonored for being drawn against a closed
account. On the same day, Arco Pulp and Paper and
Eric Sy executed a MOA where Arco Pulp and Paper
bound themselves to deliver their finished products
to Megapack Container Corporation, owned by Eric
Sy, for his account; that the raw materials would be
supplied by Lim, through his company. Despite
repeated demands by Lim, Arco Pulp and Paper did
not pay. Lim filed a complaint for collection of sum of
money with the RTC. The latter dismissed the
complaint, holding that when Arco Pulp and Paper
and Eric Sy entered into the MOA, novation took place,
which extinguished Arco Pulp and Paper’s obligation
to Lim. The CA reversed the said decision. Must the
corporate veil of Arco Pulp and Paper be pierced
thereby making Santos solidarily liable with Arco
Pulp and Paper?
A: Yes. Here, Santos entered into a contract with Lim in
her capacity as the President and Chief Executive Officer
of Arco Pulp and Paper. She also issued the check in
partial payment of Arco Pulp and Paper’s obligations to
Lim on behalf of Arco Pulp and Paper. This is clear on the
face of the check bearing the account name, "Arco Pulp &
Paper, Co., Inc." Any obligation arising from these acts
would not, ordinarily, be Santos’ personal undertaking for
which she would be solidarily liable with Arco Pulp and
Paper. 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 purposes. Santos cannot be allowed
to hide behind the corporate veil. When Arco Pulp and
Paper’s obligation to Lim became due and demandable,
she issued not only an unfunded check but also contracted
with a third party in an effort to shift Arco Pulp and
Paper’s liability. She unjustifiably refused to honor Arco
Pulp and Paper’s obligations to Lim. These acts clearly
amount to bad faith. In this instance, the corporate veil
may be pierced, and Santos may be held solidarily liable
with Arco Pulp and Paper (Arco Pulp and Paper Co., Inc. et.
al. v. Dan T. Lim, G.R. No. 206806, June 25, 2014).
Q: Rosario Lorezo received, upon inquiry, a letter
from the Social Security System, informing her that
she cannot avail of their retirement benefits since per
their record she has only paid 16 months. Aggrieved,
Lorezo then filed her Amended Petition before the
SSC, alleging that she was employed as laborer in Hda.
Cataywa managed by Jose Marie Villanueva in 1970
but was reported to the SSS only in 1978. She alleged
that SSS contributions were deducted from her wages
from 1970 to 1995, but not all were remitted to the
SSS which, subsequently, caused the rejection of her
claim. She also impleaded Talisay Farms, Inc. by
virtue of its Investment Agreement with Mancy and
Sons Enterprises. She also prayed that the veil of
corporate fiction be pierced since she alleged that
163
Mancy and Sons Enterprises and Manuel and Jose
Marie Villanueva are one and the same. Should Mancy
and Sons Enterprises’ veil of corporate fiction be
pierced?
A: No. The Court has expressed the language of piercing
doctrine when applied to alter ego cases, as follows:
Where the stock of a corporation is owned by one person
whereby the corporation functions only for the benefit of
such individual owner, the corporation and the individual
should be deemed the same.
This Court agrees with the petitioners that there is no
need to pierce the corporate veil. Lorezo failed to
substantiate her claim that Mancy and Sons Enterprises,
Inc. and Manuel and Jose Marie Villanueva are one and the
same. She based her claim on the SSS form wherein
Manuel Villanueva appeared as employer. However, this
does not prove, in any way, that the corporation is used to
defeat public convenience, justify wrong, protect fraud, or
defend crime, or when it is made as a shield to confuse the
legitimate issues, warranting that its separate and distinct
personality be set aside. Also, it was not alleged nor
proven that Mancy and Sons Enterprises, Inc. functions
only for the benefit of Manuel Villanueva, thus, one cannot
be an alter ego of the other (Hacienda Cataywa/Manuel
Villanueva, et al. v. Rosario Lorezo, G.R. No. 179640, March
18, 2015).
Q: Mr. Pablo, a rich merchant in his early forties, was
a defendant in a lawful suit which could subject him
to substantial damages. A year before the court
rendered judgment, Pablo sought his lawyer’s advice
on how to plan his estate to avoid taxes. He suggested
that he should form a corporation with himself, his
wife, and his children (all students and still
unemployed) as stockholders and then transfer all his
assets and liabilities to this corporation. Mr. Pablo
followed the recommendation of his lawyer. 1 year
later, the court rendered judgment against Pablo and
the plaintiff sought to enforce this judgment. The
sheriff, however, could not locate any property in the
name of Pablo and therefore returned the writ of
execution unsatisfied. What remedy, if any, is
available to the plaintiff? (1994 Bar)
A: The plaintiff can avail himself of the doctrine of
piercing the veil of corporate fiction which can be invoked
when a corporation is formed or used in avoiding a just
obligation. While it is true that a family corporation may
be organized to pursue an estate tax planning of which is
not per se illegal or unlawful (Delpher Trades Corp. v. IAC,
G.R. No L-69259, January 26, 1988). The factual settings,
however, indicate the existence of a lawful suit that could
subject Pablo to a substantial amount of damages. It
would thus be difficult for Pablo to convincingly assert
that the incorporation of the family corporation was
intended merely as a case of “estate tax planning” (Tan
Boon Bee v. Jarencio, G.R. No. 41337, June 30, 1988).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
ACQUISITION OF JURISDICTION AS PREREQUISITE
FOR THE APPLICATION
OF THE DOCTRINE
Q: Romeo Morales was able to obtain a favorable
judgment for a sum of money against Kukan, Inc. With
the judgment attaining finality, the sheriff levied on
execution various personal properties found at what
was supposed to be Kukan’s office. Kukan
International Corporation (KIC) filed a third-party
complaint, alleging that it was the owner of the levied
properties. Morales prayed that the principle of
piercing the veil of corporate fiction be applied in
order to satisfy the judgment debt of Kukan. The RTC
granted the motion of Morales and declared KIC and
Kukan as one and the same corporation. The CA
affirmed the RTC. Did the RTC properly apply the
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 established liability; it is not available to
confer on the court a jurisdiction it has not acquired, in
the first place, over a party not impleaded in a case.
Elsewise put, a corporation not impleaded in a suit
cannot be subject to the courts process of piercing the
veil of its corporate fiction. In that situation, the court has
not acquired jurisdiction over the corporation and,
hence, any proceedings taken against that corporation
and its property would infringe on its right to due
process. Aguedo Agbayani, a recognized authority on
Commercial Law, stated that Piercing the veil of
corporate entity applies to determination of liability not
of jurisdiction because the doctrine of piercing the veil of
corporate fiction comes to play only during the trial of
the case after the court has already acquired jurisdiction
over the corporation. Hence, before this doctrine can be
applied, based on the evidence presented, it is imperative
that the court must first have jurisdiction over the
corporation.
Two-fold Implication:
1. the court must first acquire jurisdiction over the
corporation or corporations involved before its or
their separate personalities are disregarded; and
2. the doctrine of piercing the veil of corporate entity
can only be raised during a full-blown trial over a
cause of action duly commenced involving parties
duly brought under the authority of the court by
way of service of summons or what passes as such
service.
The issue of jurisdiction or the lack of it over KIC has
already been discussed. Anent the matter of the time and
manner of raising the principle in question, it is
undisputed that no full-blown trial involving KIC was had
when the RTC disregarded the corporate veil of KIC. The
reason for this actuality is simple and undisputed: KIC
was not impleaded in Civil Case and that the RTC did not
acquire jurisdiction over it. It was dragged to the case
after it reacted to the improper execution of its
properties and veritably hauled to court, not thru the
usual process of service of summons, but by mere motion
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
164
of a party with whom it has no privity of contract and
after the decision in the main case had already become
final and executor (Kukan International Corporation v.
Hon. Amor Reyes and Romeo Morales, G.R. No. 182729,
September 29, 2010).
Q: Ma. Concepcion Lacsa was riding a Goldline
passenger bus owned and operated by Travel & Tours
Advisers, Inc. (TTAI) when the bus collided with a
passenger jeepney, which resulted to her instant death.
The Heirs of Concepcion instituted a suit in the RTC for
damages due to breach of contract, with the complaint
set against “Travel & Tours Advisers, Inc. (Goldline)” and
the bus driver. The RTC ruled in favor of the Heirs,
holding TTAI (Goldline) liable to pay the heirs damages
and expenses. A writ of execution was served upon
TTAI and William Cheng, operator of the Goldline bus.
Cheng failed to settle the judgment, thus a tourist bus
was levied.
Gold Line Tours, Inc. (GLTI) filed a third-party claim,
claiming that the levied tourist bus be returned to GLTI
because it was its owner and GLTI had not been made a
party to the case, and it was a corporation entirely
different from TTAI. The RTC dismissed the third-party
claim, observing that the identity of TTAI cannot be
divorced from that of GLTI, considering that Cheng had
claimed to be the operator as well as the
President/Manager/incorporator of both entities; and
that Travel & Tours Advisers, Inc. had been known in
Sorsogon as Goldline. The CA affirmed the RTC
decision.
Did the RTC lack legal basis to declare TTAI and GLTI
one and the same?
A: No. As the Court sees it, the RTC had sufficient factual
basis to find that Goldline and Travel and Tours Advisers,
Inc. were one and the same entity, specifically: (a)
documents submitted by Goldline in the RTC showing that
William Cheng, who claimed to be the operator of Travel
and Tours Advisers, Inc., was also the President/Manager
and an incorporator of the petitioner; and (b) Travel and
Tours Advisers, Inc. had been known in Sorsogon as
Goldline (Gold Line Tours, Inc. v. Heirs of Maria Concepcion
LAcsa, G.R. No. 159108, June 18, 2012).
Q: Eric Livesey filed a complaint for illegal dismissal
with money claims against CBB Philippines Strategic
Property Services, Inc. (CBB) and Paul Dwyer, its
president. The LA ruled in favor of Livesey. The latter
and CBB entered into a compromise agreement
where Livesey is to receive a sum of money with a
downpayment. Unless and until the agreement is
fully satisfied, CBB shall not sell, alienate, or
otherwise dispose of all or substantially all of its
assets or business; suspend its business operations;
substantially change the nature of its business; and
declare bankruptcy or insolvency.
CBB failed to pay the rest of the amount as the
company ceased operations. Livesey moved for the
issuance of an alias writ of execution, alleging that
CBB and Keith Elliot have organized another
corporation, “Binswanger Philippines, Inc.” He
 CORPORATION CODE
claimed that there was evidence showing that CBB
and Binswanger Philippines, Inc. are one and the
same corporation, pointing out that CBB stands for
Chesterton Blumenauer Binswanger. Invoking the
doctrine of piercing the veil of corporate fiction,
Livesey prayed that an alias writ of execution be
issued against Binswanger and Elliot, CBB’s former
President, and now Binswanger’s President and Chief
Executive Officer (CEO).
Is the doctrine of piercing the veil of corporate fiction
applicable?
A: Yes. Shortly after Elliot forged the compromise
agreement with Livesey, CBB ceased operations. Then
Binswanger suddenly appeared. It was established almost
simultaneously with CBB’s closure, with no less than
Elliot as its President and CEO. A reasonable mind would
arrive at the conclusion that Binswanger is CBB’s alter ego
or that CBB and Binswanger are one and the same
corporation. There are also indications of badges of fraud
in Binswanger’s incorporation. It was a business strategy
to evade CBB’s financial liabilities, including its
outstanding obligation to Livesey. 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 purposes.
In the present case, the Court sees an indubitable link
between CBB’s closure and Binswanger’s
incorporation. CBB ceased to exist only in name; it re–
emerged in the person of Binswanger for an urgent
purpose — to avoid payment by CBB of the last two
installments of its monetary obligation to Livesey, as
well as its other financial liabilities. It was not just
coincidence that Binswanger is engaged in the same line
of business CBB embarked on: (1) it even holds office in
the very same building and on the very same floor where
CBB once stood; (2) CBB’s key officers, Elliot, no less, and
Catral moved over to Binswanger (3) the use of
Binswanger of CBB’s paraphernalia (receiving stamp) (4)
Binswanger’s takeover of CBB’s project with the PNB.
While the ostensible reason for Binswanger’s
establishment is to continue CBB’s business operations in
the Philippines, which by itself is not illegal, the close
proximity between CBB’s disestablishment and
Binswanger’s coming into existence was to evade CBB’s
unfulfilled financial obligation to Livesey under the
compromise agreement.
This underhanded objective, it must be stressed, can only
be attributed to Elliot as it was apparent that
Binswanger’s stockholders had nothing to do with
Binswanger’s operations as noted by the NLRC and which
the respondents did not deny. Elliot was well aware of the
compromise agreement that the last two installments of
CBB’s obligation to Livesey were due. These installments
were not met and the reason is that after the alleged sale
of the majority of CBB’s shares of stock, it closed down.
The Court, therefore, finds Elliot as liable as Binswanger
for CBB’s unfulfilled obligation to Livesey (Eric Godfrey
Stanley Livesey v. Binswanger Philippines, Inc. and Keith
Elliot, G.R. No. 177493, March 19, 2014).
165
Q: In an action for collection of a sum of money, the
RTC of Makati City issued a decision finding D-
Securities, Inc. liable to Rehouse Corporation
for P10,000,000.00. Subsequently, the writ of
execution was issued but returned unsatisfied
because D-Securities had no more assets to satisfy the
judgment. Rehouse moved for an Alias Writ of
Execution against Fairfield Bank (FB), the parent
company of D-Securities. FB opposed the motion on
the grounds that it is a separate entity and that it was
never made a party to the case. The RTC granted the
motion and issued the Alias Writ of Execution. In its
Resolution, the RTC relied on the following facts:
499,995 out of the 500,000 outstanding shares of
stocks of D-Securities are owned by FB; FB had actual
knowledge of the subject matter of litigation as the
lawyers who represented D-Securities are also the
lawyers of FB. As an alter ego, there is no need for a
finding of fraud or illegality before the doctrine of
piercing the veil of corporate fiction can be applied.
The RTC ratiocinated that being one and the same
entity in the eyes of the law, the service of summons
upon D-Securities has bestowed jurisdiction over
both the parent and wholly-owned subsidiary. Is the
RTC correct? (2014 Bar)
A: No. The Court already ruled in Kukan International
Corporation v. Reyes that compliance with the recognized
modes of acquisition of jurisdiction cannot be dispensed
with even in piercing the veil of corporate fiction.
From the preceding, it is therefore correct to say that the
court must first and foremost acquire jurisdiction over
the parties; and only then would the parties be allowed to
present evidence for and/or against piercing the veil of
corporate fiction. If the court has no jurisdiction over the
corporation, it follows that the court has no business in
piercing its veil of corporate fiction because such action
offends the corporation’s right to due process.
“Jurisdiction over the defendant is acquired either upon a
valid service of summons or the defendant’s voluntary
appearance in court. When the defendant does not
voluntarily submit to the court’s jurisdiction or when
there is no valid service of summons, ‘any judgment of the
court which has no jurisdiction over the person of the
defendant is null and void.’” “The defendant must be
properly apprised of a pending action against him and
assured of the opportunity to present his defenses to the
suit. Proper service of summons is used to protect one’s
right to due process.”
As [Fairfield] Bank was neither served with summons, nor
has it voluntarily appeared before the court, the judgment
sought to be enforced against [D-Securities] cannot be
made against its parent company, [Fairfield] Bank.
[Fairfield] Bank has consistently disputed the RTC
jurisdiction, commencing from its filing of an Omnibus
Motion by way of special appearance during the execution
stage until the filing of its Comment before the Court
wherein it was pleaded that “RTC never acquired
jurisdiction over [Fairfield] Bank. [Fairfield] Bank was not
pleaded as a party in this case. It was never served with
summons by nor did it voluntarily appear before RTC as
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
to be subjected to the latter’s jurisdiction” (Pacific
Rehouse Corporation v. Export Industry Bank, G.R. No.
201537, G.R. No. 199687 March 24, 2014).
NOTE: There appears to be a lack of conclusive yardstick
as to when the court may pierce the veil of corporate
fiction of a corporation which has not been brought to its
jurisdiction by summons, voluntary appearance or other
recognized modes of acquiring jurisdiction. To be safe,
any bar question should be answered based on similarity
with the facts of each case (Divina, 2014).
CIRCUMSTANCES WHICH DO NOT WARRANT THE
PEIRCING OF THE CORPORATE VEIL
The mere fact that: (FCS)
1. A corporation owns fifty (50%) of the capital stock of
another corporation, or the majority ownership of
the stocks of a corporation is not per se a cause for
piercing the veil.
2. Two corporations have common directors or same or
single stockholder who has all or nearly all of the
capital stock of both corporations is not in itself
sufficient ground to disregard separate corporate
entities.
3. There is a substantial identity of the incorporators of
the 2 corporations does not necessarily imply fraud
and does not warrant piercing the corporate veil.
Q: Land Bank of the Philippines (LBP) extended a
series of credit accommodations to ECO using the
trust funds of PVTA. The proceeds of the credit
accommodations were received on behalf of ECO by
Emmanuel Oñate. Upon maturity of the loans, ECO
failed to pay the same. Despite demands, ECO was
unable to pay. ECO then submitted a Plan of Payment
to LBP, however, the latter rejected the same. LBP
filed a complaint for collection of sum of money
against ECO and Oñate. The RTC rendered judgment
against ECO and absolved Oñate from personal
liability. The CA affirmed. LBP contends that the
personalities of Oñate and of ECO should be treated as
one, for the particular purpose of holding Oñate liable
for the loans incurred by ECO from Land Bank. Is
Oñate jointly and severally liable with ECO for the
loans incurred from LBP?
A: No. Oñate should not be held jointly and severally liable
with ECO. A corporation, upon coming into existence, is
invested by law with a personality separate and distinct
from those persons composing it as well as from any other
legal entity to which it may be related. By this attribute, a
stockholder may not, generally, be made to answer for
acts or liabilities of the said corporation, and vice
versa. The mere fact that Oñate owned the majority of the
shares of ECO is not a ground to conclude that Oñate and
ECO are one and the same. Mere ownership by a single
stockholder of all or nearly all of the capital stock of a
corporation is not by itself sufficient reason for
disregarding the fiction of separate corporate
personalities. Neither is the fact that the name “ECO”
represents the first three letters of Oñate’s name
sufficient reason to pierce the veil. Even if it did, it does
not mean that the said corporation is merely a dummy of
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2016 GOLDEN NOTES
166
Oñate. A corporation may assume any name provided it is
lawful. There is nothing illegal in a corporation acquiring
the name or as in this case, the initials of one of its
shareholders (Land Bank ofthe Philippines v. CA, et al., G.R.
No. 127181, September 4, 2011).
TEST IN DETERMINING APPLICABILITY
The following are the tests in determining the
applicability of the doctrine of piercing the corporate veil:
(ECAO)
1. When the corporation is used to defeat public
convenience as when the corporate fiction is used as
a vehicle for the evasion of an existing obligation;
(Equity Cases)
2. In fraud cases or when the corporate entity is used to
justify a wrong, protect fraud, or defend a crime;
(Control Test)
3. In Alter ego cases, where a corporation is merely a
farce since it is a mere alter ego or business conduit
of a person, or where the corporation is so organized
and controlled and its affairs are so conducted as to
make it merely an instrumentality, agency, conduit or
adjunct of another corporation (Timoteo H. Sarona vs.
National Labor Relations Commission, Royale Security
Agency, et al., G.R. No. 185280, January 18, 2012).
4. The Objective test where the end result in piercing
the veil of corporate fiction is to make the
stockholders liable for debts and obligations of the
Corporation not to make the Corporation liable for
the debts and obligations of the stockholders (Umali
v CA, G.R. No. 89561, September 13, 1990).
Three-pronged test to determine the application of
the alter ego/ instrumentality theory:
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 (Instrumentality or
Control test);
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
plaintiff’s legal right; (Fraud test) and
3. The aforesaid control and breach of duty must have
proximately caused the injury or unjust loss
complained of (Harm test).
Instrumentality or Control Test
This test requires that the subsidiary be completely under
the control and domination of the parent. It examines the
parent corporation’s 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 instrumentality 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 autonomy and
the parent corporation, though acting through the
 CORPORATION CODE
subsidiary in form and appearance, “is operating the
business directly for itself.
Fraud Test
This test requires that the parent corporation’s conduct in
using the subsidiary corporation be unjust, fraudulent or
wrongful. It examines the relationship of the plaintiff to
the corporation. It recognizes that piercing is appropriate
only if the parent corporation uses the subsidiary in a way
that harms the plaintiff creditor. As such, it requires a
showing of “an element of injustice or fundamental
unfairness.”
Harm Test
This test requires the plaintiff to show that the
defendant’s control, exerted in a fraudulent, illegal or
otherwise unfair manner toward it, caused the harm
suffered. A causal connection between the fraudulent
conduct committed through the instrumentality of the
subsidiary and the injury suffered or the damage incurred
by the plaintiff should be established. The plaintiff must
prove that, unless the corporate veil is pierced, it will have
been treated unjustly by the defendant’s exercise of
control and improper use of the corporate form and,
thereby, suffer damages.
NOTE: Piercing the corporate veil based on the alter ego
theory requires the concurrence of the three elements -
control, fraud or fundamental unfairness, and harm or
damage. The absence of any of these elements prevents
piercing the corporate veil (DBP v. Hydro Resources
Contractors Corporation, G.R. Nos. 167603, 167561, &
167530, March 13, 2013).
The absence of any one of these elements prevents
‘piercing the corporate veil’ in applying the
‘instrumentality’ or ‘alter ego’ doctrine, the courts are
concerned with reality and not form, with how the
corporation operated and the individual defendant’s
relationship to that operation. Hence, all three elements
should concur for the alter ego doctrine to be applicable.
Control, by itself, does not mean that the controlled
corporation is a mere instrumentality or a business
conduit of the mother company. Even control over the
financial and operational concerns of a subsidiary
company does not by itself call for disregarding its
corporate fiction. There must be a perpetuation of fraud
behind the control or at least a fraudulent or illegal
purpose behind the control in order to justify piercing the
veil of corporate fiction.
If used to perform legitimate functions, a subsidiary’s
separate existence shall be respected, and the liability of
the parent corporation as well as the subsidiary will be
confined to those arising in their respective business.
Furthermore, ownership by a parent corporation of a
great majority or all of the subsidiary and the existence of
interlocking directorates may serve as badges of control,
but ownership of another corporation, per se, without
proof of actuality of the other conditions are insufficient
167
to establish an alter ego relationship or connection
between the two corporations, which will justify the
setting aside of the cover of corporate fiction (Pacific
Rehouse Corporation v. CA, G.R. No. 199687, Mar. 24, 2014).
Piercing the veil of corporate fiction on the basis of
equity
Equity cases applying the piercing doctrine are what are
termed the "dumping ground", where no fraud or alter
ego circumstances can be culled by the Court to warrant
piercing.
The main feature of equity cases is the need to render
justice in the situation at hand or to brush aside merely
technical defenses. Often, equity cases of piercing appear
in combination with other types of piercing (Villanueva,
2010).
Specifically, the equity test can be applied when:
1. The corporate personality would be inconsistent
with the business purpose of the legal fiction; or
2. The piercing the corporate fiction is necessary to
achieve justice or equity for those who deal in good
faith with the corporation;
3. When the use of the separate juridical personality is
used to confuse legitimate issues.
Indications that a subsidiary corporation is a mere
instrumentality of its parent corporation
1. The parent corporation owns all or most of the
capital stock of the subsidiary.
2. The parent and subsidiary corporations have
common directors or officers.
3. The parent corporation finances the subsidiary.
4. The parent corporation subscribes to all the capital
stock of the subsidiary or otherwise causes its
incorporation.
5. The subsidiary has grossly inadequate capital.
6. The parent corporation pays the salaries and other
expenses or losses of the subsidiary.
7. The subsidiary has substantially no business except
with the parent corporation or no assets except those
conveyed to or by the parent corporation.
8. In the papers of the parent corporation or in the
statements of its officers, the subsidiary is described
as a department or division of the parent
corporation, or its business or financial
responsibility is referred to as the parent
corporation's own.
9. The parent corporation uses the property of the
subsidiary as its own.
10. The directors or executives of the subsidiary do not
act independently in the interest of the subsidiary
but take their orders from the parent corporation.
11. The formal legal requirements of the subsidiary are
not observed (PNB v. Ritratto Group, G.R. No. 142616,
July 31, 2001).
Q: PNB-IFL a subsidiary company of PNB, organized
and doing business in Hong Kong, extended a letter of
credit in favor of Ritratto Group Inc., et al., in the
amount of US$300,000.00. However, as their
outstanding obligations stood at US$1,497,274.70,
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
and the same remains unpaid, PNB-IFL, through its
attorney-in-fact PNB, notified the Ritratto Group Inc.,
et al., of the foreclosure of all the real estate
mortgages and that the properties subject thereof
were to be sold at a public auction. Ritratto Group Inc.,
et al., filed a complaint for injunction against PNB for
the latter to be restrained from foreclosing and
eventually selling its property. The RTC granted the
injunction. It applied the doctrine of Piercing the Veil
of Corporate Identity by stating that PNB is merely
an alter ego or a business conduit of PNB-IFL. Is PNB
is merely an alter ego or business conduit of PNB-IFL?
A: No. PNB is not an alter ego or business conduit of PNB-
IFL. Aside from the fact that PNB-IFL is a wholly owned
subsidiary of PNB, there is no showing of the indicative
factors that the former corporation is a mere
instrumentality of the latter. Neither is there a
demonstration that any of the evils sought to be
prevented by the doctrine of piercing the corporate veil
exists. Inescapably, therefore, the doctrine of piercing the
corporate veil based on the alter ego or instrumentality
doctrine finds no application in the case at bar. In any
case, the parent-subsidiary relationship between PNB and
PNB-IFL is not the significant legal relationship involved
in this case since PNB was not sued because it is the
parent company of PNB-IFL. Rather, PNB was sued
because it acted as an attorney-in-fact of PNB-IFL in
initiating the foreclosure proceedings. A suit against an
agent cannot, without compelling reasons, be considered
a suit against the principal. Under the Rules of Court,
every action must be prosecuted or defended in the name
of the real party-in-interest, unless otherwise authorized
by law or these Rules (PNB v. Ritratto Group Inc., et al.,
supra).
Q: In the course of its business undertakings, Union
Refinery Corporation (URC) imported oil products
into the country. Union and Oilink had interlocking
directors when Oilink started its business. They had
the same Board of Directors and Oilink was 100%
owned by URC. The District Collector of the Port of
Manila, formally demanded, at first, that URC must
pay the taxes and duties on its oil imports that had
arrived at the Port of Lucanin in Bataan. But
Commissioner Tan made a final demand for the total
liability both upon URC and Oilink. The latter formally
protested the assessment on the ground that it was
not the party liable for the assessed deficiency taxes.
Commissioner Tan stressed that the Bureau of
Customs would not issue any clearance to Oilink
unless the amount demanded as Oilink’s tax liability
be first paid, and a performance bond be posted by
URC/Oilink. May the Commissioner of Customs pierce
the veil of corporate fiction?
A: No. A corporation, upon coming into existence, is
vested by law with a personality separate and distinct
from those of the persons composing it as well as from any
other legal entity to which it may be related. URC and
Oilink had the same Board of Directors and Oilink was
100% owned by URC. The Court held that the doctrine of
piercing the corporate veil has no application here
because the Commissioner of Customs did not establish
that Oilink had been set up to avoid the payment of taxes
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
168
or duties, or for purposes that would defeat public
convenience, justify wrong, protect fraud, defend crime,
confuse legitimate legal or judicial issues, perpetrate
deception or otherwise circumvent the law
(Commissioner of Customs v. Oilink International
Corporation, G.R. No. 161759, July 2, 2014).
Q: Plaintiffs filed a collection action against X
Corporation. Upon execution of the court's decision, X
Corporation was found to be without assets.
Thereafter, the plaintiffs filed an action against its
present and past stockholder, Y Corporation, which
owned substantially all of the stocks of X corporation.
The two corporations have the same board of
directors and Y Corporation financed the operations
of X corporation. May Y Corporation be held liable for
the debts of X Corporation? Why? (2001 Bar)
A: Yes. Y Corporation may be held liable for the debts of X
Corporation. The doctrine of piercing the veil of
corporation fiction applies to this case. The two
corporations have the same board of directors and Y
Corporation owned substantially all of the stocks of X
Corporation, which facts justify the conclusion that the
latter is merely an extension of the personality of the
former, and that the former controls the policies of the
latter. Added to this is the fact that Y Corporation controls
the finances of X Corporation which is merely an adjunct,
business conduit or alter ego of Y Corporation (CIR v.
Norton & Harrison Company, G.R. No. L‐17618, August 31,
1964).
Q: X Corp. operates a call center that received orders
for pizzas on behalf of Y Corp. which operates a chain
of pizza restaurants. The two companies have the
same set of corporate officers. After 2 years, X Corp.
dismissed its call agents for no apparent reason. The
agents filed a collective suit for illegal dismissal
against both X Corp. and Y Corp. based on the doctrine
of piercing the veil of corporate fiction. The latter set
up the defense that the agents are in the employ of X
Corp. which is a separate juridical entity. Is this
defense appropriate? (2011 Bar)
A: Yes. It is not shown that one company completely
dominates the finances, policies, and business practices of
the other.
INCORPORATION AND ORGANIZATION
Incorporation
It is the performance of conditions, acts, deeds, and
writings by incorporators, and the official acts,
certification or records, which give the corporation its
existence.
Steps in the creation of a corporation
1. Promotion
2. Incorporation (Sec. 10, CC)
3. Formal organization and commencement of business
operations (Sec. 22, CC)
 CORPORATION CODE
Components of a corporation (DUMP-ISCO) Promotional activities

1. Corporators – Those who compose a corporation, Promotional activities includes: (DIA)

whether as stockholders or members
2. Incorporators – They are those mentioned in the
Articles of Incorporation as originally forming and
composing the corporation and who are signatories
thereof.
3. Directors and trustees – The Board of Directors is the
governing body in a stock corporation while the
Board of Trustees is the governing body in a non-
stock corporation.
4. Corporate Officers – Officers who are identified as
such in the Corporation Code, the Articles of
Incorporation, or the By-laws of the corporation.
5. Stockholders – Owners of shares of stock in a stock
corporation.
6. Members – Corporators of a corporation which has
no capital stock. They are not owners of shares of
stocks, and their membership depends on terms
provided in the articles of incorporation or by-laws
(CC, Sec. 91,CC).
7. Promoter – A person who, acting alone or with
others, takes initiative in founding and organizing the
business or enterprise of the issuer and receives
consideration therefor (Securites and Regulation
Code [SRC], Sec. 3.10).
8. Subscribers – persons who have agreed to take and
pay for original, unissued shares of a corporation
formed or to be formed.
9. Underwriter – a person who guarantees on a firm
commitment and/or declared best effort basis the
distribution and sale of securities of any kind by
another (Securities and Regulation Code [SRC], Sec.
3.15).
Kinds of Underwriting Agreement
a. English – the underwriter sells what the
corporation cannot sell.
b. Firm Commitment – the underwriter purchases
outright the securities and then resells the
same .
c. Best Efforts – the underwriter merely sells for
commission.
PROMOTER
A promoter is a person who, acting alone or with others,
takes initiative in founding and organizing the business or
enterprise of the issuer and receives consideration
therefor (SRC, Sec. 3.10).
Specifically, a promoter is a person who brings about or
cause to bring about the formation and organization of a
corporation by:
1. Bringing together the incorporators or the persons
interested in the enterprise;
2. Procuring subscriptions or capital for the
corporation; and
3. Setting in motion the machinery which leads to the
incorporation of the corporation itself.
1. Discovery – consists of finding a business
opportunity to be developed.
2. Investigation – entails an analysis of the proposed
business to determine whether or not it is
economically feasible.
3. Assembly – Includes the bringing together of the
necessary personnel, property or money to set the
business in motion as well as secondary details of
setting up the corporation itself (De Leon, supra).
Promoter vs. Promotee
PROMOTER PROMOTEE
Those who merely
Involved in the initial
subscribe to the shares of
steps that finally led to the
stock of a corporation to
incorporation
be formed
Promoters organize a
corporation and are active
Merely passive investors
participants in its
formation
A mere promotee should
Promoter(s) have joint not be held liable for a
personal liability for a promoter’s liability in a
corporation which was not corporation which was not
formed formed
Relation of the promoter to the corporation
The promoter occupies a fiduciary or quasi-trust relation
toward the corporation when it comes into existence and
towards the subscribers prior to its organization, as long
as they are acting as promoters (De Leon, supra).This
fiduciary relation imposes upon the promoter to act in
good faith in all dealings in behalf of the corporation to
protect the corporation from dishonest promoters (ibid).
Promoter is not an agent of the corporation
The promoters are not in any sense agents of the
corporation before it comes into existence for there
cannot be an agency unless there is a principal. But, they
may become the agents of the corporation after it has
been formed provided there is assent, express or implied,
on the part of the corporation (ibid).
Promoter as agent of an incorporator/ corporator/
subscriber before the commencement of the
corporate existence
Before the corporation is formed, the promoters are
considered agents of the subscribers, the incorporators or
corporators.
NOTE: The subscribers for stock in a proposed
corporation do not, without agreement to such effect,
become partners with the promoters of it (ibid).

UNIVERSITY OF SANTO TOMAS

169 FACULTY OF CIVIL LAW
 MERCANTILE LAW
Promoter vs. Corporation by estoppel
CORPORATION BY
PROMOTER
ESTOPPEL
Persons assume to act as
No misrepresentation that
a corporation knowing it
the corporation does not
to be without authority
yet exist
to do so
LIABILITY OF PROMOTER
Rules governing the liability of promoters in pre-
incorporation agreements
1. If Corporation was never formed - The promoter is
liable for his pre-incorporation acts and assumes the
risk that he may not be reimbursed or relieved of
liability in the event that the corporation is not
formed (Wells v. Fay & Egan Co., 143 Ga. 732). If the
promoter contracts as an agent, when in fact he has
no principal, he will be personally liable (Ibid).
GR: The promoter is liable to return the money paid
by the subscribers for shares in a projected
corporation, which failed to organize, this
notwithstanding that the money has been already
applied in payment of preliminary expenses or
otherwise.
It must be shown by the subscriber that the person
receiving the money sought to be recovered was
authorized to receive it and the fact that the said
person actually received it.
XPN: Where the subscriber agrees that the amount
paid on his subscription may be applied on certain
promotional or development expenses and it is so
applied, the promoters are not personally liable for
the amount paid on the subscription (De Leon, 2010).
2. If Corporation was formed -
GR: If the contract is partly to be performed before
incorporation, the promoters solely are liable even if
the promoter signed "on behalf of corporation to be
formed, who will be obligor" (Stanley J. How & Assoc.,
Inc. v. Boss, 222 F. Supp. 936, 1963 U.S. Dist. 1963).
XPN: The promoter may be absolved from liability by
the adoption of the corporation of the contract. The
adoption must be expressed in a novation or
agreement to the effect:
1. That the creditor agreed to look solely to the
new corporation for payment; or
2. That the promoter did not have any duty
toward the creditor to form the corporation and
give the corporation the opportunity to assume
and pay the liability (ibid).
LIABILITY OF CORPORATION FOR
PROMOTER’S CONTRACT
GR: Since a corporation cannot, before its organization,
have agents contract for itself, or be contracted with, it is
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2016 GOLDEN NOTES
170
not liable upon any contract which a promoter attempts
to make for it prior to its organization.
XPNs:
1. The contract is expressly or impliedly adopted or
ratified by the corporation after its organization is
completed; or
2. Liability is imposed by statute.
NOTE: Until such assumption of liability is made by the
corporation, the better rule is that the contracts entered
into by promoters “should at most be deemed suspended
and enforceable only after the incorporation and
organization” of the corporation (Ibid).
Liability of corporation for promotion fees
GR: The corporation is not liable to its promoters for their
service fees incurred before incorporation.
XPNs:
1. The corporation expressly agrees to make such
payment or;
2. From other facts the court can infer a new contract to
reimburse (Ibid); or
3. If the same is provided for in the registration
statement of securities filed with the SEC (Sec. 8[34],
Revised Securities Act).
Stockholders of the corporation cannot be held
personally liable for compensation claimed by
promoters
Stockholders cannot be held personally liable for the
compensation for services performed by promoters in the
organization of the corporation in the absence of any
showing that said stockholders contracted such services.
The fact that they benefited from such services is no
justification to hold them personally liable therefore
(Ibid., citing Caram, Jr. vs. CA, G.R. No. L-48627, June 30,
1987).
NUMBER AND QUALIFICATIONS OF INCORPORATORS
Number and the qualifications of incorporators in a
stock corporation (N5L - R1)
1. GR: Natural person
XPN: Under the Rural Banks Act of 1992,
incorporated cooperatives are allowed to be
incorporators of rural banks.
2. GR: Incorporators must not be less than 5 but not
more than 15
XPNS:
1. Corporation sole
2. Educational institutions
3. An incorporator must be of Legal age
4. Majority of the incorporators must be Residents of
the Philippines (2006 Bar).
5. Each must own or subscribe to at least 1 share
(Sec.10, CC).
 CORPORATION CODE
Q: What is the minimum and maximum number of
incorporators required to incorporate a stock
corporation? Is this also the same minimum and
maximum number of directors required in a stock
corporation? (2006, 2010 Bar)
directors must not be less than five (5) nor more than
fifteen (15) as indicated in the AOI (CC, Sec. 14).
Q: Must all incorporators and directors be residents
of the Philippines? (2006 Bar)

A: Any number of natural persons not less than five (5) A: No. The Corporation Code only provides that majority
but not more than fifteen (15) may form a private of incorporators and directors of a corporation must be
corporation (CC, Section 10). Likewise, the number of residents of the Philippines (CC, Secs. 10 and 23).

Corporator vs. Incorporator

BASIS INCORPORATOR CORPORATOR

Who are they?
Signatory of the AOI?
Effect upon the sale of his
shares
Those stockholders or members mentioned in
Those who compose a corporation,
the AOI as originally forming and composing the
whether as stockholders or as members.
corporation and who are signatories thereof.
A signatory of the AOI May or may not be signatory of the AOI
Ceases to be a corporator by sale of his
shares in case of stock corporation.
Does not cease to be an incorporator upon sale
of his shares
In case of non-stock corporation, when
the corporator ceases to be a member.
GR: 5 to 15 natural persons

Number of XPNs: GR: No limit

incorporators/corproator 1. In case of rural banks, registered cooperatives XPN: Close corporations
may be incorporators.
2. corporation sole – only 1 incorporator
GR: Filipino citizenship is not a requirement.

Filipino Citizenship XPN: When engaged in a business which is Same rule applies
partly or wholly nationalized where majority
must be citizens.

Incorporator vs. Subscriber (2012 Bar)

BASIS INCORPORATORS SUBSCRIBER
They are persons who have agreed to
Those stockholders or members mentioned in
take and pay for original, unissued
Who are they? the AOI as originally forming and composing the
shares of a corporation formed or to be
corporation.
formed.
Signatory of the AOI? A signatory of the AOI May or may not be signatory of the AOI
GR: 5 to 15 natural persons
GR: No limit
Number of XPNs:
incorporators/subscribe 1. In case of rural banks, registered cooperatives XPN: Close corporations – not more
r may be incorporators. than a specified number of persons,
usually not exceeding 20 (CC, Sec. 96).
2. corporation sole – only 1 incorporator
GR: Filipino citizenship is not a requirement.

Filipino Citizenship
Residence requirement
XPN: When engaged in a business which is Same rule applies
partly or wholly nationalized where majority
must be citizens.
Majority of the incorporators must be residents Residency requirement is not
of the Philippines. applicable.

NOTE: Non-residents may be incorporators because the
law only requires that the majority of incorporators be
residents of the Philippines.
Q: X is a Filipino immigrant residing in Sacramento,
California. Y is a Filipino residing in Quezon City,
171
Philippines. Z is a resident alien residing in Makati
City. GGG Corporation is a domestic corporation –
40% owned by foreigners and 60% owned by
Filipinos, with T as authorized representative. CCC
Corporation is a foreign corporation registered with
the Philippine Securities and Exchange Commission.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
KKK Corporation is a domestic corporation (100%)
Filipino owned. S is a Filipino, 16 years of age, and the
daughter of Y. Who can be incorporators? Who can be
subscribers?
A: X, Y, and Z can be incorporators. Sec. 10 of the CC
merely requires majority of the incorporators to be
residents (not necessarily citizens) of the Philippines.
Further, said incorporators must be natural persons, of
legal age and must own or subscribe to at least 1 share.
Meanwhile, X, Y, Z, GGG, CCC, KKK can be subscribers.
Residency requirement is immaterial in subscription
contracts. However, the citizenship requirement is
material in subscription contracts if the corporation is
engaged in nationalized activities requiring at least
majority Filipino citizenship as a requirement.
CORPORATE NAME
Limitations on the use of corporate name
1. No corporate name may be allowed by the SEC if the
proposed name is identical or deceptively or
confusingly similar to that of any existing corporation
(CC, Sec. 18).
2. No corporate name may be allowed by the SEC if the
proposed name is identical or deceptively or
confusingly similar to any other name already
protected by law (Sec. 18, CC).
3. The proposed name is patently deceptive, confusing
or contrary to existing laws (Sec. 18, CC).
4. If the name applied for is similar to the name of a
registered firm, the applicant shall at least contain
one or more distinctive words to the proposed name
to remove the similarity or differentiate it from the
registered name. However, the addition of these
distinctive words shall not be allowed if the
registered name is coined or unique unless the board
of directors of the subject corporation gives its
consent to the applied name (De Leon, 2010, citing
SEC Memo, Cir. No. 5, Series of 2008).
5. The corporate name shall contain the word
“Corporation” or its abbreviation “Corp.” or
“Incorporated”, or “Inc.” The corporate name of a
foundation shall use the word “Foundation”. This is
to distinguish the corporation from a partnership
and other business organizations (SEC Memo. Circ.
No. 5, Series of 2008).
6. A person’s full name or surname may be used in a
corporate name:
a. If he is a stockholder of the corporation and has
consented to such use;
b. If the person is already deceased, the consent
shall be given by his estate;
c. The Commission may require a registrant to
explain to its satisfaction the reason for the use
of a person’s name;
d. The meaning of initials used in a name shall be
stated by the registration the articles of
incorporation in a separate document signed by
an incorporator or director (SEC Memo. Circ. No.
5, Series of 2008).
7. The name of a dissolved firm shall not be allowed to
be used by other firms within 3 years after the
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172
approval of the dissolution of the corporation by SEC,
unless allowed by the last stockholders representing
at least majority of the outstanding capital stock of
the dissolved firm (SEC Memo. Circ. 14, Series of
2000).
8. For as long as a corporation is existing regardless of
whether or not it is in operation, its corporate name
cannot be used by any other group or corporation
(SEC Opinion, Sept. 2, 1993).
NOTE: Priority of adoption determines the right to the
exclusive use of a corporate name with freedom from
infringement. Further, to determine whether a given
corporate name is “identical” or “confusingly or
deceptively similar” with another entity’s corporate
name, the corporate names must be evaluated in their
entirety (Lyceum of the Philippines v. CA, G.R. No. 101897,
March 5, 1993).
Q: Lepanto Consolidated Mining Company filed with
the RTC a Complaint against NM Rothschild & Sons
(Australia) Limited praying for a judgment declaring
the loan and hedging contracts between the parties
void for being contrary to Article 2018 of the Civil
Code of the Philippines and for damages. NM
Rothschild filed a Special Appearance with Motion to
Dismiss, but the same was denied. NM Rothschild
sought redress via a Petition for Certiorari with the
Court of Appeals, alleging that the trial court
committed grave abuse of discretion in denying its
Motion to Dismiss. The CA dismissed the petition.
Should NM Rothschild’s petition be dismissed for not
being filed by a real party in interest and for lack of a
proper verification and certificate of non-forum
shopping?
A: No. Lepanto argues that the present Petition should be
dismissed on the ground that NM Rothschild no longer
existed as a corporation at the time said Petition was filed.
Lepanto points out that as of the date of the filing of the
Petition, there is no such corporation that goes by the
name NM Rothschild and Sons (Australia) Limited. Thus,
according to respondent, the present Petition was not
filed by a real party in interest, citing the Court’s ruling in
Philips Export B.V. v. Court of Appeals, wherein it held that
a name is peculiarly important as necessary to the very
existence of a corporation. Its name is one of its attributes,
an element of its existence, and essential to its identity.
The general rule as to corporations is that each
corporation must have a name by which it is to sue and be
sued and do all legal acts. The name of a corporation in
this respect designates the corporation in the same
manner as the name of an individual designates the
person, and the right to use its corporate name is as much
a part of the corporate franchise as any other privilege
granted.
In its Memorandum before this Court, NM Rothschild
started to refer to itself as Investec Australia Limited
(formerly NM Rothschild & Sons [Australia] Limited) and
captioned said Memorandum accordingly. NM Rothschild
claims that NM Rothschild and Sons (Australia) Limited
still exists as a corporation under the laws of Australia
under said new name. It presented before us documents
evidencing the process in the Australian Securities &
 CORPORATION CODE
Investment Commission on the change of NM Rothschild’s
company name from NM Rothschild and Sons (Australia)
Limited to Investec Australia Limited.
The Court finds the submissions of NM Rothschild on the
change of its corporate name satisfactory and resolve not
to dismiss the present Petition for Review on the ground
of not being prosecuted under the name of the real party
in interest. While the Court stands by its pronouncement
in Philips Export 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 when adequate identification is presented.
A real party in interest is the party who stands to be
benefited or injured by the judgment in the suit, or the
party entitled to the avails of the suit. There is no doubt in
the Court’s mind that the party who filed the present
Petition, having presented sufficient evidence of its
identity and being represented by the same counsel as
that of the defendant in the case sought to be dismissed, is
the entity that will be benefited if this Court grants the
dismissal prayed for (NM Rothschild & Sons (Australia)
Limited, v. Lepanto Consolidated Mining Company, G.R. No.
175799, November 28, 2011).
Q: Refractories Corporation of the Philippines (RCP)
is a corporation for the purpose of engaging in the
business of manufacturing, producing, selling,
exporting and otherwise dealing in any and all
refractory bricks, its by-products and derivatives. On
June 22, 1977, it registered its corporate and business
name with the Bureau of Domestic Trade. On the
other hand, Synclaire Manufacturing Corporation
amended its AOI on August 23, 1985 to change its
corporate name to Industrial Refractories Corp. of the
Philippines (IRCP). Both companies are the only local
suppliers of monolithic gunning mix. Discovering that
IRCP was using such corporate name, RCP filed with
SEC a petition to compel IRCP to change its corporate
name on the ground that its corporate name is
confusingly similar with that of RCP’s such that the
public may be confused or deceived into believing
that they are one and the same corporation. Is
Industrial Refractories Corporation of the Philippines
confusingly similar with Refractories Corporation of
the Philippines?
A: Yes. To fall within the prohibition of the law, two
requisites must be proven, to wit: (1) that the
complainant corporation acquired a prior right over the
use of such corporate name; and (2) the proposed name
is either: (a) identical, or (b) deceptively or confusingly
similar to that of any existing corporation or to any other
name already protected by law; or (c) patently deceptive,
confusing or contrary to existing law. In this case, RCP was
incorporated on October 13, 1976 and since then has been
using the corporate name “Refractories Corp. of the
Philippines”. Meanwhile, IRCP was incorporated on
August 23, 1979 originally under the name “Synclaire
Manufacturing Corporation”. It only started using the
name “Industrial Refractories Corp. of the Philippines”
when it amended its Articles of Incorporation on August
23, 1985, or nine (9) years after respondent RCP started
using its name. Thus, being the prior registrant,
173
respondent RCP has acquired the right to use the word
“Refractories” as part of its corporate name (Industrial
Refractories Corporation of the Philippines v. CA, et al., G.R.
No. 122174, October 3, 2002).
Doctrine of Secondary Meaning
It is the doctrine which states that a word or phrase
originally incapable of exclusive appropriation with
reference to an article on the market, because
geographically or otherwise descriptive, might
nevertheless have been used so long and so exclusively by
one producer with reference to his article that, in that
trade and to that branch of the purchasing public, the
word or phrase has come to mean that the article was his
product (Philippine Nut Industry, Inc. vs. Standard Brands.
Inc. G.R. No.L-23035, July 31, 1975).
The doctrine of secondary meaning requires that the
word or phrase used in the corporate name has been for
such length of time with such exclusivity as to have
associated or identified the corporation in the mind of the
general public (or at least that portion of the general
public to do with the corporation’s market) (Lyceum of the
Philippines vs. CA, supra).
NOTE: The application of this Trademark Law doctrine
has been extended to corporate names since the right to
use a corporate name to the exclusion of others is based
upon the same principle which underlies the right to use
a particular trademark or trade name (De Leon, 2010).
A corporation that changes its corporate name is not
considered as a new corporation
A corporation that changes its corporate name is not
considered as a new corporation. It is the same
corporation with a different name, and its character is in
no respect changed (Republic Planters Bank v. CA, G.R. No.
93073, December 21, 1992).
Q: P.C. Javier and Sons Services, Inc., (PC) applied with
First Summa Savings and Mortgage Bank, later on
renamed as PAIC Savings and Mortgage Bank (The
Bank) for a loan accommodation under the Industrial
Guarantee Loan Fund (IGLF). Upon maturity, PC failed
to pay, hence, the Bank initiated an extrajudicial
foreclosure of the real estate mortgage. The instant
complaint was filed to forestall the extrajudicial
foreclosure sale of a piece of land mortgaged by PC in
favor of PAIC Savings and Mortgage Bank, Inc. PC
argues that they are legally justified to withhold their
amortized payments to the bank until such time they
would have been properly notified of the change in
the corporate name. They claim that they have never
received any formal notice of the alleged change of
corporate name of First Summa Savings and Mortgage
Bank to PAIC Savings & Mortgage Bank, Inc. Is the
Bank required to notify PC Javier & Sons, Inc., of the
change in its corporate name?
A: No. The bank is not required to notify PC of its change
of name. After going over the Corporation Code and
Banking Laws, as well as the regulations and circulars of
both the SEC and the Bangko Sentral ng Pilipinas (BSP),
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
the Supreme Court found that there is no such
requirement. This being the case, the Court cannot impose
on a bank that changes its corporate name to notify a
debtor of such change absent any law, circular or
regulation requiring it. Such act would be judicial
legislation. The formal notification is, therefore,
discretionary on the bank. Unless there is a law,
regulation or circular from the SEC or BSP requiring the
formal notification of all debtors of banks of any change in
corporate name, such notification remains to be a mere
internal policy that banks may or may not adopt. A change
in the corporate name does not make a new corporation,
whether effected by a special act or under a general law. It
has no effect on the identity of the corporation, or on its
property, rights, or liabilities. The corporation, upon such
change in its name, is in no sense a new corporation, nor
the successor of the original corporation. It is the same
corporation with a different name, and its character is in
no respect changed (P.C. Javier & Sons, Inc., v. CA et al., G.R.
No. 129552, June 29, 2005).
CORPORATE TERM
Term of corporate existence
GR: The period stated in the AOI, this in no case, shall
exceed 50 years.
XPN: Unless sooner dissolved or unless said period is
extended (CC, Sec. 11).
NOTE: Extension may be made for periods not exceeding
50 years in any single instance by an amendment of the
articles of incorporation. However, extension must be
made within 5 years before the expiry date of the
corporate term, unless there are justifiable reasons for an
earlier extension as may be determined by the SEC (CC,
Sec. 11).
Extension must also comply with procedural
requirements for amendment of AOI.
Doctrine of Relation or Relating Back Doctrine
GR: The filing and recording of a certificate of extension
after the term cannot relate back to the date of the
passage of the resolution of the stockholders to extend the
life of the corporation.
XPNs: The doctrine of relation applies if the failure to file
the application for extension within the term of the
corporation is due to:
1. The neglect of the SEC officer with whom the
certificate is required to be filed; or
2. A wrongful refusal on his part to receive it (Aquino,
2006).
Q: The term of GGG Corporation in accordance with its
Articles of Incorporation ended last January 30, 2012.
The term was not extended. What will happen to the
corporation? (2012 Bar)
A: A. The corporation ceases to exist and is dissolved ipso
facto upon the expiration of the period fixed in the
original AOI, in the absence of compliance with the legal
requisites of extension of period (PNB vs. CFI of Rizal, G.R.
No. 63201, May 27, 1992).
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174
MINIMUM CAPITAL STOCK AND
SUBSCRIPTION REQUIREMENTS
Capital stock requirements
GR: There is no minimum authorized capital stock as long
as the paid-up capital is not less than P5,000.00.
XPN: As provided by special law.
Minimum stock subscription and paid-up capital
requirements
At least 25% of the authorized capital stock as stated in
the AOI must be subscribed at the time of incorporation,
and at least 25% of the total subscription must be paid
upon subscription (Sec 13, CC).
Each subscriber is not required to pay 25% of each
subscribed share
It is not required that each subscriber pay 25% of each
subscribed share. It is only required that at least 25% of
the total subscribed capital must be paid.
Paid-up capital
Paid-up capital forms part of the authorized capital stock
of the corporation, subscribed and then actually paid for.
The assets transferred and the loans extended to a
corporation should not be considered in computing the
paid-up capital of the corporation (MISCI-NACUSIP Local
Chapter v. National Wages and Productivity Commission,
G.R. No. 125198, March 3, 1997).
NOTE: The term “capital” in Section 11, Article XII of the
Constitution refers only to shares of stock that can vote in
the election of directors. To construe broadly the term
“capital” as the total outstanding capital stock, including
both common and non-voting preferred shares, grossly
contravenes the intent and letter of the Constitution. A
broad definition unjustifiably disregards who owns the
all-important voting stock, which necessarily equates to
control of the public utility (Wilson Gamboa vs. Finance
Secretary Margarito Teves, et. al., G.R. No. 176579, October
9, 2012).
Time when the unpaid subscription is payable
The balance or the unpaid subscription shall be payable:
1. On a date or dates fixed in the contract of
subscription without need of call; or
2. In the absence of a fixed date or dates, upon call for
payment by the BOD (Sec. 13, CC).
ARTICLES OF INCORPORATION (AOI)
NATURE AND FUNCTION OF ARTICLES
Articles of Incorporation
The Articles of Incorporation (AOI) is one that defines the
charter of the corporation and the contractual
relationships between the State and the corporation, the
stockholders and the State, and between the corporation
 CORPORATION CODE
and its stockholders (Government of the Philippine Islands
v. Manila Railroad Co., G.R. No. L-30646, January 30, 1929).
Three-fold nature of AOI
An AOI, which stands as the corporate charter is a
contract of three-fold nature because it is a contract
between:
1. The State and the corporation;
2. The corporation and the stockholders; and
3. The stockholders inter se.
CONTENTS
All corporations organized under the Code shall file with
the SEC an AOI in any of the official languages duly signed
and acknowledged by all of the incorporators, containing
substantially the following matters, except as otherwise
prescribed by the Code or by special law: (NaP-
PlaTINum-ASONO)
1. NAme of corporation;
2. Purpose/s, indicating the primary and secondary
purposes (Purpose Clause);
3. PLAce of principal office;
4. Term of existence;
5. Names, nationalities and residences of
Incorporators;
6. NUMber of directors or trustees, which shall not be
less than 5 nor more than 15, except for corporation
sole;
7. Names, nationalities, and residences of the persons
who shall Act as directors or trustees until the first
regular ones are elected and qualified;
8. If a Stock corporation, the amount of its authorized
capital stock, number of shares and in case the shares
are par value shares, the par value of each share;
9. Names, nationalities, number of shares, and the
amounts subscribed and paid by each of the Original
subscribers which shall not be less than 25% of
authorized capital stock;
10. If Non-stock, the amount of capital, the names,
residences, and amount paid by each contributor,
which shall not be less than 25% of total
subscription; name of treasurer elected by
subscribers; and
11. Other matters as are not inconsistent with law and
which the incorporators may deem necessary and
convenient (Sec. 14, CC).
Incorporator may delegate the signing of the AOI
An incorporator may delegate to an attorney-in-fact the
signing of the AOI in a special power of attorney to such
effect. However, the acknowledgment required under Sec.
15 of the CC must reflect this fact (De Leon, 2010, citing
SEC Opinion, Dec. 26, 1972).
Reason for the statement of the purpose clause in the
AOI
The purpose clause determines whether the acts
performed by the corporation are authorized or beyond
its powers. Acts beyond the corporation’s powers are
called ultra vires acts.
175
Rules in the statement of the purpose clause
1. If there is more than one stated purpose, specify
which the main or primary purpose is and which is
or are the secondary or subsidiary purpose/s (Sec.
14[2], CC).
NOTE: This specification is important in the
application of the prohibition under Sec. 42 of the CC
which states that the corporation is prohibited from
investing corporate funds “for any purpose other
than the primary purpose for which it was
organized” unless such investment is approved by
both majority of the BOD or BOT and ratified by the
stockholders representing at least 2/3 of the
outstanding capital stock or by at least 2/3 of the
members in the case of a non-stock corporation.
2. The purposes must be capable of being lawfully
combined.
3. A non-stock corporation may not include a purpose
which would change or contradict its nature as such
(ibid).
Requirements of the SEC as regards the address
specification of the corporation in the AOI
SEC requires that the applicant corporation must state in
its AOI the:
1. Specific address of their principal office, which shall
include, if feasible, the street name, barangay, city or
municipality; and
2. Specific residence address of each incorporator,
stockholder, director, trustee, or partner.
NOTE: SEC likewise prohibits the use of “Metro Manila” as
address of the principal office.
Residence of the corporation
The corporation is “in a metaphysical sense a resident of
the place where its principal office is located as stated in
the AOI” (Golden Arches Dev’t Corp. vs. St. Francis Square
Holdings, Inc., GR 183843, January 19, 2011). This ruling
regarding the residence of the corporation holds true
even though the corporation has closed its office therein
and relocated to another place (Hyatt Elevators and
Escalators Corp. vs. Goldstar Elevators Phils., Inc., GR
161026, Oct. 24, 2005).
Duty of the SEC to file the AOI and to issue a certificate
of incorporation
GR: The duty of the SEC to file the AOI and to issue a
certificate of incorporation is ministerial provided that
the AOI substantially comply with the statute. The SEC’s
discretion can only be exercised on matters of form and
does not extend to the merits of an application for
incorporation (Asuncion vs. De Yriarte, GR No. 9321,
Sepember 24, 1914).
NOTE: If the SEC refuses to file the AOI, which
substantially complied with the statute, the remedy of the
applicant is to file a petition for mandamus (ibid).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
XPN: However, SEC has authority to pass upon the
lawfulness of the object or purpose of the corporation as
expressed in the AOI. Such determination is an exercise of
judgment, that is, judicial function on a question of law
(ibid).
NOTE: If the SEC errs in the determination of the
lawfulness of the purpose of the corporation stated in the
AOI and refuses to file the said AOI, its decision is subject
to review and correction by the court (ibid).
AMENDMENT
Limitations in the amendment of AOI
1. The amendment must be for legitimate purposes and
must not be contrary to other provisions of the CC
and special laws;
2. Approved by majority of BOD/BOT;
3. Vote or written assent of stockholders representing
2/3 of the outstanding capital stock or 2/3 of
members;
4. The original and amended articles together shall
contain all provisions required by law to be set out in
the AOI. Such articles, as amended, shall be indicated
by underscoring the change/s made;
5. Certification under oath by corporate secretary and a
majority of the BOD/BOT stating the fact that said
amendment/s have been duly approved by the
required vote of the stockholders or members, shall
be submitted to the SEC;
6. Must be approved by SEC (Sec. 16, CC);
7. Must be accompanied by a favorable
recommendation of the appropriate government
agency in cases of:
a. Banks
b. Banking and quasi-banking institutions
c. Building and loan associations
d. Trust companies and other financial
intermediaries
e. Insurance companies
f. Public utilities
g. Educational institutions
h. Other corporations governed by special laws
(Sec. 17 [2], CC).
Time when the amendment of the AOI takes effect
The amendment of the AOI takes effect either:
1. Upon approval by the SEC, that is, upon issuance of
amended certificate of incorporation or
2. From the date of filing with the SEC:
a. If not acted upon within 6 months from the date
of filing; and
b. For a cause not attributable to the corporation.
NOTE: The provision on automatic approval in Sec. 16
does not apply to the dissolution of the corporations in
light of Sec. 120, CC (SEC Opinion, March 30, 1982).
Conversion of a stock corporation into a non-stock
corporation (2001 Bar)
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
176
A stock corporation may be converted into a non-stock
corporation by mere amendment provided, all the
requirements are complied with. Its rights and liabilities
will remain (CC, Sec. 16).
NOTE: A non-stock corporation cannot be converted into
a stock corporation through mere amendment of its
Articles of Incorporation. This would violate Section 87 of
the Corporation Code, which prohibits distribution of
income as dividends to members. Giving the members
shares, is tantamount to distribution of its assets or
income (SEC Opinion, March 20, 1995). Under Section 122
of the Corporation Code, the non-stock corporation must
be dissolved first.
NON-AMENDABLE ITEMS
Non-amendable items in the AOI
Those matters referring to accomplished facts, except to
correct mistakes:
1. Names of incorporators;
2. Names of original subscribers to the capital stock of
the corporation and their subscribed and paid up
capital;
3. Names of the original directors;
4. Treasurer elected by the original subscribers;
5. Members who contributed to the initial capital of the
non‐stock corporation;
6. Witnesses to and acknowledgment with AOI;
Grounds for the rejection or disapproval of the AOI or
amendment thereto
1. If such is not substantially in accordance with the
form prescribed by the CC;
2. The purpose/s of the corporation is/are patently
unconstitutional, illegal, immoral, or contrary to
government rules and regulations;
3. The treasurer’s affidavit concerning the amount of
capital stock subscribed and/or paid is false;
4. The required percentage of ownership of the capital
stock to be owned by Filipino citizens has not been
complied with (CC, Sec. 17).
The above grounds are not exclusive. The grounds
according to PD No. 902‐A are:
1. Fraud in procuring its certificate of incorporation;
2. Serious misrepresentation as to what the
corporation can do or is doing to the great prejudice
of, or damage to, the general public;
3. Refusal to comply with, or defiance or a lawful order
of the SEC restraining the commission of acts which
would amount to a grave violation of its franchise;
4. Continuous inoperation for a period of at least five
(5) years after commencing the transaction of its
business (CC, Sec. 22);
5. Failure to file the by‐laws within the required period;
6. Failure to file required reports.
No automatic rejection of the AOI or any amendment
thereto
 CORPORATION CODE
There is no automatic rejection of the AOI or any
amendment thereto. The SEC shall give the incorporators
a reasonable time within which to correct or modify the
objectionable portions of the AOI or amendment (Sec.
17[1], CC).
Effect of non-use of corporate charter and continuous
inoperation of a corporation
1. Failure to organize and commence business within 2
years from incorporation – its corporate powers
ceases and the corporation shall be deemed
dissolved.
2. Continuous inoperation for at least 5 years – ground
for the suspension or revocation of corporate
franchise or certificate of incorporation (Sec. 22, CC).
NOTE: The above shall not be applicable if it is due to
causes beyond the control of the corporation as
determined by SEC.
Suspension or revocation of the certificate of
registration due to failure to operate or continuous
inoperation is not automatic
Under PD No. 902-A, SEC should afford due process or
proper notice and hearing before the suspension or
revocation of certificate of registration. The suspension or
revocation of the certificate of registration due to failure
to operate or continuous inoperation is not automatic.
REGISTRATION AND ISSUANCE OF
CERTIFICATE OF INCORPORATION
Basic requirements for the registration and issuance
of a certificate of incorporation of a stock corporation
1. Name verification slip;
2. AOI and by-laws;
3. Treasurer’s affidavit;
Contents of a treasurer’s affidavit
That at least 25% of the authorized capital stock of the
corporation has been subscribed, and at least 25% of the
total subscription has been fully paid in actual cash
and/or property; such paid-up capital being not less than
P5,000 (Sec. 14, 15, CC).
Q: You are asked to incorporate a new company to be
called FSB Savings & Mortgage Bank, Inc. List the
documents that you must submit to the Securities and
Exchange Commission(SEC) to obtain a Certificate of
Incorporation for FSB Savings & Mortgage Bank, Inc.
(2002 Bar)
A: The documents to be submitted for the issuance of a
certificate of incorporation in favor of FSB Savings &
Mortgage Bank, Inc. are the following:
a. Articles of Incorporation
b. Treasurer’s Affidavit
c. Certificate of Authority by the Monetary Board of BSP
177
d. Verification slip from the records of the SEC whether
or not the proposed name has already been
registered under a different entity
e. An undertaking stating the proposed name shall be
changed in case another entity has been registered
under the proposed name
f. Registration sheet
g. Bank certificate of deposit covering the paid-up
capital
h. Letter containing authorization to the SEC or
Monetary Board or any of its duly authorized
representative to inspect bank records concerning
the paid-up capital
i. Favorable endorsement from proper government
agency in case of special corporations
Doctrine of corporate entity
GR: A corporation comes into existence upon the issuance
of the certificate of incorporation by the SEC under its
official seal. Then and only then will it acquire a juridical
personality (CC, Sec. 19).
XPN: In case of a corporation sole, the corporation sole
commences existence upon the filing of the articles of
incorporation.
ADOPTION OF BY-LAWS
By-laws
By-laws are rules and regulations or private laws enacted
by the corporation to regulate, govern and control its own
actions, affairs and concerns and of its stockholders or
members and directors and officers in relation thereto
and among themselves in their relation to it (Valley Golf &
Country Club, Inc. vs. Vda. De Caram, GR 158805, April 16,
2009).
By-laws are relatively permanent and continuing rules of
action adopted by the corporation for its for its own
government and that of individuals composing of it and
those having the direction, management, and control of its
affairs, in whole or in part, in the management and control
of its affairs and activities (China Banking Corporation v.
CA, G.R. No. 117604, March 26, 1997).
Nature and functions of by-laws
The corporate power to adopt by-laws is inherent in every
corporation. However, to give emphasis to such necessary
corporate incident, said power is expressed in Sec. 36(5)
and Sec. 46 of the CC.
The by-laws supplement the AOI. The function of by-laws
is to define the rights and duties of corporate officers and
directors or trustees, and of stockholders or members
towards the corporation and among themselves with
reference to the management of corporate affairs and to
regulate transaction of the business of the corporation in
a particular way (De Leon, 2010).
A corporation sole is not governed by by-laws
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
A corporation sole is not governed by by-laws. It is instead
governed by Rules, Regulations and Discipline of its
religious denomination which already contain the
provisions embodied in the by-laws of ordinary
corporations.
Requisites of valid By-laws (2000, 2001 Bar)
The following are the requisites for the validity of by-
laws: (CoMorO-RAG)
1. Must be consistent with the COrporation Code, other
pertinent laws and regulations;
2. Must not be contrary to MORals and public policy;
3. Must not impair Obligations and contracts or
property rights of stockholders;
4. Must be Reasonable;
5. Must be consistent with the charter or AOI;
6. Must be of General application and not directed
against a particular individual.
Rule in case of conflict between the by-laws and the
AOI
In case of conflict between the by-laws and the AOI, the
AOI prevails because the by-laws are intended merely to
supplement the former.
Contents of by-laws
1. Time, place and manner of calling and conducting
regular or special meetings of directors or trustees;
2. Time and manner of calling and conducting regular
or special meetings of the stockholder or members;
3. The required quorum in meeting of stockholders or
members and the manner of voting therein;
4. The form for proxies of stockholders and members
and the manner of voting them;
5. The qualification, duties and compensation of
directors or trustees, officers and employees;
6. Time for holding the annual election of directors or
trustees and the mode or manner of giving notice
thereof;
7. Manner of election or appointment and the term of
office of all officers other than directors or trustees;
8. Penalties for violation of the by-laws;
9. In case of stock corporations, the manner of issuing
certificates;
10. Such other matters as may be necessary for the
proper or convenient transaction of its corporate
business and affairs (CC, Sec. 47).
Adoption of the Original By-laws
Filed within one (1) month from notice of issuance of
certificate of incorporation , in which case it must be: (i)
approved by stockholders constituting at least a majority
of outstanding capital and (ii) a copy (signed by approving
stockholders or members, certified by majority of
directors or trustees, and countersigned by corporate
secretary) filed with the SEC.
Procedures in adopting by-laws
The by-laws may be adopted before or after
incorporation. In all cases, the by-laws shall be effective
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
178
only upon the issuance by the SEC of a certification that
the by-laws are not inconsistent with the AOI.
1. Pre - incorporation – It shall be approved and signed
by all the incorporators and submitted to the SEC,
together with AOI.
2. Post – incorporation:
a. Vote of the majority of the stockholders
representing the outstanding capital stock or
members;
b. By-laws shall be signed by the stockholders or
members voting for them
c. It shall be kept in the principal office of the
corporation and subject to the inspection of the
stockholders ore members during office hours
d. Copy thereof, duly certified by the BOD or BOT
countersigned by the secretary of the
corporation, shall be filed with the SEC and shall
be attached with the original AOI (Sec. 46, CC).
Binding effects of by-laws
The following are the binding effects of by-laws:
1. As to members/ stockholders, officers, trustees/
directors and corporation – They are bound by and
must comply them. They are presumed to know the
provisions of the by-laws.
2. As to third persons – 3rd persons are not bound
unless they have knowledge of by-laws. (PMI College
vs. NLRC, G.R. No. 121466, August 15, 1997).
NOTE: By-laws have no extra-corporate force and are not
in the nature of legislative enactments so far as third
persons are concerned.
Q: PMI Colleges (PMI) an educational institution
offering courses on basic seaman’s training and other
marine-related courses, hired Alejandro Galvan as
contractual instructor. Pursuant to this engagement,
Galvan then organized classes in marine engineering.
Initially, Galvan and other instructors were
compensated for services rendered during the first
three periods of the abovementioned
contract. However, for unknown reasons, Galvan
stopped receiving payment for the succeeding
rendition of services. Despite repeated demands, PMI
failed to pay and hence, Galvan filed a
complaint seeking payment for salaries earned. In the
proceedings, PMI manifested that a member of the
PMI’s Board of Trustees wrote a letter to the
Chairman of the Board clarifying the case of Galvan
and stating therein, inter alia, that under PMI’s by-
laws only the Chairman is authorized to sign any
contract. Hence, according to PMI, the employment
contract which was not signed by the Chairman is not
binding upon PMI.
Is the employment contract invalid because it
violated PMI’s by-laws stating that the Chairman of
the BOD should be the signatory thereon?
A: No. The employment contract is not invalidated by the
failure of the Chairman to sign such. Since by-laws operate
merely as internal rules among the stockholders, they
 CORPORATION CODE
cannot affect or prejudice third persons who deal with the
corporation, unless they have knowledge of the same. No
proof appears on record that Galvan ever knew anything
about the provisions of said by-laws. In fact, PMI itself
merely asserts the same without even bothering to attach
a copy or excerpt thereof to show that there is such a
provision (PMI Colleges v. NLRC, et al., supra).
Q: FEPI., undertook to market the golf club shares of
Forest Hills Golf and Country Club, Inc. for a fee.
Gardpro, Inc. bought class “C” common shares of
stock, which were special corporate shares that
entitled the registered owner to designate two
nominees or representatives for membership in the
Club. Albert, the General Manager of the Club, notified
the shareholders that it was already accepting
applications for membership. Gardpro then
designated Martin and Reyes to be its nominees;
hence, the two applied for membership in the Club.
Forest Hills charged them membership fees each.
With Albert assuring that the fees were temporary,
both nominees of Gardpro paid the fees. Both
nominees of Gardpro were then admitted as
members. Later, Gardpro decided to change its
designated nominees, and Forest Hills charged
Gardpro new membership fees per nominee. When
Gardpro refused to pay, the replacement did not take
place. Gardpro then filed a complaint in the SEC.
Is Forest Hill’s act authorized under its articles of
incorporation and by-laws to collect new
membership fees for the replacement nominees of
Gardpro?
A: No. There is no question that Gardpro held class “C”
common stocks that entitled it to two memberships in the
Club. Based on the procedure set forth in Section 2.2.7 of
the by-laws, the applicant was the juridical entity, not its
nominee or nominees. Although the nominee or nominees
also accomplished their application forms for
membership in the Club, it was the corporate member
that was obliged to pay the membership fees in its own
capacity because the share was registered in its name in
the Stock and Transfer Book. The charter and the by-laws
were the fundamental documents governing the conduct
of Forest Hills’ corporate affairs; they established norms
of procedure for exercising rights, and reflected the
purposes and intentions of the incorporators. Until
repealed, the by-laws were a continuing rule for the
government of Forest Hills and its officers, the proper
function being to regulate the transaction of the incidental
business of Forest Hills. The by-laws constituted a binding
contract as between Forest Hills and its members, and as
between the members themselves. The by-laws were self-
imposed private laws binding on all members, directors
and officers of Forest Hills. The prevailing rule is that the
provisions of the articles of incorporation and the by-laws
must be strictly complied with and applied to the letter
(Forest Hills Golf and Country Club, Inc. v. Gardpro, Inc. G.R.
No. 164686, October 22, 2014).
Effect of non-filing of the by-laws within the required
period
Failure to submit the by-laws within 30 days from
incorporation does not automatically dissolve the
corporation. It is merely a ground for suspension or
revocation of its charter after proper notice and hearing,
under Section 6(I) of PD 902-A. The corporation is, at the
very least, a de facto corporation whose existence may not
be collaterally attacked (Sawadjaan v. CA, G.R. No. 142284,
June 8, 2005).

Articles of incorporation vs. By-laws

BASIS AOI BY-LAWS

Requirement for
corporate existence
Essence
Time of execution
Manner of amendment
Condition subsequent; its absence merely
Condition precedent in the acquisition of
furnishes a ground for the revocation of the
corporate existence
franchise
Essentially a contract between the
For the internal government of the corporation
corporation and the stockholders/
but has the force of a contract between the
members; between the stockholders/
corporation and the stockholders/ members, and
member inter se, and between the
between the stockholders and members;
corporation and the State;
May be executed after incorporation. Sec. 46
Executed before incorporation allows the filing of the by-laws simultaneously
with the Articles of Incorporation
Amended by a majority of the directors/
May be amended by a majority vote of the BOD
trustees and stockholders representing
and majority vote of outstanding capital stock or
2/3 of the outstanding capital stock, or
a majority of the member in non-stock
2/3 of the members in case of non-stock
corporation
corporations

UNIVERSITY OF SANTO TOMAS

179 FACULTY OF CIVIL LAW
 MERCANTILE LAW
AMENDMENT OR REVISION
Ways of amending, repealing or adopting new by-
laws:
1. Amendment may be made by stockholders together
with the Board – by majority vote of directors and
owners of at least a majority of the outstanding
capital stock/members; or
2. By the board only after due delegation by the
stockholders owning 2/3 of the outstanding capital
stock/members. Provided, that such power
delegated to the board shall be considered as
revoked whenever stockholders owning at least
majority of the outstanding capital stock or
members, shall vote at a regular or special meeting
(CC, Sec. 48).
CORPORATE POWERS
1. Express powers – granted by law, the Corporation
Code, and its Articles of Incorporation or Charter, and
administrative regulations;
2. Inherent/incidental powers – not expressly stated but
are deemed to be within the capacity of corporate
entities;
3. Implied/necessary powers – exists as a necessary
consequence of the exercise of the express powers of
the corporation or the pursuit of its purposes as
provided for in the Charter.
Q: The board of directors of Lopez Realty, Inc. passed
a resolution providing gratuity pay for its employees
in a special meeting called for the purpose. At the
time, however, Asuncion Lopez Gonzales (a member
of the board), was still out of the country. Asuncion
assailed the validity of the said board resolution
contending that the same was ultra vires on the
ground that she was not duly notified of the special
meeting in which it was passed. Is the disputed board
resolution ultra vires as urged by Asuncion?
A: No. The assailed resolution covers a subject which
concerns the benefit and welfare of the company’s
employees. To stress, providing gratuity pay for its
employees is one of the express powers of the corporation
under the Corporation Code, hence, Asuncion cannot
invoke the doctrine of ultra vires to avoid any liability
arising from the issuance of the subject resolution (Lopez
Realty, Inc. v. Fontecha, G.R. No. 76801, August 11, 1995).
Q: Sea Lion International Port Terminal Services, Inc.
filed a complaint for prohibition and mandamus
against National Power Corporation (NPC) and
Philippine Ports Authority (PPA), wherein Sea Lion
alleged that NPC had acted in bad faith and with grave
abuse of discretion in not renewing its contract for
stevedoring services for coal-handling operations at
NPC's plant, and in taking over its stevedoring
services. The RTC ruled in favor of Sea Lion. NPC seeks
to annul the order of the RTC in issuing a writ of
preliminary injunction which enjoined NPC from
further undertaking stevedoring and arrastre
services in its pier and directing it either to enter into
a contract for stevedoring and arrastre services or to
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2016 GOLDEN NOTES
180
conduct a public bidding therefor. Does NPC have the
power to undertake stevedoring and arrastre
services in its pier?
A: Yes. NPC has the power to undertake stevedoring and
arrastre services. To carry out the national policy of total
electrification of the country, the NPC was created and
empowered not only to construct, operate and maintain
power plants, reservoirs, transmission lines, and other
works, but also to exercise such powers and do such
things as may be reasonably necessary to carry out the
business and purposes for which it was organized, or
which, from time to time, may be declared by the Board to
be necessary, useful, incidental or auxiliary to accomplish
said purpose. If that act is one which is lawful in itself and
not otherwise prohibited, and is done for the purpose of
serving corporate ends, and reasonably contributes to the
promotion of those ends in a substantial and not in a
remote and fanciful sense, it may be fairly considered
within the corporation's charter powers. The rule is that
a corporation is not restricted to the exercise of powers
expressly conferred upon it by its charter, but has the
power to do what is reasonably necessary or proper to
promote the interest or welfare of the corporation. The
stevedoring services which involve the unloading of the
coal shipments into the NPC pier for its eventual
conveyance to the power plant are incidental and
indispensable to the operation of the plant (National
Power Corporation, v. Honorable Abraham P. Vera, et al.,
G.R. No. 83558, February 17, 1989).
Exercise of corporate powers
The Corporation Code of the Philippines vests in the
board of directors the exercise of the corporate powers of
the corporation, save in those instances where the Code
requires stockholders’ approval for certain specific acts
(Great Asian Sales Center Corporation v CA, G.R. No.
105774, April 25, 2002).
Q: Eliodoro C. Cruz was the former president of
Filport. During the general stockholders’ meeting, he
wrote a letter to the corporation’s Board of Directors
questioning the board’s creation of certain positions
and their corresponding monthly renumeration.
Because his letter was not heeded favorably, Cruz,
purportedly in representation of Filport and its
stockholders, among which is Mindanao Terminal
and Brokerage Services, Inc. (Minterbro), filed with
SEC a petition which he describes as a derivative suit
against the the incumbent members of Filport’s Board
of Directors, for alleged acts of mismanagement
detrimental to the interest of the corporation and its
shareholders at large. Did Filport’s Board of Directors
act within its powers in creating the executive
committee and the positions of AVPs for Corporate
Planning, Operations, Finance and Administration,
and those of the Special Assistants to the President
and the Board Chairman, each with corresponding
remuneration?
A: Yes. The governing body of a corporation is its board
of directors. Section 23 of the Corporation Code explicitly
provides that unless otherwise provided therein, the
corporate powers of all corporations formed under the
 CORPORATION CODE
Code shall be exercised, all business conducted and all
property of the corporation shall be controlled and held
by a board of directors. Thus, with the exception only of
some powers expressly granted by law to stockholders
(or members, in case of non-stock corporations), the
board of directors (or trustees, in case of non-stock
corporations) has the sole authority to determine policies,
enter into contracts, and conduct the ordinary business of
the corporation within the scope of its charter, i.e., its
articles of incorporation, by-laws and relevant provisions
of law. Verily, the authority of the board of directors is
restricted to the management of the regular business
affairs of the corporation, unless more extensive power is
expressly conferred. In the present case, the board’s
creation of the subject positions was in accordance with
the regular business operations of Filport as it is
authorized to do so by the corporation’s by-laws,
pursuant to the Corporation Code (Filipinas Port Services,
Inc., v. Victoriano S. Go, et al., G.R. No. 161886, March 16,
2007).
Three levels of control in the corporate hierarchy
1. The board of directors, which is responsible for
corporate policies and the general management of
the business affairs of the corporation;
2. The officers of the corporation, who in theory execute
the policies laid down by the board, but in practice
often have wide latitude in determining the course of
business operations;
3. The stockholders who have the residual power over
fundamental corporate changes, like amendments of
the articles of incorporation (City Bank NA vs. Chua,
G.R. No. 102300, March 17, 1993).
GENERAL POWERS, THEORY OF
GENERAL CAPACITY
Theory of General Capacity
The general powers of a corporation also called Theory of
General Capacity are the following: (SuSuCo-ABS-
PEDRO)
1. To SUe and be sued;
2. Of Succession;
3. To adopt and use of COrporate seal;
4. To amend its Articles of Incorporation;
5. To adopt its By-laws;
6. For Stock corporations: issue and sell stocks to
subscribers and treasury stocks; for non-stock
corporations: admit members;
7. To Purchase, receive, take or grant, hold, convey, sell,
lease, pledge, mortgage and deal with real and
personal property, securities and bonds;
8. To Enter into merger or consolidation;
9. To make reasonable Donations for public welfare,
hospital, charitable, cultural, scientific, civic or
similar purposes, provided that no donation is given
to any:
a. Political party,
b. Candidate and
c. Partisan political activity.
181
10. To establish pension, Retirement, and other plans for
the benefit of its directors, trustees, officers and
employees – basis of which is the Labor code;
11. To exercise Other powers essential or necessary to
carry out its purposes (CC, Sec. 36).
Commencement of the power to sue and be sued
The power to sue and be sued commences upon issuance
by SEC of Certificate of Incorporation.
The power of the corporation to sue and be sued is
exercised by the board of directors.
The power of the corporation to sue and be sued is
exercised by the board of directors. The physical acts of
the corporation, like the signing of documents, can be
performed only by natural persons duly authorized for
the purpose by corporate bylaws or by a specific act of the
board. Absent the said board resolution, a petition may
not be given due course (Ligaya Esguerra, et al. vs Holcim
Philippines, Inc., G.R. No. 182571, September 2, 2013).
If the real party in interest is a corporate body, an officer
of the corporation can sign the verification against forum
shopping so long as he has been duly authorized by a
resolution of its board of directors. The court did not
commit grave abuse of discretion in dismissing the
petition for lack of authority of the officer who signed the
certification of forum shopping in representation of
Petitioner corporation (San Miguel Bukid Homeowners
Association, Inc. v. City of Mandaluyong, et al, G.R. No.
153653, October 2, 2009; Republic of the Philippines v.
Coalbrine International Philippines, et al, G.R. No. 161838,
April 7, 2010).
The following officers may sign the verification and
certification against forum shopping on behalf of the
corporation even in the absence of a board
resolution:
a. Chairperson of the Board of Directors;
b. President;
c. General Manager;
d. Personnel Officer;
e. Employment Specialist in labor case.
These officers are in the position to verify the truthfulness
and correctness of the allegations in the petition (Mid
Pasig Land and Development Corporation v. Tablante, G.R.
No. 162924, February 4, 2010; Skyway Traffic Management
and Security Division Workers Organization v. PNCC
Skyway Corporation, G.R. No. 171231, February 17, 2010).
An unregistered corporation has no right to sue or be
sued for want of corporate personality.
“Lideco Corporation” had no personality to intervene
since it had not been duly registered as a coporation. If
petitioner “Laureano Investment & Devlopment
Corporation” legally and truly wanted to intervene, it
should have used its corporate name as the law requires
and not another name which it had not registered
(Laureano Investment & Development Corporation v. the
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Honorable Court of Appeals and BORMAHECO, Inc., GR No.
100468, May 6, 1997).
Limitations of the corporation in dealing with
property
1. In dealing with any kind of property, it must be in the
furtherance of the purpose for which the corporation
was organized.
2. Constitutional limitations – cannot acquire public
lands except by lease.
With regard to private land, 60% of the corporation
must be owned by the Filipinos, same with the
acquisition of a condominium unit.
NOTE: No law disqualifies a person from purchasing
shares in a landholding corporation even if the latter
will exceed the allowed foreign equity, what the law
disqualifies is the corporation from owning land (JG
Summit Holdings, Inc. vs. CA, G.R. No. 124293, January
31, 2005).
3. Special law – subject to the provisions of the Bulk
Sales Law and law against monopoly, illegal
combination or restraint of trade.
Requisites for a valid donation (RPAI)
1. Donation must be Reasonable;
2. Must be for valid Purposes including public welfare,
hospital, charitable, cultural, scientific, civic or
similar purposes;
3. Must not be an Aid in any
a. Political party,
b. Candidate and
c. Partisan political activity
4. Donation must bear a reasonable relation to the
corporation’s Interest and not be so remote and
fanciful.
Corporation as surety or guarantor
GR: A corporation cannot act as a surety or guarantor.
Acting as a surety or guarantor will be contrary to the
primary purpose for which the corporation was created.
XPN: Such guaranty may be given in the accomplishment
of any object for which the corporation was created, or
when the particular transaction is reasonably necessary
or proper in the conduct of its business.
Implied powers of a corporation
A corporation is not restricted to the exercise of powers
expressly conferred upon it by its charter but has the
power to do what is reasonably necessary or proper to
promote the interest or welfare of the corporation
(NAPOCOR v. Vera, G.R. No. 83558, February 27, 1989).
UNIVERSITY OF SANTO TOMAS
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182
SPECIFIC POWERS, THEORY OF
SPECIFIC CAPACITY
Theory of Specific Capacity
The specific powers of a corporation also called Theory of
Specific Capacity are the following:
(ESB-PA-SIDE-A)
1. Power to Extend or shorten corporate term (CC, Sec.
37).
2. Increase or decrease corporate Stock (CC, Sec. 38).
3. Incur, create, or increase Bonded indebtedness (CC,
Sec. 38).
4. Deny Pre-emptive right (CC, Sec. 39).
5. Sell, dispose, lease, encumber all or substantially all
of corporate Assets (CC, Sec. 40).
6. Purchase or acquire Shares (CC, Sec. 41).
7. Invest corporate funds in another corporation or
business for other purpose other than primary
purpose (CC, Sec. 42).
8. Declare Dividends out of unrestricted retained
earnings (CC, Sec. 43).
9. Enter into management contract with another
corporation (not with an individual or a partnership
– within general powers) whereby one corporation
undertakes to manage all or substantially all of the
business of the other corporation for a period not
longer than five (5) years for any one term (CC, Sec.
44).
10. Amend Articles of Incorporation (CC, Sec. 16).
Authority to enter into contract (1996 Bar)
The Board of Directors or Trustees must act together as a
body in order to bind the corporation by their acts (Yao
KaSinTrading v. CA, et. al. G.R. No. 53820, June 15, 1992).
The acts of the President do not fall within his apparent
authority, and do not bind the corporation without prior
authority of the Board of Directors, which under Sec. 23 of
the Corporation Code is the sole repository of corporate
powers (2007 Bar).
Corporate powers which are exercised by the BOD
and stockholders jointly (ASIA-IDEA- MC)
1. Amendments to by-laws;
2. Extending or Shortening the corporate term;
3. Increase or decrease of capital stock;
4. The sale or other disposition of All or substantially all
of the corporate assets;
5. Investment of corporate funds in another
corporation or business or for any other purpose;
6. Issuance of stock Dividends;
7. Entering into management contract;
8. Amendment to Articles of incorporation;
9. Merger or consolidation;
10. Grant of Compensation to directors;
 CORPORATION CODE
POWER TO EXTEND OR SHORTEN
CORPORATE TERM
Procedural requirements in extending/ shortening
corporate term
1. Majority vote of the BOD or BOT;
2. Ratification by 2/3 of the SH representing
outstanding capital stock or by at least 2/3 of the
members in case of non-stock corporation;
3. Written notice of the proposed action and of the time
and place of the meeting shall be addressed to each
stockholder or member at his place of residence as
shown on the books of the corporation and deposited
to the addressee in the post office with postage
prepaid, or served personally;
4. Copy of the amended AOI shall be submitted to the
SEC for its approval; and
5. In case of Special Corporation, a favorable
recommendation of appropriate government agency
(CC, Sec. 37).
6. The extension must be done during the lifetime of the
corporation not earlier than 5 years prior to the
expiry date unless exempted. The extension must not
exceed 50 years (CC, Sec 16).
NOTE: After the term had expired without extension, the
corporation is deemed ipso facto dissolved. The remedy of
the stockholders is reincorporation. Any dissenting
stockholder may exercise his appraisal right in case of
shortening or extending corporate term (CC, Sec. 37).
Q: T Corp. has a corporate term of 20 years under its
Articles of Incorporation or from June 1, 1980 to June
1, 2000. On June 1, 1991 it amended its Articles of
Incorporation to extend its life by 15 years from June
1, 1980 to June 1, 2015. On June 1, 2011, however, T
Corp decided to shorten its term by 1 year or until
June 1, 2014. Both the 1991 and 2011 amendments
were approved by majority vote of its Board of
Directors and ratified in a special meeting by its
stockholders representing at least 2/3 of its
outstanding capital stock. The SEC, however,
disapproved the 2011 amendment on the ground that
it cannot be made earlier than 5 years prior to the
expiration date of the corporate term, which is June 1,
2014. Is this SEC disapproval correct? (2011 Bar)
A: No. The 5-year rule on amendment of corporate term
applies only to extension, not to shortening, of term.
POWER TO INCREASE OR DECREASE CAPITAL
STOCK OR INCUR, CREATE,
INCREASE BONDED INDEBTEDNESS
Procedural requirements in increasing or decreasing
capital stock
1. Majority vote of the BOD;
2. Ratification by stockholders representing 2/3 of the
outstanding capital stock;
3. Written notice of the proposed increase or
diminution of the capital stock and of the time and
place of the stockholder’s meeting at which the
proposed increase or diminution of the capital stock
183
must be addressed to each stockholder at his place of
residence as shown on the books of the corporation
and deposited to the addressee in the post office with
postage prepaid, or served personally;
4. A certificate in duplicate must be signed by a majority
vote of the directors of the corporation and
countersigned by the chairman and the secretary of
the stockholder’s meeting, setting forth:
a. That the foregoing requirements have been
complied with;
b. The amount of increase or diminution of the
capital stock;
c. If an increase of the capital stock, the amount of
capital stock or number of shares of no par stock
actually subscribed, the names, nationalities and
residences of the persons subscribing, the
amount of capital stock or number of no par
stock subscribed by each, and the amount paid
by each on his subscription in cash or property,
or the amount of capital stock or number of
shares of no par stock allotted to each
stockholder if such increase is for the purpose of
making effective stock dividend authorized;
d. The amount of stock represented at the meeting;
and
e. The vote authorizing the increase or diminution
of the capital stock, or the incurring, creating or
increasing of any bonded indebtedness.
NOTE: The increase or decrease in the capital stock or the
incurring, creating or increasing bonded indebtedness
shall require prior approval of the SEC.
Prior to the approval of the SEC of the increase in the
authorized capital stock, such payments cannot as yet be
deemed part of the corporation’s paid-up capital,
technically speaking, because its capital stock has not yet
been legally increased. Such payments constitute deposits
on future subscriptions, money which the corporation
will hold in trust for the subscribers until it files a petition
to increase its capitalization and a certificate of filing of
increase of capital stock is approved and issued by the SEC
(Central Textile Mills, Inc. v. National Wages and
Productivity Commission, et al., GR No. 104102, August 7,
1996).
Additional requirement with respect to increase of
capital stock
The application to be filed with the SEC shall be
accompanied by the sworn statement of the treasurer of
the corporation, showing that at least 25% of the increase
in the capital stock was subscribed and 25% of the said
amount has been paid either in actual cash to the
corporation or that there has been transferred to the
corporation property the valuation of which is equal to
25% of the subscription.
NOTE: A corporation is not prohibited from increasing its
authorized capital stock even if the same has not yet been
fully subscribed. Once an increase in authorized capital
stock is effected, it may be necessarily accompanied by an
actual increase in the assets and additional subscriptions
in order to comply with the 25% subscription
requirement. However, if such increase is for the purpose
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
of effecting a stock dividend previously authorized, then
additional subscriptions are NOT urgent.
Reason: The actual capital is increased by accumulated
profits and such profits are distributed to the
stockholders in the form of stock dividends, the capital
stock is increased, for the profits are reinvested in the
corporation by transferring the same from surplus
account to a capital account. The amount corresponding
to the stock dividends declared may be used to cover the
required 25% subscription to increase the authorized
capital stock and, if sufficient, will obviate the necessity of
taking in new subscription (De Leon, supra).
Basis of the required 25% subscription
The 25% subscription shall be based on the additional
amount by which the capital stock increased and not on
the total capital stock as increased.
NOTE: Treasurer’s affidavit is required in increasing
capital stock, NOT in decreasing capital stock.
Additional requirement with respect to the decrease
of capital stock
In case of decrease in capital stock, the same must not
prejudice the right of the creditors.
Ways of increasing or decreasing the capital stock
By increasing or decreasing the:
1. Number of shares and retaining the par value;
2. Par value of existing shares and retaining the number
of shares;
3. Number of shares and increasing or decreasing the
par value.
NOTE: In decreasing the capital stock, resorting to
reduction of number of shares may also be done through:
1. Redeeming redeemable shares (CC, Sec. 8);
2. purchasing of own shares(CC, Sec. 41);
3. Cancelling or retiring the shares, including the
treasury shares (CC, Sec. 9);
4. The corporation may accept a surrender of shares
and give the holders in exchange therefor a
proportionate amount of its assets, provided no
rights of creditors are involved;
5. Issue bonds for that purpose;
6. Exchange another class of stock for that retired;
7. Exchange the corporation’s outstanding shares for a
smaller number of shares;
8. Cancelling shares which have not yet been issued (De
Leon, 2010).
Q: Can there be a distribution of surplus on reduction?
A: It depends whether there is an impairment of capital.
1. If there is no impairment of capital, the surplus may
be equitably distributed by the directors or so much
thereof as may not be required in carrying on the
business for the best interests of the stockholders:
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184
Provided the rights of creditors will not be affected
nor the capital impaired.
2. If there is reduction to meet an impairment – there
will be no distribution.
NOTE: The distribution stated above is not mandatory,
notwithstanding the authority granted by the CC for the
same under Sec. 122, last par (ibid.).
Over-issue of shares is not allowed
An issue of stock by a corporation in excess of the amount
prescribed or limited by its AOI is ultra vires and the stock
so issued is void even in the hands of a bona fide purchaser
for value (ibid.).
An over-issued stock is a spurious stock (De Leon, 2010).
Over-issue of stock does not avoid the original issue
There is no avoidance of the original issue (ibid).
There is no over-issue in the case of shares, which were
surrendered and new shares issued in their stead. The
new issue in such case merely takes the place of the shares
surrendered (ibid).
Effects of an attempted unauthorized increase of
capital stock
An attempted unauthorized increase of capital stock
amounts to an over-issue and such stock is, therefore,
absolutely void and cannot be validated by application of
the doctrine of estoppel.
Thus, the following are the effects of such unauthorized
increase:
1. Subscriptions for such stock are likewise void both
on the ground of illegality and for want of
consideration;
2. Subscribers for or purchasers of such stock acquire
none of the rights of stockholders;
3. Subscribers for or purchasers of such shares do not
become liable to creditors of the corporation or on a
winding up as stockholders for unpaid subscriptions,
and are not subject to a statutory liability to creditors
imposed upon stockholders; and
4. Subscribers for or purchasers of such shares from the
corporation may recover from it money paid to it
under their subscription or purchase as upon a
failure of consideration, or breach of warranty for the
existence of the thing sold, unless they are precluded
from such relief as parties in pari delicto (ibid).
The board of directors may issue additional issuances
of shares of stock without approval of the
stockholders.
A stock corporation is expressly granted the power to
issue or sell stocks. The power to issue stocks is lodged
with the Board of Directors and no stockholder’s meeting
is required to consider it because additional issuance of
stock (unlike increase in capital stock) does not need
approval of the stockholders. What is only required is the
board resolution approving the additional issuance of the
 CORPORATION CODE
shares. The corporation shall also file the necessary
application with the SEC to exempt these from the
registration requirements under the SRC (Majority
Stockholders of Ruby Industrial Corporation v. Lim &
MinorityStockholders of Ruby Industrial Corporation,
supra).
Q: The stockholders of People Power, Inc. (PPI)
approved two resolutions in a special stockholders'
meeting:
1. Resolution increasing the authorized capital
stock of PPI; and
2. Resolution authorizing the Board of Directors to
issue, for cash payment, the new shares from the
proposed capital stock increase in favor of
outside investors who are non‐stockholders.
The foregoing resolutions were approved by
stockholders representing 99% of the total
outstanding capital stock. The sole dissenter was
Jimmy Morato who owned 1% of the stock. Are the
resolutions binding on the corporation and its
stockholders including Jimmy Morato, the dissenting
stockholder? (1998 Bar)
A: No. The resolutions are not binding on the corporation
and its stockholders including Jimmy Morato. While these
resolutions were approved by the stockholders, the
directors' approval, which is required by law in such case,
does not exist.
Q: What remedies, if any, are available to Morato?
(1998 Bar)
A: Jimmy Morato can petition the Securities and Exchange
Commission to declare the two (2) resolutions, as well as
any and all actions taken by the Board of Directors
thereunder, null and void.
Evidence of the corporation’s indebtedness
When a corporation borrows money, its indebtedness
may be evidenced by notes or bonds as its primary
security (De Leon, 2010).
Difference between a note and a bond
1. If the amount borrowed is small and it is borrowed in
a single sum, or from a few persons, or for a short
time notes are usually given.
2. If, however, the amount is large and obtained from a
number of people and extends over a period of years,
the corporate obligation is preferably and usually
evidenced by bonds (ibid). 1.
Bonded indebtedness
It is a long-term indebtedness secured by real or personal
property (corporate assets).
NOTE: The requirements for the power to incur, create or
increase bonded indebtedness is also the same with the
power to increase or decrease capital stock.
185
Registration of the bonds issued by the corporation
Bonds issued by a corporation shall be registered with the
SEC which shall have the authority to determine the
sufficiency of the terms thereof (CC, Sec. 38).
Stockholders’ approval is not required for all
borrowings of the corporation
Not all borrowings of the corporation need stockholders’
approval. Only bonded indebtedness requires such
approval.
POWER TO DENY PRE-EMPTIVE RIGHTS
Pre-emptive right
It is the preferential right of shareholders to subscribe to
all issues or disposition of shares of any class in
proportion to their present shareholdings (CC, Sec. 39).
NOTE: The stockholder must exercise his pre-emptive
right within the time fixed in the resolution authorizing
the increase of capital stock.
Purpose of pre-emptive right
The purpose of pre-emptive right is to enable the
shareholder to retain his proportionate control in the
corporation and to retain his equity in the surplus.
Exercise of pre-emptive right
Pre-emptive right must be exercised within the period
stated in the AOI or the By-Laws. When the AOI and the
By-Laws are silent, the Board may fix a reasonable time
within which the stockholders may exercise the right.
NOTE: Pre-emptive right can only be exercised to the
same class of shares issued or disposed with that owned
by the stockholder (Share-a-like basis).
Pre-emptive right is available on the re-issuance of
treasury shares
When a corporation reacquires its own shares which
thereby become treasury shares, all shareholders are
entitled to pre-emptive right when the corporation
reissues or sells these treasury shares. The re-issuance of
treasury shares is not among the exception provided by
Sec. 39 when pre-emptive right does not exist.
Pre-emptive right may be waived
Preemptive right may be waived by the stockholder.
However, the waiver should be given individually by the
stockholder concerned or by another by way of Special
Power of Attorney. Being a personal right, the waiver
cannot be waived by the corporation itself through a
stockholders’ resolution (SEC Opinion, Dec. 12, 1994). A
stockholder cannot be forced to waive the right even if the
majority of the stockholders opt to waive it (SEC Opinion
No. 08-08, March 31, 2008).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
However, pre-emptive right may be waived impliedly as
when the stockholder fails to exercise his pre-emptive
right after being notified and given an opportunity to avail
of such right.
Transferability of pre-emptive right of a stockholder
The pre-emptive right of a stockholder is transferable
unless there is an express restriction in the AOI.
Q: Suppose that X Corporation has already issued the
1000 originally authorized shares of the corporation
so that its Board of Directors and stockholders wish
to increase X's authorized capital stock. After
complying with the requirements of the law on
increase of capital stock, X issued an additional 1000
shares of the same value. Assume that stockholder A
presently holds 200 out of the 1000 original shares.
Would A have a pre‐emptive right to 200 of the new
issue of 1000 shares? Why?
controlling stockholders notwithstanding the non-
existence of the pre-emptive right.
Even if pre-emptive right does not exist either because the
issue comes within the exceptions in Sec. 39 of the CC or
because it is denied in the AOI, an issue of shares may still
be objectionable if the directors acted in breach of trust
and their primary purpose is to perpetuate or shift control
of the corporation or to “freeze out” the minority interest.
The issuance of unissued shares out of the original
authorized capital stock pursuant to a rehabilitation plan
the propriety or validity of which was on question by the
minority stockholders and subsequently disapproved by
the Supreme Court amounts to unlawful dilution of the
minority shareholdings (Majority Stockholders of Ruby
Industrial Corporation vs. Miguel Lim and Minority
Stockholders of Ruby Industrial Corporation, G.R. Nos.
165887 & 165929, June 6, 2011, in Divina, 2014).
Pre-emptive right vs. Right of first refusal

A: Yes, A would have a pre‐emptive right to 200 of the BASIS PRE-EMPTIVE RIGHT OF FIRST
new issue of 1000 shares. A is a stockholder of record RIGHT REFUSAL
holding 200 shares in X Corporation. According to the
Corporation Code, each stockholder has the pre‐emptive Right to subscribe to
right to all issues of shares made by the corporation in all issuance or
Right to purchase
proportion to the number of shares he holds on record in dispositions of
shares of a
the corporation. Description shares of the
stockholder.
corporation even to
Q: Assuming a stockholder disagrees with the the subsequent sale
issuance of new shares and the pricing for the shares, of treasury stocks.
may the stockholder invoke his appraisal rights and Pertains to
Pertains to the
demand payment for his shareholdings? (1999 Bar) To what unsubscribed
sale of the stocks
does it portion of the
by another
A: No, the stockholder may not exercise appraisal right pertain? authorized capital
stockholder
because the matter that he dissented from is not one of stock.
those where right of appraisal is available under the Against who Right exercised Right exercised
Corporation Code. is it against the against a co-
exercised? corporation. stockholder.
Denial by the corporation of pre-emptive right Can only be
Effect of the May be exercised
exercised when
The corporation can deny pre-emptive right if the AOI or absence of even when there is
so provided in
any amendment thereto denies such right (Sec. 39, CC). express no express provision
the AOI, by-laws
provision in in the AOI or
and printed in the
NOTE: A stockholder whose pre-emptive right is violated the AOI amendment thereto.
stock certificate.
may maintain an action to compel the corporation to give Treasury It includes treasury Does not include
him that right. If the denial is by amendment to the AOI, shares shares. treasury shares
he may exercise his appraisal right under Sec. 81(1).
POWER TO SELL OR DISPOSE OF CORPORATE ASSETS
Instances when pre-emptive right is not available (SLEMPAD)
1. Shares to be issued to comply with laws requiring Substantially all of corporate assets
stock offering or minimum stock ownership by the
public; There is a sale, lease, exchange, mortgage, pledge, and
2. Shares issued in good faith with the approval of the any other disposition (SLEMPAD) of substantially all of
stockholders representing 2/3 of the outstanding corporate asset if in the SLEMPAD thereof, the
capital stock in exchange for property needed for corporation would be rendered:
corporate purposes; 1. Incapable of continuing the business; or
3. Shares issued in payment of previously contracted 2. Incapable of accomplishing the purpose for which it
debts; was incorporated (Sec 40, CC).
4. In case the right is denied in the AOI;
5. Waiver of the right by the stockholder. Procedural requirements for SLEMPAD of all or
substantially all of corporate assets
The validity of issuance of additional shares may be
questioned if done in breach of trust by the 1. Majority vote of the BOD or BOT;

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186
 CORPORATION CODE
2. Ratification by stockholders representing at least
2/3 of the outstanding capital stock or by at least 2/3
of the members in case of non-stock corporation;
3. Written notice of the proposed action and of the time
and place of the meeting addressed to each
stockholder or member at his place of residence as
shown on the books of the corporation and deposited
to the addressee in the post office with postage
prepaid, or served personally (Sec. 40, CC).
NOTE: The sale of the assets shall be subject to the
provisions of existing laws on illegal combinations and
monopolies (ibid).
Further, in case of non-stock corporations, where there
are no members with voting rights, the vote of at least a
majority of the trustees in office will be sufficient
authorization for the corporation to enter into any
transaction authorized by this section (ibid).
Instances when the corporation may forego the
ratification by stockholders / members:
1. If sale is necessary in the usual and regular course of
business;
2. If the proceeds of the sale or other disposition of such
property and assets are to be appropriated for the
conduct of the remaining business;
3. If the transaction does not cover all or substantially
all of the assets.
Remedy of a stockholder who disagrees with the plan
of SLEMPAD of all or substantially all of corporate
assets
Any dissenting stockholder shall have the option to
exercise his appraisal right.
Abandonment of the plan for SLEMPAD even after the
vote of the stockholders or members
The BOD, in its discretion, may abandon the plan for
SLEMPAD even after such authorization or approval by
the stockholders, subject to the rights of third parties
under any contract relating thereto, without further
action or approval by the stockholders or members (ibid).
Effect of sale of all or substantially all of assets of one
corporation to another corporation (1996, 2005 Bar)
GR: The corporation who acquired all or substantially all
of the assets of the selling corporation shall not be liable
for the debts of the latter.
XPNs:
1. Express or implied assumption of liabilities;
2. Merger or consolidation;
3. If the purchase was in fraud of creditors;
4. If the purchaser becomes a continuation of the seller;
5. If there is violation of the Bulk Sales Law.
Q: Divine Corporation is engaged in the manufacture
of garments for export. In the course of its business, it
was able to obtain loans from individuals and
financing institutions. However, due to the drop in the
187
demand for garments in the international market,
Divine Corporation could not meet its obligations. It
decided to sell all its equipment such as sewing
machines, permapress machines, high-speed sewers,
cutting tables, ironing tables, etc., as well as its
supplies and materials to Top Grade Fashion
Corporation, its competitor.
a. How would you classify the transaction?
b. Can Divine Corporation sell aforesaid items to its
competitor, Top Grade Fashion Corporation?
What are the requirements to validly sell the
items? Explain. (Bar 2005)
A:
a. The transaction is deemed classified as a sale of all or
substantially all of the corporate assets because the
corporation would be rendered incapable of
continuing the business or accomplishing the
purpose for which it was incorporated.
b. Yes. The law does not prohibit sale of all or
substantially all of corporate assets to competitor-
company provided said sale is subject to laws against
illegal combination, monopoly, or restraint of trade
and Bulk Sales Law. Nowhere in the facts state that
the competitor-company lies within the restrictions
provided for by law. For the transaction to be valid, it
needs a majority vote of its board of directors and
stockholder’s approval representing at least 2/3 of
outstanding capital stock. Further, since bulk sales
apply to sale of all or substantially all of corporate
assets, it also requires the following:
i. list of creditors under oath must be given by
the seller to the buyer 10 days before the sale
containing the lists of their respective names,
addresses, due dates and amount owing each;
ii. inventory of goods or properties to be sold,
cost price and the amount for which it has been
sold; and c) the list of inventory is filed with the
DTI, otherwise, it will be null and void for being
in fraud of creditors.
Where an asset constitutes the only property of the
corporation, its sale to a 3rd party is a sale or disposition
of all the corporate property and assets of the corporation
falling squarely within the contemplation of Sec. 40 of the
Corporation Code. Hence, for the sale to be valid, the
majority vote of the legitimate Board of Trustees,
concurred in by the vote of at least 2/3 of the bona fide
members of the corporation should have been obtained
(Islamic Directorate of the Philippines, et al., v. Court of
Appeals and Iglesia ni Cristo, G.R. No. 117897, May 14,
1997).
POWER TO ACQUIRE OWN SHARES
Instances when a corporation may acquire its own
shares (1991, 1992, 2005 Bar)
1. To eliminate fractional shares out of stock dividends
(CC, Sec. 41);
2. To collect or compromise an indebtedness to the
corporation, arising out of unpaid subscription, in a
delinquency sale and to purchase delinquent shares
sold during said sale (ibid.);
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
3. To pay dissenting or withdrawing stockholders (in
the exercise of the stockholder’s appraisal right)
(ibid.);
4. To acquire treasury shares (CC, Sec. 9);
5. To acquire Redeemable shares regardless of
existence of retained earnings (CC, Sec 8);
6. To effect a decrease of capital stock (CC, Sec. 38);
7. In close corporations, when there is a deadlock in the
management of the business, the SEC may order the
purchase at their fair value of the shares of any
stockholder by a corporation regardless of the
availability of unrestricted retained earnings (URE’s)
in its books (CC, Sec. 104, par. 1 [4]).
NOTE: Where a corporation reacquires its own shares, it
does not thereby become a subscriber thereof.
Rule in order that a corporation may acquire its own
shares
GR: The corporation may only acquire its own stocks in
the presence of unrestricted retained earnings (URE)
XPNs: (RDC)
1. Redeemable shares may be acquired even without
surplus profit for as long as it will not result to the
insolvency of the Corporation
2. In cases that the corporation conveys its stocks in
payment of a Debt
3. In a Close corporation, a stockholder may demand
the payment of the fair value of shares regardless of
existence of retained earnings for as long as it will not
result to the insolvency of the corporation.
Unrestricted retained earnings (URE)
It represents the surplus profits of the corporation. It is
determined by subtracting the liabilities (L), the Capital
Stock (CS) and the Restricted Retained Earnings (RRE)
from the assets (A) of the corporation (URE = A – (L + CS+
RRE)).
Unrestricted Retained Earnings shall include
accumulated profits and gains realized out of the normal
and continuous operations of the company after
deducting therefrom distributions of stockholders and
transfers to capital stock or other accounts. It does NOT
include:
1. Funds appropriated by its BOD for corporate
expansion projects or programs;
2. Funds covered by a restriction for dividend
declaration under a loan agreement;
3. Funds required to be retained under special
circumstances obtaining in the corporation such as
when there is a need for a special reserve for probable
circumstances.
Guidelines for the acquisition of its own shares
1. The capital of the corporation must not be impaired.
There shall be URE’s to purchase the shares;
2. Legitimate or proper corporate objective is
advanced;
3. Condition of the corporate affairs warrants it;
4. Transaction is designed and carried out in good faith;
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
188
5. Interest of creditors is not impaired, that is, the same
is not violative of the trust fund doctrine (Sec. 41, SEC
Opinions, October. 12, 1992, September 11, 1985, and
April 11, 1994).
The requirement of unrestricted retained earnings to
cover the share is based on the trust fund doctrine which
means that the capital stock, property and other assets of
a corporation are regarded as equity in trust for the
payment of corporate creditors. The reason is that the
creditors of a corporation are preferred over the
stockholders in the distribution of corporate assets
(Boman Environmental Development Coporation v. Hon.
Court of Appeals and Nilcar Y. Fajilan, GR No. 77860,
November 22, 1988).
POWER TO INVEST CORPORATE FUNDS IN
ANOTHER CORPORATION OR BUSINESS
The corporation is not allowed to engage in a business
different from those enumerated in its AOI
The corporation is not allowed to engage in a business
different from those enumerated in its AOI unless the
purpose will be amended to include the desired business
activity among its secondary purpose.
NOTE: However, in the case of pawnshops organized as
corporations and partnerships, they may be allowed to
engage in ancillary activity of directly purchasing or
selling goods or articles. The Pawnshop Regulation Act
contains no prohibition to engage in ancillary activities.
Hence, by implication, their scope may be extended to
other unrelated business unless clearly prohibited by the
said Act.
The only requirement is that the person or entity engaged
at the same time in other business not directly related or
not incidental to pawnshop business, shall keep such
business distinct and separate from his pawnshop
operations (De Leon, 2010 citing SEC Opinion, March 28,
1985).
Rule in case a corporation wants to invest in an
undertaking
GR: Investment of a corporation in a business which is in
line with its primary purpose requires only the approval
of the board.
XPN: Where the corporation undertakes to invest in
another corporation or business or for any purpose other
than a primary purpose, it has to comply with the
statutory requirements before it can do so (Sec. 42, CC).
Statutory requirements that the corporation needs to
comply with to invest in another corporation or
business or for any purpose other than a primary
purpose (1995, 1996 Bar)
1. Approval by the majority vote of the BOD or BOT;
2. Ratification by stockholders representing at least
2/3 of the outstanding capital stock or by at least 2/3
of the members in case of non-stock corporations;
 CORPORATION CODE
3. Ratification must be made at a meeting duly called
for the purposes; and
4. Prior written notice of the proposed investment and
the time and place of the meeting shall be made
addressed to each stockholder or member by mail or
by personal service.
NOTE: Investment of a corporation in a business which is
in line with its primary purpose requires only the
approval of the board. Any dissenting stockholder shall
have appraisal right.
Q: Stikki Cement Co. was organized primarily for
cement manufacturing. Anticipating substantial
profits, its President proposed that Stikki invest in: a)
a powerplant project;, b) a concrete road project; and
c) quarry operations for limestone in the
manufacture of cement.
a. What corporate approvals or votes are needed
for the proposed investments? Explain.
b. Describe the procedure in securing these
approvals (1992 Bar)
A:
a. Section 42 provides that when the investment of
corporate funds is directed at a purpose not primary
in character or not reasonably necessary for the
accomplishment of the primary purpose, majority of
the votes of the board of directors or trustees with
the ratification of stockholders representing 2/3 of
the outstanding capital stock or 2/3 of the members,
in case of a non-stock corporation, are required.
Since a powerplant project and a concrete road
project are neither primary purposes nor reasonably
necessary for the accomplishment thereof, majority
votes of the board of directors plus the ratification of
the stockholders representing 2/3 of the outstanding
capital stock are needed.
On the other hand, quarry operations for limestone
are reasonably necessary or incidental to attain the
primary purpose of the corporation, i.e. the
manufacture of cement. Hence, only the majority
approval of the board of directors is needed. The
ratification by the stockholders is no longer
necessary.
b. To secure the aforementioned approvals, there must
be a written notice of the proposed investment and
the time and place of the meeting shall be addressed
to each stockholder or member at his place of
residence as shown on the books of the corporation
and deposited to the addressee in the post office with
postage prepaid, or served personally (CC, Sec. 42).
POWER TO DECLARE DIVIDENDS
Requirements for the declaration of dividends
1. Existence of URE’s;
2. Resolution of the board; and
3. Additional Requirements for stock dividends:
a. A vote representing 2/3 of outstanding capital.
(Sec. 43, CC)
189
b. A corporation must have also a sufficient
number of authorized unissued shares for
distribution to stockholders.
Q: Under what circumstances may a corporation
declare dividends? (Bar 2005)
A: A corporation may declare dividends when there is
unrestricted retained earnings, a resolution of the Board
of Directors and in case of declaration of stock dividends,
a ratification of the stockholders representing two-thirds
(2/3) of the outstanding capital stock.
Q: At least 2/3 of the stockholders of Solar
Corporation, meeting upon the recommendation of
the BOD, declared a 50% stock dividend during their
annual meeting. The notice of the annual
stockholders’ meeting did not mention anything
about a stock dividend declaration. The matter was
taken up only under the item “other business” in the
agenda of the meeting. C.K. Senwa, a stockholder, who
received his copy of the notice but did not attend the
meeting, subsequently learned about the 50% stock
dividend declaration. He desires to have the stock
dividend declaration cancelled and set aside, and
wishes to retain your services as a lawyer for the
purpose. Will you accept the case? Discuss with
reasons. (1990 Bar)
A: No, I will not accept the case. Sec 43 of the CC states
that no stock dividend shall be issued without the
approval of the stockholders representing not less than
2/3 of the outstanding capital stock at a regular or special
meeting duly called for that purpose. Conformably with
Sec 50 of the CC, a written notice of the holding of the
regular meeting sent to the shareholders will suffice. The
notice itself specified the said subject matter.
Alternative answer:
Yes, I will accept the case. The problem does not indicate
that there is action by the BOD which is also necessary for
the declaration of 50% stock dividend.
Q: During the annual stockholders meeting, Riza, a
stockholder proposed to the body that a part of the
corporation’s unreserved earned surplus be
capitalized and stock dividends be distributed to the
stockholders, arguing that as owners of the company,
the stockholders, by a majority vote, can do anything.
As chairman of the meeting, how would you rule on
the motion to declare stock dividends? (Bar 1991)
A: As the chairman of the meeting, I would rule against the
motion considering that a declaration of stock dividends
should initially be taken by the BOD and thereafter to be
concurred in by a 2/3 vote of the stockholders (CC, Sec.
43). There is no prohibition, however, against the
stockholders’ resolving to recommend to the BOD that it
consider a declaration of stock dividends for concurrence
thereafter by the stockholders. Sec 43 of the Corporation
Code provides that the board of directors of a stock
corporation may declare dividends out of the unrestricted
retained earnings which shall be payable in cash,
property, or in stock to all stockholders.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Forms of dividends Scrip dividend

1. Cash A scrip dividend is dividend issued by the corporation

when the obligation to pay becomes absolute. Thus, it
Cash dividends due on delinquent stock shall first be becomes a debt absolutely due to the stockholders
applied to the unpaid balance on the subscription although payment is postponed to a future date (De Leon,
plus cost and expenses (Sec. 43, CC). supra).

2. Stock Stock split

Stock dividends are withheld from the delinquent It is merely a dividing up of the outstanding shares of a
stockholder until his unpaid subscription is fully paid corporation into a greater number of units, without
(ibid). disturbing the stockholder’s original proportional
participating interest in the corporation.
3. Property
Stock split is different from stock dividend. Stock dividend
Stockholders are entitled to dividends PRO‐RATA is a capitalization of earnings or profits, together with a
based on the total number of shares and not on the distribution of the added shares which evidence the
amount paid on shares. assets transferred to capital. The stock split, on the other
hand, is a mere increase in the number of shares which
Cash dividends vs. Stock dividends evidence ownership without altering the amount of the
capital, surplus, or segregated earnings (De Leon, supra).
CASH DIVIDENDS STOCK DIVIDENDS
Part of general fund Part of capital Sources of retained earnings
Results in cash outlay No cash outlay
Once issued, can be levied by 1. Paid-in surplus – It is the difference between the par
Not subject to levy by corporate creditors because value and the issued value or selling price of the
corporate creditors they’re part of corporate shares. It cannot be declared as cash dividend but can
capital be declared only as stock dividends
Declared only by the Declared by the board with 2. Operational Income - The amount of profit realized
board of directors at its the concurrence of the from a business's operations after taking out
discretion stockholders representing at operating expenses. It is available for both cash and
(majority of the quorum least 2/3 of the outstanding stock dividends
only, not majority of all capital stock at a 3. Revaluation surplus – Increase in the value of a fixed
the board) regular/special meeting asset as a result of its appreciation. They are by
Does not increase the Corporate capital is nature subject to fluctuations.
corporate capital increased
Its declaration creates a GR: It cannot be declared as dividends because there is no
debt from the No debt is created by its actual gain.
corporation to each of declaration
its stockholders XPN: It can be used in the declaration of dividends
If received by individual: provided the following conditions exist:
subject to tax; Not subject to tax either a. The corporation has sufficient income from
If received by received by individual or a operations from which the depreciation on the
corporation: not subject corporation appraisal increase was charged;
to tax b. It has no deficit at the time the depreciation on the
Can be revoked despite appraisal increase was charged to operations; and
Cannot be revoked after c. Such depreciation on appraisal increase previously
announcement but before
announcement charged to operations has not been erased or
issuance
impaired by subsequent losses; otherwise, only that
Applied to the unpaid Can be withheld until
portion not impaired by subsequent losses is
balance of delinquent payment of unpaid balance
available for dividend (SEC Opinions, Oct. 2, 1981 and
shares of delinquent shares
March 19, 1992).
4. Reduction surplus – the surplus arises from the
Q: From what funds are cash and stock dividends
reduction of the par value of the issued shares of
sourced? Explain why (Bar 2005)
stocks. It cannot be declared as cash dividend but can
be declared only as stock dividends.
A: Dividends either cash or stock dividend must be
5. Gain from Sale of Real Property - Available as
declared out of unrestriscted retained earnings because
dividends.
of the Trust Fund Doctrine. The Trust Fund Doctrine
6. Treasury Shares – Gain realized from reissuance of
provides that subscription to the capital stock of a
treasury shares. It cannot be declared as stock or
corporation constitute a fund to which the creditors have
cash dividends but it may be declared as property
the right to look for the satisfaction of their claims (Ong v.
dividend.
Tiu, G.R. No. 144476, April 8, 2003). Thus, dividends must
never impair the subscribed capital stock.

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 CORPORATION CODE
Prohibition imposed by law on URE's of a stock
corporation
GR: Stock corporations are prohibited from retaining
surplus profits in excess of one hundred (100%) percent
of their paid-in capital stock.
XPNs: (2001 Bar)
1. When justified by definite corporate expansion
projects or programs approved by the board of
directors;
2. When the corporation is prohibited under any loan
agreement with any financial institution or creditor,
whether local or foreign, from declaring dividends
without its/his consent, and such consent has not yet
been secured;
3. When it can be clearly shown that such retention is
necessary under special circumstances obtaining in
the corporation, such as when there is need for
special reserve for probable contingencies (CC, Sec.
43).
Q: For the past three years of its commercial
operation, X, an oil company, has been earning
tremendously in excess of 100% of the corporation’s
paid-in capital. All of the stockholders have been
claiming that they share in the profits of the
corporation by way of dividends but the Board of
Directors failed to lift its finger. Is Corporation X
guilty of violating a law? If in the affirmative, state the
basis. (2001 Bar)
A: Corporation X is guilty of violating Section 43 of the CC.
This provision prohibits stock corporations from
retaining surplus profits in excess of 100% of their paid-
in capital.
Penalty in case of unjustifiable retention of surplus
profits
The penalty in case a corporation unjustifiably retains
surplus profits in excess of one hundred (100%) percent
of the paid in accumulated capital is the payment of
Improperly Earnings Tax equal to 10% of the improperly
accumulated taxable income (NIRC OF 1997, Sec. 29 [A]).
Q: During the annual stockholders meeting, Cheryl, a
majority stockholder, proposed that a part of the
corporation’s URE's be capitalized and stock
dividends be distributed to the stockholders. Can she
compel the corporation to declare stock dividends?
(2001 Bar)
A: No. Stock dividends should initially be taken by the
BOD and thereafter to be concurred in by a 2/3 vote of the
stockholders. A stockholder cannot compel the
corporation to declare either cash or stock dividends as it
rests with the sound discretion of the board.
Sources of dividends
GR: Dividends can only be declared out of actual and bona
fide unrestricted retained earnings
191
XPN: Dividends can be declared out of capital in the
following instances:
1. Dividends from investments wasting assets
corporation;
2. Liquidating dividends
Wrongful or illegal declaration of dividends
The Board of Director is liable in case of wrongful or
illegal declaration of dividends. The stockholders should
return the dividends to the corporation (solution indebiti).
Persons entitled to receive dividends
Dividends are payable to the stockholders of record as of
the date of the declaration of dividends or holders of
record (Cojuanco and Prime Holdings, Inc., v.
Sandiganbayan G.R. No. 183278, April 24, 2009).
Rule on the receipt of dividends in case of mortgaged
or pledged shares
GR: The mortgagor or the pledgor has the right to receive
the dividends.
XPN: When the mortgagor or pledgor defaults and the
mortgagee or pledgee acquires the pledged stocks and the
transfer is recorded in the books of the corporation, the
mortgagee or pledgee is entitled to receive the dividends.
Q: May stock dividends be issued to a person who is
not a stockholder in payment of services rendered?
A: No. Only stockholders are entitled to payment of stock
dividends (Nielson & Co., Inc. v. Lepanto Consolidated
Mining Co., G.R. No. 21763, December 17, 1966).
POWER TO ENTER INTO
MANAGEMENT CONTRACT
Management contract
It is any contract whereby a corporation undertakes to
manage or operate all or substantially all of the business
of another corporation, whether such contracts are called
service contracts, operating agreements or otherwise (CC,
Sec. 44).
NOTE: Sec. 44 refers only to a management contract with
another corporation. Hence, it does not apply to
management contracts entered into by a corporation with
natural persons (ibid).
Requirements for a management contract to be valid
1. Contract must be approved by the majority of the
BOD or BOT of both managing and managed
corporation;
2. Ratified by the stockholders owning at least the
majority of the outstanding capital stock, or
members in case of a non-stock corporation, of both
the managing and the managed corporation, at a
meeting duly called for the purpose;
3. Contract must be approved by the stockholders of
the managed corporation owning at least 2/3 of the
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
outstanding capital stock entitled to vote or 2/3 of either proscribed or declared illegal (Rural Bank of Milaor
the members when: v. Ocefemia, G.R. No. 137686, February 8, 2000).
a. Stockholders representing the same interest in
both of the managing and the managed It is one committed outside the object for which a
corporation own or control more than 1/3 of the corporation is created as defined by the law of its
total outstanding capital stock entitled to vote of organization and therefore beyond the power conferred
the managing corporation (interlocking upon it by law (Atrium Management Corporation vs. CA,
stockholders); G.R. No. 109491, February 28, 2001).
b. Majority of the members of the BOD of the
managing corporation also constitute a majority Unlike illegal acts which contemplate the doing of an act
of the BOD of the managed corporation that is contrary to law, morals, or public policy or public
(Interlocking Directors; CC, Sec. 44). duty, and are void, ultra vires acts are not illegal but not
merely within the scope of the articles of incorporation
Q: ABC Management Inc. presented to the DEF Mining and the by-laws. They are merely voidable and may
Co, the draft of its proposed Management Contract. As become binding and enforceable when ratified by the
an incentive, ABC included in the terms of stockholders (Maria Clara Pirovana, et al. v. the De La
compensation that ABC would be entitled to 10% of Rama Steamship Co., G.R. No. L-5377, December 29, 1954).
any stock dividend which DEF may declare during the
lifetime of the Management Contract. Would you Types of UVA
approve of such provision? If not, what would you
suggest as an alternative? (1991 Bar) 1. Acts done beyond the powers of the corporation
(through BOD)
A: I would not approve a proposed stipulation in the 2. Ultra vires acts by corporate officers
management contract that the managing corporation, as 3. Acts or contracts which are per se illegal as being
an additional compensation to it, should be entitled to contrary to law.
10% of any stock dividend that may be declared.
Stockholders are the only ones entitled to receive stock APPLICABILITY OF ULTRA VIRES DOCTRINE
dividends (Nielson & Co v. Lepanto Mining G.R. No. L-
21601, December 17, 1966). I would add that the Ultra vires acts by reason of lack of authority vs. Ultra
unsubscribed capital stock of a corporation may only be vires acts by reason of illegality (illegal acts)
issued for cash or property or for services already
rendered constituting a demandable debt (CC, Sec. 62). As ULTRA VIRES
BASIS ILLEGAL ACTS
an alternative, I would suggest that the managing ACT
corporation should instead be given a net profit Not necessarily
participation and, if it later so desires, to then convert the Unlawful; against
unlawful, but
amount that may be due thereby to equity or shares of Lawfulness law, morals,
outside the
stock at no less than the par value thereof. public policy, and
powers of the
public order
corporation
A corporation can enter into a management contract
with a natural person without complying with the Merely voidable
requisites of Sec. 44 and may be
enforced by Cannot be
Enforceability performance, validated
Sec 44 refers only to a management contract with another
corporation. Hence, it does not apply to management ratification or
contracts entered into by a corporation with natural estoppel
persons. Cannot be
Ratification Can be ratified
ratified
Period for every management contract entered into
by the corporation Can bind the
parties if wholly Cannot bind the
GR: Management contract shall be entered into for a Binding effect or partly parties
period not longer than 5 years for any one term. executed

XPN: In cases of service contracts or operating

Distinguished from acts that do not comply with
agreements which relate to the exploitation,
formalities and unauthorized acts
development, exploration or utilization of natural
resources, it may be entered for such periods as may be
provided by the pertinent laws or regulations. ACTS THAT DO NOT
COMPLY WITH UNAUTHORIZED ACTS
ULTRA VIRES ACTS FORMALITIES
If certain procedures or The act may be within the
An ultra vires act refers to an act outside or beyond formalities are powers of the corporation
express, implied and incidental corporate powers. The prescribed in the AOI or but not within the powers of
concept also includes those acts that may ostensibly be BL and the same are not the particular officer. The
within such powers but are, by general or special laws, complied with, the latter is sometimes referred
resulting act is not an to as ultra vires act of the

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 CORPORATION CODE
ultra vires act of the officer. The law on agency
corporation. applies.
Instances when the acts of the officers bind the
corporation
1. If it is provided in the by-laws;
2. If authorized by the board;
3. Under the doctrine of apparent authority;
4. When the act was ratified.
Doctrine of apparent authority
If a corporation knowingly permits one of its officers, or
any other agent, to act within the scope of an apparent
authority, it holds him out to the public possessing the
power to do those acts; and thus, the corporation will, as
against anyone who has in good faith dealt with it through
such agent, be estopped from denying the agent’s
authority.
Apparent authority is derived not merely from practice.
Its existence may be ascertained through:
1. The general manner in which the corporation holds
out an officer or agent as having the power to act, or
in other words, the apparent authority to act in
general, with which it clothes him; or
2. The acquiescence in his acts of a particular nature,
with actual or constructive notice thereof, within or
beyond the scope of his ordinary powers.
It is not the quantity of similar acts which establishes
apparent authority but the vesting of a corporate officer
with the power to bind the corporation (Advance Paper
Corporation v. Arma Traders Corporation, GR No. 176897,
December 11, 2013).
Instances when the corporation is estopped to deny
ratification of contracts or acts entered by its officers
or agents
Generally, when the corporation has knowledge that its
officers or agents exceed their power, it must promptly
disaffirm the contract or act, and allow the other party or
third person to act in the belief that it was authorized or
has been ratified. Otherwise, if it acquiesces, with
knowledge of the facts, or if it fails to disaffirm, ratification
will be implied (Premiere Development Bank v. CA, G.R. No.
159352, April 14, 2004).
So settled is the precept that ratification can be made by
the corporate board either expressly or impliedly. Implied
ratification may take various forms - like silence or
acquiescence; by acts showing approval or adoption of the
contract; or by acceptance and retention of benefits
flowing therefrom (MWSS v. CA, G.R. No. 126000,Oct. 7,
1998).
Where the practice of the corporation has been to allow
its general manager to negotiate and execute contracts in
its copra trading activities for and in behalf of the
corporation without board approval, the board itself, by
its acts through acquiescence, practically laid aside the
by-law requirement of prior approval. Settled is the rule
193
that where similar acts have been approved by the
directors as a matter of general practice, custom, and
policy, the general manager may bind the company
without formal authorization from the board of directors
(The Board of Liquidators, representing the Government of
the Philippines v. Heirs of Maximo M. Kalaw, et al., G.R. No.
L-18805, August 14, 1967).
A corporation cannot deny the authority of a lawyer when
they clothed him with apparent authority to act in their
behalf such as when he entered his appearance
accompanied by the corporation’s general manager and
the corporation never questioned his acts and even took
time and effort to forward all the court’s documents to
him. The lawyer may not have been armed with a board
resolution but the doctrine of apparent authority imposes
liability not as a result of contractual relationship but
rather because of the actions of the principal or an
employer in somehow misleading the public that the
relationship or authority exists (Megan Sugar Corporation
v. RTC Iloilo Br. 68, G.R. NO. 170352, June 1, 2011).
Q: The Rural Bank of Milaor (RBM) acquired
ownership over 5 parcels of land formerly owned by
the spouses Felicisimo and Juanita Ocfemia after the
bank foreclosed the mortgage over the said
properties. These parcels of land were in the
possession of the grandchildren of the spouses
Felicisimo and Juanita because they were sold by RBM
bank to the children of the spouses. However, the
properties have not been transferred in the name of
the children of the spouses after they were sold
because according to the Assessor's Office they
cannot be transferred in the name of the buyers as
there is a need to have the document of sale
registered with the Register of Deeds (RD). Marife, the
grandchild of the spouses went to the RD with the
Deed of Sale in order to have the same registered. The
RD however, informed her that the document of sale
cannot be registered without a board resolution of
RBM. Marife went to the bank and requested the for a
board resolution so that the property can be
transferred to the name of Renato Ocfemia. RBM
refused her request.
May the board of directors of a rural banking
corporation be compelled to confirm a deed of
absolute sale of real property owned by the
corporation which deed of sale was executed by the
bank manager without prior authority of the board of
directors of the rural banking corporation?
A: Yes, the corporation may be compelled. A bank is liable
to innocent third persons where representation is made
in the course of its normal business by an agent like the
bank manager, even though such agent is abusing her
authority. Clearly, persons dealing with her could not be
blamed for believing that she was authorized to transact
business for and on behalf of the bank. The bank is
estopped from questioning the authority of the bank
manager to enter into the contract of sale. If a corporation
knowingly permits one of its officers or any other agent to
act within the scope of an apparent authority, it holds the
agent out to the public as possessing the power to do
those acts; thus, the corporation will, as against anyone
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
who has in good faith dealt with it through such agent, be
estopped from denying the agent's
authority. Unquestionably, the bank has authorized its
manager to enter into the Deed of Sale. Accordingly, it has
a clear legal duty to issue the board resolution sought by
the Ocfemias. Having authorized her to sell the property,
it behooves the bank to confirm the Deed of Sale so that
the buyers may enjoy its full use (Rural Bank of Milaor
(Camarines Sur) v. Francisca Ocfemia, et al., G.R. No.
137686, February 8, 2000).
Q: Inland Construction and Development Corp.
(Inland) obtained various loans and other credit
accommodations from Westmont Bank (WB). Inland
executed real estate mortgages and issued
promissory notes in favor of WB. Inland defaulted on
the payment of the notes.
It appeared that Aranda, president of Inland, assigned
and conveyed all his rights to Hanil-Gonzales
Corporation in favor of Abrantes, and that Abrantes
assumed, among other obligations of Inland and
Aranda, a promissory note under the latter’s
obligation with WB. WB’s Account Officer, Lionel Calo,
Jr. (Calo) signed for its conformity to the deed.
Inland was notified of the foreclosure of its real estate
mortgages by WB. Inland filed an injunction suit
against WB. The latter underscored that it had no
knowledge, much less did it give its conformity to the
alleged assignment of the obligation.
Did Calo’s conformity to the deed bind WB?
A: Yes. The general rule remains that, in the absence of
authority from the board of directors, no person, not even
its officers, can validly bind a corporation. If a
corporation, however, consciously lets one of its officers,
or any other agent, to act within the scope of an apparent
authority, it will be estopped from denying such officers
authority.
The records show that Calo was the one assigned to
transact on WB’s behalf respecting the loan transactions
and arrangements of Inland as well as those of Hanil-
Gonzales and Abrantes. Since it conducted business
through Calo, who is an Account Officer, it is presumed
that he had authority to sign for the bank in the Deed of
Assignment.
WB cannot feign ignorance of the Deed of
Assignment. Notably, assignee Abrantes notified WB
about his assumption of Inlands obligation. That WB sent
a reply-letter indicates that it had full and complete
knowledge of the assumption by Abrante’s of Inland’s
obligation (Westmont Bank vs. Inland Construction and
Development Corporation, G.R. Nos. 123650 & 123822,
March 23, 2009).
Q: Associated Bank (the Bank) purchased in a
foreclosure sale the real properties the Sps. Vaca
mortgaged in its favor. The Sps. Vaca, however,
prayed for the nullification of the mortgage and
foreclosure sale. In the meantime, the Bank
advertised for sale the subject properties, and the Sps.
Prosntroller offered to buy the same. The offer was
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made through Atty. Jose Soluta, Jr. (Atty. Soluta), the
Bank’s Vice-President, Corporate Secretary and a
member of its Board of Directors. The Bank accepted
the Sps. Pronstroller’s offer of P7.5 million, and the
latter paid 10% downpayment.
Sps. Pronstroller and Atty. Soluta executed two
Letters-Agreement wherein the balance of the
purchase price will be paid upon receipt of a final
order from the Supreme Court in the Vaca case and
the delivery of the property to the Sps. Pronstroller
free from occupants.
The Bank was later on reorganized, and Atty. Soluta
was relieved from his duties. The Bank, through its
Assistant Vice-President, Atty. Dayday, informed Sps.
Pronstroller that their request for extension was
disapproved by ARRMC and, in view of their breach of
the contract, the Bank was rescinding the same and
forfeiting their deposit.
Is the Associated Bank bound by the Letter-
Agreement signed by Atty. Soluta under the doctrine
of apparent authority?
A: Yes. The authority of a corporate officer or agent in
dealing with third persons may be actual or
apparent. Accordingly, the authority to act for and to bind
a corporation may be presumed from acts of recognition
in other instances, wherein the power was exercised
without any objection from its board or
shareholders. Undoubtedly, Associated Bank had
previously allowed Atty. Soluta to enter into the first
agreement without a board resolution expressly
authorizing him; thus, it had clothed him with apparent
authority to modify the same via the second letter-
agreement. It is not the quantity of similar acts which
establishes apparent authority, but the vesting of a
corporate officer with the power to bind the corporation
(Associated Bank v. Spouses Rafael and Monaliza
Pronstroller, G.R. No. 148444, July 14, 2008).
Q: The Sps. Magsalang obtained a loan from
Philippine Countryside Rural Bank (PCRB), secured
by a real estate mortgage over their property,
including the house constructed thereon owned by
the Sps. Cortel. The Sps. Magsalang and Sps. Cortel
asked permission from PCRB to sell the subject
properties. Pancraiso Mondigo, Branch Manager of
PCRB, verbally agreed to their request but first
required full payment of the loan. The subject
properties were later sold to Banate. The title issued
to Banate, however, carried over the mortgage lien in
PCRB’s favor. PCRB refused to release the property
from the lien.
Did the purported agreement between Banate and
Mondigo novate the mortgage contract over the
subject properties and is thus binding upon PCRB?
A: No. The Court would be unduly stretching the doctrine
of apparent authority if the Court would consider the
power to undo or nullify solemn agreements validly
entered into as within the doctrine’s ambit. Although a
branch manager, within his field and as to third persons,
is the general agent and is in general charge of the
 CORPORATION CODE
corporation, with apparent authority commensurate with
the ordinary business entrusted him and the usual course
and conduct thereof, yet the power to modify or nullify
corporate contracts remains generally in the board of
directors. Being a mere branch manager alone is
insufficient to support the conclusion that Mondigo has
been clothed with “apparent authority” to verbally alter
terms of written contracts, especially when viewed
against the telling circumstances of this case: the
unequivocal provision in the mortgage contract; PCRB’s
vigorous denial that any agreement to release the
mortgage was ever entered into by it; and, the fact that the
purported agreement was not even reduced into writing
considering its legal effects on the parties’ interests. To
put it simply, the burden of proving the authority of
Mondigo to alter or novate the mortgage contract has not
been established (Violeta Tudtud Banate,et al., v.
Philippine Countryside Rural Bank, Inc., et al., G.R.
No. 163825, July 13, 2010).
Q: PPI, a fertilizer manufacturer, entered into an
arrangement with Janet Layson for the delivery of
fertilizers to her, payable from the proceeds of the
loan that UCPB extended to her. Layson executed a
document called “pagares,” written on the dorsal side
of a UCPB promissory note. The pagares stated that
Layson had an approved loan with UCPB-Iloilo
Branch. The second portion of the pagares, signed by
that branch’s manager Gregory Grey, stated that the
assignment has been duly accepted and payment duly
guaranteed within 60 days from PPI’s Invoice. But
contrary to her undertakings, Layson withdrew with
branch manager Grey’s connivance, the loan that
UCPB granted her. On the strength of the three
documents, PPI delivered quantities of fertilizers to
Layson. When PPI presented the documents of the
financed transactions to UCPB for collection, the bank
denied the claim on the ground that it neither
authorized the transactions nor the execution of the
documents which were not part of its usual banking
transactions. UCPB claimed that branch manager
Grey exceeded his authority in guaranteeing payment
of Layson’s purchases on credit. UCPB contends that
the pagares were illegal and void since banking laws
prohibit bank officers from guaranteeing loans of
bank clients. Is UCPB bound by Grey’s undertaking on
its behalf to deliver to PPI the proceeds of the bank’s
loan in payment of the fertilizers Laysonbought?
A: No, UCPB is not bound. A corporation like UCPB is
liable to innocent third persons where it knowingly
permits its officer, or any other agent, to perform acts
within the scope of his general or apparent authority,
holding him out to the public as possessing power to do
those acts. But, here, it is plain from the guarantee Grey
executed that he was acting for himself, not in
representation of UCPB. The latter cannot be bound by
Grey’s above undertaking since he appears to have made
it in his personal capacity. He signed it under his own
name, not in UCPB’s name or as its branch
manager. Indeed, the wordings of the undertaking do not
at all make any allusion to UCPB (United Coconut Planters
Bank v. Planters Products, Inc., et al., G.R. No. 179015, June
13, 2012).
195
Q: Arma Traders is a domestic corporation engaged in
the wholesale and distribution of school and office
supplies, and novelty products. Antonio Tan (Tan)
was formerly the President while UySengKee Willy
(Uy) is the Treasurer. They represented Arma
Traders when dealing with its supplier, Advance
Paper, for about 14 years.
Arma Traders purchased on credit several paper
products from Advance Paper. Upon the
representation of Tan and Uy, Arma Traders was able
to obtain a loan from Advance Paper, which the latter
granted due to its good business relations with Arma
Traders.
Arma Traders issued postdated checks signed by Tan
and Yu, who were its authorized bank signatories.
Upon presentment by Advance Papers, the checks
were dishonored due to insufficient balance. Arma
Traders failed to settle the loan despite several
demands, claiming that the purchase on credit and
the loan were spurious as the Board of Arma Traders
did not issue a resolution authorizing the same.
Is the Doctrine of Apparent Authority applicable?
A. Yes. Apparent authority is derived not merely from
practice. Its existence may be ascertained through (1)
the general manner in which the corporation holds out an
officer or agent as having the power to act or, in other
words the apparent authority to act in general, with which
it clothes him; or (2) the acquiescence in his acts of a
particular nature, with actual or constructive
knowledge thereof, within or beyond the scope of his
ordinary powers. It requires presentation of evidence
of similar act(s) executed either in its favor or in favor
of other parties. It is not the quantity of similar acts
which establishes apparent authority, but the vesting
of a corporate officer with the power to bind the
corporation.
The Court does not agree with the CA’s findings that Arma
Traders is not liable to pay the loans due to the lack of
board resolution authorizing Tan and Uy to obtain the
loans. To begin with, Arma Traders’ Articles of
Incorporation provides that the corporation may borrow
or raise money to meet the financial requirements of
its business by the issuance of bonds, promissory notes
and other evidence of indebtedness. Likewise, it states
that Tan and Uy are not just ordinary corporate officers
and authorized bank signatories because they are also
Arma Traders’ incorporators along with respondents Ng
and Ting, and Pedro Chao. Furthermore, Arma Traders, et
al., through Ng who is Arma Traders’ corporate secretary,
incorporator, stockholder and director, testified that the
sole management of Arma Traders was left to Tan and
Uy and that he and the other officers never dealt with
the business and management of Arma Traders for 14
years. He also confirmed that since 1984 up to the filing
of the complaint against Arma Traders, its
stockholders and board of directors never had its
meeting.
Thus, Arma Traders bestowed upon Tan and Uy broad
powers by allowing them to transact with third persons
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
without the necessary written authority from its non-
performing board of directors. Arma Traders failed to
take precautions to prevent its own corporate officers
from abusing their powers. Because of its own laxity in its
business dealings, Arma Traders is now estopped from
denying Tan and Uy’s authority to obtain loan from
Advance Paper (Advance Paper Corporation vs. Arma
Traders Corporation, G.R. No 176897, December 11, 2013).
CONSEQUENCES OF ULTRA VIRES ACTS
Effects of an ultra vires act
Ultra vires acts entered into by the board of directors
binds the corporation and the courts will not interfere
unless terms are oppressive and unconscionable (Gamboa
vs. Victoriano, G.R. No. L-43324. May 5, 1979).
These are the effects for the specific acts:
1. Executed contract – courts will not set aside or
interfere with such contracts;
2. Executory contracts – no enforcement even at the suit
of either party (void and unenforceable);
3. Partly executed and partly executory – principle of “no
unjust enrichment at expense of another” shall apply;
4. Executory contracts apparently authorized but ultra
vires – the principle of estoppel shall apply.
Remedies in case of ultra vires act
1. State
a. Obtain a judgment of forfeiture; or
b. The SEC may suspend or revoke the certificate
of registration
2. Stockholders
a. Injunction; or
b. Derivative suit
3. Creditors - Nullification of contract in fraud of
creditors.
Q: X Corp., whose business purpose is to manufacture
and sell vehicles, invested its funds in Y Corp., an
investment firm, through a resolution of its Board of
Directors. The investment grew tremendously on
account of Y Corp.'s excellent business judgment. But
a minority stockholder in X Corp. assails the
investment as ultra vires. Is he right and, if so, what is
the status of the investment? (2011 Bar)
A: Yes, it is an ultra vires act of its Board of Directors but
voidable only, subject to stockholders’ ratification.
Q: Which of the following corporate acts are valid,
void or voidabe? Indicate your answer by writing the
paragraph number of the query, followed by your
corresponding answer as “valid,” “void,” or
“voidbale,” as the case may be. If your answer is “void”
explain your answer. In case of “voidable” answer,
specify what conditions must be present or complied
with to make the corporate act valid.
a. XL Food Corporation, which is engaged in the
fast-food business, entered into a contract with
its President, Jose Cruz, whereby the latter would
supply the corporation with its meat and poultry
requirements.
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196
b. The Board of Drectors of XL Foods Corporation
declared and paid cash dividends without
approval of the stockholders.
c. XL Foods Corporation guaranteed the loan of its
sister company XL Meat Products, Inc. (2002 Bar)
A:
a. Voidable – A contract of the corporation with one or
more of its directors or trustees or officers is
voidable, at the option of such corporation (Sec 32,
Corporation Code). Such contract can be ratified by
the vote of the stockholders representing at least
two-thirds of the outstanding capital stock in a
meeting called for the purpose: Provided, that full
disclosure of the adverse interest of the directors or
trustees involved is made at such meeting: Provided,
however, That the contract is fair and reasonable
under the circumstances.
b. Valid – Approval of the stockholders is not required
in declaring cash dividends
c. Void – This is an ultra vires act on part of XL Foods
Corporation, and is not one of the powers provided
for in Sec. 36 of the Corporation Code. It can be
ratified provided it is not illegal per se but merely
beyond the powers of the corporation by the
approval of the majority of the board and vote of the
stockholders representing at least two thirds of the
outstanding capital stock. Where the contract or act
is not illegal per se but merely beyond the power of
the corporation, the same is merely voidable and may
be enforced by performance, ratification, or
estoppels, or on equitable grounds (Republic v. Acoje
Mining Co., Inc.) especially if no creditors are
prejudiced thereby and no rights of the state or the
public are involved (Flecher, p.585).
POWERS, HOW EXERCISED
BY THE SHAREHOLDERS
The shareholders participate in controlling the affairs of
the corporation by exercising their right to vote. They can
elect the directors who will actually govern the
corporation and they can also vote on important matters
that are still reserved to them by the Corporation Code
(Aquino, 2006).
BY THE BOARD OF DIRECTORS
The Board of Directors is primarily responsible for the
governance of the corporation. Their primary duty is to
set the policies for the accomplishment of the corporate
objectives (Revised Code of Corporate Governance, Art. 3).
They elect the officers who carry out the policies that they
have established.
The general rule is that a corporation, through its Board
of Directors, should act in a manner and within the
formalities, if any, prescribed by its charter or by the
general law. Directors must act as a body in a meeting
called for the pursuant to the law or the corporation’s by
laws, otherwise, any action taken therein may be
questioned by any objecting director or shareholder; but
an action of the Board of Directors during a meeting,
which was illegal for lack of notice, may be ratified
 CORPORATION CODE
expressly, by the action of directors in a subsequent legal
meeting, or impliedly, by the corporation’s subsequent
course of conduct (Lopez Realty, Inc., and Asuncion Lopez
Gonzales v. Fontecha, et al., GR No. 76801, August 11, 1995).
Q: Sheryl Oabel was initially hired by Maranaw Hotel
as an extra beverage attendant. Oabel worked in
Century Park Hotel, an establishment owned by the
Maranaw Hotels. The latter contracted with Manila
Resource Development Corporation
(MANRED). Subsequently, Oabel was transferred to
MANRED, with the latter deporting itself as her
employer. After sometime, Oabel filed before the
Labor Arbiter a petition for regularization of
employment against the Maranaw Hotels. However,
Oabel was dismissed from employment. Oabel
converted her petition for regularization into a
complaint for illegal dismissal. The NLRC found that
Oabel was illegally dismissed. Maranaw Hotels
subsequently appealed before the CA. The CA
dismissed the petition on account of the failure of the
Maranaw Hotels to append the board resolution
authorizing the counsel for Maranaw Hotels to file the
petition before the CA. Maranaw Hotels invokes
substantial justice as justification for a reversal of the
resolution of the CA. It contends that the filing of a
motion for reconsideration with the certificate of
non-forum shopping attached constitutes substantial
compliance with the requirement. Did the petition
before the CA comply with the procedural
requirements under the law and the rules?
A: No. Well-settled is the rule that the certificate of non-
forum shopping is a mandatory requirement. Substantial
compliance applies only with respect to the contents of
the certificate but not as to its presence in the pleading
wherein it is required. Furthermore, the lawyer acting for
the corporation must be specifically authorized to sign
pleadings for the corporation. Specific authorization, the
Court held, could only come in the form of a board
resolution issued by the Board of Directors that
specifically authorizes the counsel to institute the petition
and execute the certification, to make his actions binding
on his principal, i.e., the corporation. The SC has not
wavered in stressing the need for strict adherence to
procedural requirements. The rules of procedure exist to
ensure the orderly administration of justice. They are not
to be trifled with lightly (Maranaw Hotels and Resort
Corporation v. CA, et al., G.R. No. 149660, January 20, 2009).
Q: MLDC is the registered owner of a piece of land.
MLDC represented by its Chairman and President,
Ronaldo Salonga, and ECRM Enterprises, represented
by its proprietor, Mario P. Tablante, executed an
agreement whereby the former would lease to the
latter an area to be used as the staging area for the
Home and Garden Exhibition Fair. On the date of the
expiration of the Lease Agreement, Tablante assigned
all his rights and interests under the said agreement
to Rockland Co. under a Deed of Assignment of the
same date. MLDC eventually learned that Tablante
had executed a contract of lease with MC Home Depot,
Inc. over the same parcel of land. Thereafter, MC
Home Depot, Inc. constructed improvements on the
land and subdivided the area into fifty-nine (59)
197
commercial stalls, which it leased to various entities.
Upon the expiration of the lease, MLDC demanded
that Tablante, MC Home Depot, and Rockland vacate
the land. MLDC filed a case for unlawful detainer
against Tablante, MC Home Depot, and Rockland. The
MTC held that it has no jurisdiction over the case. The
RTC affirmed. The CA dismissed the petition on the
ground that the verification and certification against
non-forum shopping was signed by a certain Antonio
A. Merelos as General Manager of MLDC without
attaching therewith a Corporate Secretary’s
certificate or board resolution that he is authorized to
sign for and on behalf of the MLDC. Does the failure to
attach the verification and certification against forum
shopping in petition justify the dismissal of the case?
A: No. It must be borne in mind that Sec. 23, in relation to
Sec. 25 of the CC, clearly enunciates that all corporate
powers are exercised, all business conducted, and all
properties controlled by the board of directors. Thus, it is
clear that an individual corporate officer cannot solely
exercise any corporate power pertaining to the
corporation without authority from the board of
directors.
However, the Court has recognized the authority of some
corporate officers to sign the verification and certification
against forum shopping. In sum, the following officials or
employees of the company can sign the verification and
certification 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) Personnel Officer, and (5) an Employment
Specialist in a labor case. The rationale applied in the
foregoing cases is to justify the authority of corporate
officers or representatives of the corporation to sign the
verification or certificate against forum shopping, being in
a position to verify the truthfulness and correctness of the
allegations in the petition.
From the foregoing, it is thus clear that the failure to
attach the Secretary’s Certificate, attesting to General
Manager Antonio Merelos’s authority to sign the
Verification and Certification of Non-Forum Shopping,
should not be considered fatal to the filing of the petition.
Nonetheless, the requisite board resolution was
subsequently submitted to the CA, together with the
pertinent documents. Considering that Mid-Pasig
substantially complied with the rules, the dismissal of the
petition was, therefore, unwarranted (Mid-Pasig Land
Developmen tCorporation v. Mario Tablante, doing
business under the name and style ECRM Enterprises, G.R.
No. 162924, February 4, 2010).
BY THE OFFICERS
After the election of directors, the latter must formally
organize by electing the corporate officers (Sec. 25, CC).
The corporate officers are tasked to carry out the policies
laid down by the Board, the AOI and the by-laws.
Corporate officer’s position
1. An “office” that is created by the charter of the
corporation and
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
2. The officer is elected by the directors or stockholders
(Easycall Communications Phils., Inc. v. Edward King,
G.R. No.145901, December 15, 2005).
Positions of corporate officers to be filled up by the Directors
CORP. OFFICER MEMBERSHIP REQUIREMENT
1. Must be a director at the time he
assumes office
President
2. must be the stockholder on record of at
least 1 share of stock
May or may not be a director, unless
Secretary required by the by-laws
Treasurer May or may not be a director
Such other Qualifications may be provided for in the by-laws
officers as may be
provided in the
by-laws
Corporate officer vs. Corporate employee
CORPORATE OFFICER
Position is provided for in the by-laws or under the
Corporation Code.
RTC acting as a special commercial court has jurisdiction
over intra-corporate controversies.
Power to amend/repeal articles cannot be delegated by the
stockholders/ members to the board of directors/ trustees
A party in a suit against a corporation cannot compel
the latter’s officers to appear as witnesses without
first serving written interrogatories upon the latter,
as said officers are also considered as adverse parties
In a complaint for nullification of mortgage and
foreclosure with damages against the mortgagee-bank,
the plaintiff cannot compel the officers of the bank to
appear and testify as plaintiff’s initial witnesses unless
written interrogatories are first served upon the bank
officers. This is in line with the Rules of Court provision
that calling the adverse party to the witness stand is not
allowed unless written interrogatories are first served
upon the latter. This is because the officers of a
corporation are considered adverse parties as well in a
case against the corporation itself based on the principle
that corporations act only through their officers and duly
authorized agents (Spouses Afulugencia v. Metropolitan
Bank and Trust Co., G.R. No. 185145, February 5, 2014, in
Divina, 2014).
Q: Ricardo Coros was dismissed by Matling Industrial
and Commercial Corporation (Matling) as its Vice
President for Finance and Administration. Because of
this, Coros filed a complaint for illegal suspension and
illegal dismissal against Matling and some of its
corporate officers with the NLRC. Matling, et al.,
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
198
Limitations on the holding of a corporate officer’s
position
Any two or more positions may be held concurrently by
the same person, except that no one shall act as president
and secretary or as president and treasurer at the same
time (CC, Sec. 25).
CITIZENSHIP RESIDENCY
Need NOT be a Filipino Need NOT be a Philippine
Citizen Resident
Must be a Filipino Must be a Philippine
Citizen Resident
Need NOT be a Filipino Must be a Philippine
Citizen Resident
CORPORATE EMPLOYEE
Employed by the action of the managing officer of the
corporation.
Labor Arbiter has jurisdiction in case of labor disputes.
Power to amend or repeal by-laws or adopt new by-laws
may be delegated by the 2/3 of the outstanding capital
stock or 2/3 of the members in the case of non-stock
corporation
moved to dismiss the complaint, raising the ground,
among others, that the complaint pertained to the
jurisdiction of the SEC due to the controversy being
intra-corporate inasmuch as Coros was a member of
Matling’s Board of Directors aside from being its Vice-
President for Finance and Administration prior to his
termination. It further argues that the power to
create corporate offices and to appoint the
individuals to assume the offices was delegated by
Matling’s Board of Directors to its President through
its By-Laws; and that any office the President created,
like the position of the Coros, was as valid and
effective a creation as that made by the Board of
Directors, making the office a corporate office. Is
Coros a corporate officer of Matling?
A: No. Pursuant to Section 25 of the Corporation Code,
whoever are the corporate officers enumerated in the by-
laws are the exclusive officers of the corporation and the
Board has no power to create other offices without
amending first the corporate By-laws. However, the
Board may create appointive positions other than the
positions of corporate officers, but the persons occupying
such positions are not considered as corporate officers
within the meaning of Section 25 of the Corporation Code
and are not empowered to exercise the functions of the
corporate officers, except those functions lawfully
delegated to them. Their functions and duties are to be
 CORPORATION CODE
determined by the Board of Directors/Trustees.
Moreover, the Board of Directors of Matling could not
validly delegate the power to create a corporate office to
the President, in light of Section 25 of the Corporation
Code requiring the Board of Directors itself to elect the
corporate officers. Verily, the power to elect the corporate
officers is a discretionary power that the law exclusively
vested in the Board of Directors, and could not be
delegated to subordinate officers or agents. The office of
Vice President for Finance and Administration created by
Matling’s President pursuant to the By-Law was an
ordinary, not a corporate, office (Matling Industrial and
Commercial Corporation, et al., v. Ricardo R. Coros, G.R. No.
157802, October 10, 2010).
Q: Arevalo set up the company Broadcom with Cosare,
his former employee, as an incorporator. Cosare was
later promoted to the position of Assistant Vice-
President for Sales and Head of the Technical
Coordination. Abiog was appointed as Broadcom’s VP
for Sales and thus, became Cosare’s immediate
superior. Later, Cosare sent a confidential memo to
Arevalo to inform him of the anomalies which were
allegedly being committed by Abiog against the
company. Subsequently, Cosare was totally barred
from entering the company premises. Cosare
attempted to furnish the company with a memo by
which he addressed and denied the accusations cited
in Arevalo’s memo. Soon after, Cosare filed a labor
complaint, claiming that he was constructively
dismissed from employment by Boradcom and
Arevalo. The LA dismissed the complaint on the
ground of Cosare’s failure to establish that he was
dismissed, constructively or otherwise, from his
employment. The NLRC reversed the decision of the
LA. On appeal, the CA ruled that the case is an intra-
corporate controversy and is under the RTC’s
jurisdiction.
Is the CA correct?
A: No. The Court has determined that contrary to the
ruling of the CA, it is the LA, and not the regular courts,
which has the original jurisdiction over the subject
controversy. 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 relationships: (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 license 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 associates,
themselves. Settled jurisprudence, however, qualifies that
when the dispute involves a charge of illegal dismissal, the
action may fall under the jurisdiction of the LA’s upon
whose jurisdiction, as a rule, falls termination disputes
and claims for damages arising from employer-employee
relations as provided in Article 217 of the Labor Code.
Consistent with this jurisprudence, the mere fact that
Cosare was a stockholder and an officer of Broadcom at
the time the subject controversy developed failed to
necessarily make the case an intra-corporate dispute.
199
Applying the case of Matling Industrial and Commercial
Corporation v. Coros, GR No. 157802, October 13, 2010, to
the present case, the LA had the original jurisdiction 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).
AWARDS FOR DAMAGES IN
INTRA-CORPORATE CONTROVERSIES
As can be gleaned from the title of A.M. No. 01-2-04-SC,
the amendment of Section 4, Rule 1 of the Interim Rules
of Procedure Governing Intra-Corporate Controversies
was crafted precisely to clarify the previous rule that
decisions on intra-corporate disputes are immediately
executory, by specifically providing for an exception.
Thus, the prevailing rule now categorically provides that
awards for moral damages, exemplary damages, and
attorney’s fees in intra-corporate controversies are not
immediately executory (Heirs of Santiago Divinagracia, v.
Ruiz, G.R. No. 172508, Janaury 12, 2011).
TRUST FUND DOCTRINE
The subscribed capital stock of the corporation is a trust
fund for the payment of debts of the corporation which
the creditors have the right to look up to satisfy their
credits, and which the corporation may not dissipate. The
creditors may sue the stockholders directly for the latter’s
unpaid subscription. (2015 Bar)
Effects of the trust fund doctrine
1. Dividends must never impair the subscribed capital
stock and must only be declared out of URE’s.
2. Subscription commitments cannot be condoned or
remitted
3. GR: The corporation cannot buy its own shares using
the subscribed capital as the consideration therefore
(NTC v. Court of Appeals, G.R. No. 127937. July 28,
1999).
XPN: (RDC)
a. Redeemable shares may be acquired even
without surplus profit for as long as it will not
result to the insolvency of the Corporation
b. In cases that the corporation conveys its stocks
in payment of a Debt
c. In a Close corporation, a stockholder may
demand the payment of the fair value of shares
regardless of existence of retained earnings for
as long as it will not result to the insolvency of
the corporation
4. Rescission of a subscription agreement is not
allowed since it will effectively result in the
unauthorized distribution of the capital assets and
property of the corporation. (Ong v Tiu, ibid).
NOTE: Rescission of a subscription agreement is not one
of the instances when distribution of capital assets and
property of the corporation is allowed (ibid).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
When negotiations ensued in the light of a planned
takeover of a company and the counsel of the buyer
advised the stockholder through a letter that he may take
the machineries he brought to the corporation out with
him for his own use and sale, the previous stockholder
cannot recover said machineries and equipment because
these properties remained part of the capital property of
the corporation. Under the trust fund doctrine, the capital
stock, property, and other assets of a corporation are
regarded as equity in trust for the payment of corporate
creditors which are preferred over the stockholders in the
distribution of corporate assets (Ryuichi Yamamoto v.
Nishino Leather Industries, Inc., G.R. No. 150283, April 16,
2008).
Exceptions to the trust fund doctrine
The Code allows distribution of corporate capital only in
these instances:
1. Amendment of the AOI to reduce authorized capital
stock;
2. Purchase of redeemable shares by the corporation
regardless of existence of unrestricted retained
earnings;
3. Dissolution and eventual liquidation of the
corporation.
The trust fund doctrine covers not only capital stock
but also unpaid subscriptions, and other corporate
property and assets.
The creditor is allowed to maintain an action upon any
unpaid subscriptions (in the same collection suit against
the corporation) and thereby steps into the shoes of the
corporation for the satisfaction of the debt. To make out a
prima facie case in a suit against stockholders of an
insolvent corporation to compel them to contribute to the
payment of its debts by making good the balances upon
their subscriptions, it is only necessary to establish that
the stockholders have not in good faith paid the par value
of the stocks of the corporation. Subscriptions to the
capital stock of a corporation constitute a fund to which
creditors have the right to look for satisfaction of their
claims. The scope of the doctrine when the corporation is
insolvent encompasses not only the capital stock, but also
other property and assets generally regarded in equity as
a trust fund for the payment of corporate debts (Halley v.
Printwell, Inc., G.R. No. 157549, May 30, 2011, in Divina,
2014).
BOARD OF DIRECTORS AND TRUSTEES
DOCTRINE OF CENTRALIZED MANAGEMENT
The Doctrine of Centralized Management states that all
corporate powers are exercised by the BOD or BOT (CC,
Sec. 23). However, this doctrine is not applicable to the
following instances:
1. In case of delegation to the Executive Committee duly
authorized in the by-laws;
2. Authorization pursuant to a contracted manager
which may be an individual, a partnership, or
another corporation;
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
200
3. In case of close corporations, the stockholders may
manage the business of the corporation instead of a
board of directors, if the articles of incorporation so
provide.
Independent director
For this purpose, an “independent director” shall mean a
person other than an officer or employee of the
corporation, its parent or subsidiaries, or any other
individual having a relationship with the corporation,
which would interfere with the exercise of independent
judgment in carrying out the responsibilities of a director.
Cases where independent directors are required
At least two (2) independent directors are required in the
following companies:
1. Any corporation with a class of equity securities
listed for trading on an Exchange (Publicly traded
companies);
2. Banks;
3. Corporations with secondary franchise.
Required number of independent directors for the
corporations covered by the Revised Code of
Corporate Governance (RCCG)
At least 2, or such number of independent directors that
constitute 20% of the members of the board, whichever is
lesser, but in no case less than 2 (RCCG, Art. 3 [A]).
Q: May the composition of the board of directors of
the National Power Corporation be validly reduced to
three (3)? Explain you answer fully. (Bar 2008)
A: Yes. NPC is a government owned and controlled
corporation created by a special charter. Its charter
allows composition of its board of directors to be reduced.
The prohibition only applies to private corporations. As
clearly enunciated in Section 16, Article XII, 1987
Constitution: Congress shall not, except by general law,
provide for the formation, organization, or regulation of
private corporations. The general law creating private
corporations is governed by Batas Pambansa Blg. 68
otherwise known as the Corporation Code of the
Philippines where the number of directors or trustees
shall not be less than five (5) nor more than fifteen (15).
Since NPC is not governed by the Corporation Code, the
standard number of directors is not required.
BUSINESS JUDGMENT RULE
Business Judgment Rule
GR: Contracts intra vires entered into by the board of
directors are binding upon the corporation beyond the
interference of courts. The courts are barred from
intruding into business judgments of corporations, when
the same are made in good faith (Ong v Tiu, G.R. No.
144476. April 8, 2003).
XPNs: Courts can inquire unto contracts which are:
 CORPORATION CODE
1. Unconscionable and oppressive as to amount to
wanton destruction to the rights of the minority (Ong
v Tiu, ibid).
2. Bad faith or gross negligence by the directors
(Republic Communications Inc v CA, G.R. No. 135074,
January 29, 1999).
Consequences of Business Judgment Rule
1. Resolutions and transactions entered into by the
Board within the powers of the corporation cannot
be reversed by the courts not even on the behest of
the stockholders.
2. Directors and officers acting within such business
judgment cannot be held personally liable for such
acts.
3. If the cause of the losses is merely error in business
judgment, not amounting to bad faith or negligence,
directors and/or officers are not liable (Filipinas Port
Services v. Go, G.R. No. 161886, March 16, 2007).
4. The Board of Directors has the power to create
positions not provided for in the corporation's by-
laws since the board is the corporation’s governing
body, clearly upholding the power of its board to
exercise its prerogatives in managing the business
affairs of the corporation (Filipinas Port Services v. Go,
ibid).
5. Directors and officers who purport to act for the
corporation, keep within the lawful scope of their
authority and act in good faith, do not become liable,
whether civilly or otherwise, for the consequences of
their acts, which are properly attributed to the
corporation alone (Benguet Electric Cooperative, Inc.
v. NLRC,GR 89070, May 18, 1992).
6. The power to elect corporate officers was a
discretionary power that the law exclusively vested
in the Board of Directors and could not be delegated
to subordinate officers or agents (Matling Industrial
and Commercial Corporation, et al. v. Coros, G.R. No.
157802, October 13, 2010).
Q: PALI sought to offer its shares to the public in order
to raise funds for development of properties and pay
its loans with several banks. To facilitate the trading
of its shares, PALI applied for a listing in the
Philippine Stock Exchange Inc. (PSE), a non-profit
corporation. Subsequently, PSE received a letter from
the Heirs of Marcos, requesting PSE to defer PALI’s
registration, contending that certain properties of
PALI are owned by Marcos. Consequently, PSE
rejected PALI’s application. The SEC reversed the
ruling of the PSE. Is the SEC correct?
A: No. In applying the business judgment rule, the SEC and
the courts are barred from intruding into business
judgments of corporations, when the same are made in
good faith. The said rule precludes the reversal of the
decision of the PSE to deny PALI's listing application,
absent a showing of bad faith on the part of the PSE.
Under the listing rules of the PSE, to which PALI had
previously agreed to comply, the PSE retains the
discretion to accept or reject applications for listing (PSE
v. CA, G.R. No. 125469, October 27, 1997).
201
TENURE, QUALIFICATIONS AND
DISQUALIFICATIONS OF DIRECTORS OR TRUSTEES
Term of office of BOD/BOT
GR: The regular director shall hold office for 1 year.
XPN: If no election is held, the directors and officers will
continue to occupy position even after the lapse of 1 year
under a hold-over capacity until their successors are
elected and qualified.
NOTE: This is applicable to a going concern where there
is no break in the exercise of the duties of the officers and
directors (SEC Opinion, Dec. 15, 1989).
Term, Tenure, and Holdover Period
Term – it is the time during which the officer may claim
to hold the office as a matter of right, and fixes the interval
after which the several incumbents shall succeed one
another. The term of office is not affected by the holdover.
It is fixed by statute and does not change simply because
the office may have become vacant, nor because the
incumbent holds over in office beyond the end of the term
due to the fact that a successor has not been elected.
Tenure – represents the term during which the
incumbent actually holds office. The tenure may be
shorter (or, in case of holdover, longer) than the term for
reasons within or beyond the power of the incumbent.
Holdover Period – the time from the lapse of one year
from a member’s election to the Board and until his
successor’s election and qualification. It is not part of the
director’s original term of office, nor is it a new term; the
holdover period, however, constitutes part of his tenure
(Valle Verde Country Club v. Africa, G.R. No. 151969,
September 4, 2009).
Common qualifications of a director and trustee
1. Majority of the directors/trustees must be residents
of the Philippines (CC, Sec. 23);
2. He must not have been convicted by final judgment
of an offense punishable by imprisonment for period
exceeding 6 years or a violation of the Corporation
Code, committed within 5 years prior to the date of
his election (CC, Sec. 27);
3. He must be of legal age;
4. Other qualifications as may be prescribed in special
laws or regulations or in the by-laws of the
corporation;
A director cannot be elected without owning any
stock in the corporation
A person who does not own a stock at the time of his
election or appointment does not disqualify him as
director if he becomes a shareholder before assuming the
duties of his office (SEC Opinions, November 9, 1987 & April
5, 1990).
Both under the old and the new Corporation Codes, there
is no dispute as to the most immediate effect of a Voting
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Trust Agreement (VTA) on the status of a stockholder
who is a party to its execution - from legal titleholder or
owner of shares subject of the VTA, he becomes equitable
or beneficial owner. Any director who executes a VTA
over all his shares ceases to be a stockholder of record in
the books of the corporation and therefore ceases to be a
director (Lee v. Court of Appeals, G.R. No. 93695, February
4, 1992).
Q: Grace Christian High School is an educational
institution at the Grace Village in Quezon City. Grace
Village Association, Inc., on the other hand, is an
organization of lot and/or building owners, lessees
and residents at Grace Village. From 1975 up to 1990,
Grace Christian High School was given a permanent
seat in the board of directors of the association. After
some time, the association’s committee on election
informed James Tan, principal of the school, that all
directors should be elected by members of the
association. For this reason, Tan was told that the
proposal to make the Grace Christian High School
representative as a permanent director of the
association, although previously tolerated in the past
elections should be reexamined. Grace Christian High
School argues that it had acquired a vested right to a
permanent seat in the board of directors. Did Grace
Christian High School acquire vested right to a
permanent seat in the board of directors?
A: No. The board of directors of corporations must be
elected from among the stockholders or
members. Section 28 of the Old Corporation Code
provides that unless otherwise provided, the corporate
powers of all corporations formed under this Act shall be
exercised, all business conducted and all property of such
corporations controlled and held by a board of not less
than five nor more than eleven directors to be elected
from among the holders of stock or, where there is no
stock, from the members of the corporation. Section 29
also states that directors of the corporation shall be
elected annually by the stockholders if it be a stock
corporation or by the members if it be a non-stock
corporation, and if no provision is made in the by-laws for
the time of election the same shall be held on the first
Tuesday after the first Monday in January. Moreover, the
term of the board of directors or trustee is embodied in
Section 23 stating that a member of the board of director
should be elected from among the holders of stocks, or
where there is no stock, from among the members of the
corporation, who shall hold office for one (1) year and
until their successors are elected and qualified. Since the
provision in question is contrary to law, the fact that for
fifteen years it has not been questioned or challenged but,
on the contrary, appears to have been implemented by the
members of the association cannot forestall a later
challenge to its validity. Neither can it attain validity
through acquiescence because, if it is contrary to law, it is
beyond the power of the members of the association to
waive its invalidity (Grace Christian High School v. CA, et
al., G.R. No. 108905, October 23, 1997).
Additional qualifications provided by the Revised
Code of Corporate Governance
A director should have the following:
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
202
1. College education or equivalent academic degree
2. Practical understanding of the business of the
corporation
3. Membership in good standing in relevant industry,
business or professional organizations
4. Previous business experience (RCCG, Art. 3 [D])
Grounds for disqualification of a director
1. Conviction by final judgment of an offense
punishable by imprisonment exceeding 6 years;
2. Violation of the Corporation Code committed within
5 years prior to his election or appointment (CC, Sec.
27).
NOTE: Disqualification by reason of violation of the CC
does not require conviction for the reason that the
decision of the SEC is final and executory unless appealed
in CA and a TRO is obtained.
Q: John Gokongwei Jr., as stockholder of San Miguel
Corporation, filed with SEC a petition for declaration
of nullity of amended by-laws against the majority of
the members of the Board of Directors and San Miguel
Corporation. Gokongwei claimed that prior to the
questioned amendment, he had all the qualifications
to be a director of the corporation, being a substantial
stockholder thereof, Gokongwei had acquired rights
inherent in stock ownership, such as the rights to vote
and to be voted upon in the election of directors, and
that in amending the by-laws, Soriano, et. al.
purposely provided for Gokongwei's disqualification
and deprived him of his vested right as
aforementioned, hence the amended by-laws are null
and void. Is a provision on the by-laws disqualifying a
person for a position in the board of directors on the
ground that he is engaged in a business which
competes with that of the Corporation valid?
A: Yes. A corporation is authorized to prescribe the
qualifications of its directors. A provision in the by-laws
of the corporation that no person shall qualify or be
eligible for nomination for elections to the board of
directors if he is engaged in any business which compete
with that of the Corporation is valid; provided, however,
that before such nominee is disqualified, he should be
given due process to show that he is covered by the
disqualification. A director stands in fiduciary relation to
the corporation and its stockholders. The disqualification
of a competitor from being elected to the board of
directors is a reasonable exercise of corporate authority.
Sound principles of corporate management counsel
against sharing sensitive information with a director
whose fiduciary duty to loyalty may well require that he
discloses this information to a competitive rival (John
Gokongwei, Jr. v. SEC, et al., G.R. No. L-45911, April 11,
1979).
Q: The BOD of X Co., acting on a standing authority of
the stockholders to amend the by-laws, amended its
by-laws so as to disqualify any of its stockholders who
is also a stockholder and director of a competitor
from being elected to its BOD. Y, a stockholder holding
sufficient assets to assure him of a seat in the BOD,
 CORPORATION CODE
filed a petition with the SEC for a declaration of nullity
of the amended by-law. He alleged among other
things that as a stockholder, he had acquired rights
inherent in stock ownership such as the right to vote
and be voted upon in the election of directors. Is the
stockholder’s petition tenable?
A: No. In a similar case, Gokongwei v. SEC, it was held that
a corporation is authorized to prescribe the qualifications
of its directors. A provision in the by-laws of the
corporation that no person shall qualify or be eligible for
nomination for elections to the BOD if he is engaged in any
business which competes with that of the corporation is
valid, provided, however, that before such nominee is
disqualified, a director stands in a competition from being
elected to the board of directors is a reasonable exercise
of corporate authority. Sound principles of corporate
management counsel against sharing sensitive
information with a director whose fiduciary duty to
loyalty may well require that he discloses this information
to a competitive rival. In the case at bar, the petition of Y
is not tenable because he has no vested right to be elected
as a director. When a person buys stock in a corporation,
he does so with the knowledge that its affairs are
dominated by a majority of the stockholders. Such
amendment are made in the by-laws is valid.
Foreigners are not disqualified from being elected/
appointed as members of the BOD
While foreigners are disqualified from being elected/
appointed as corporate officers in wholly or partially
nationalized business activities, they are allowed
representation in the BOD or governing body of said
entities in proportion to their shareholding (Anti-Dummy
Law, Sec. 2-A; 1987Constitution, Art. XII, Sec. 11).
Reason: The BOD/ governing body performs specific
duties as a “body”. Unlike corporate officers, each member
of the BOD/ governing body has no individual power or
authority to perform management functions (De Leon,
supra).
Q: A Korean national joined a corporation which is
engaged in the furniture manufacturing business. He
was elected to the Board of Directors. To complement
its furniture manufacturing business, the corporation
also engaged in the logging business. With the
additional logging activity, can the Korean national
still be a member of the Board of Directors? Explain
(Bar 2005)
A: Yes. The Korean national can still be a member of the
Board of Directors as long as sixty percent (60%) of the
Board of Directors are Filipinos. Corporations that are
sixty percent (60%) owned by Filipinos can engage in the
business of exploration, development and utilization of
natural resources (1987 Constitution, Art. XII, Sec. 2). The
election of aliens as members of the Board of Directors
engaging in partially-nationalized activities is allowed in
proportion to their allowable participation or share in the
capital of such entities (Anti-Dummy Law, Sec. 2-A).
Nothing in the facts shows that more than forty percent
(40%) of the Board of Directors are foreigners.
203
ELECTIONS
Requirements for the election of directors in a stock
corporation
1. Stockholders, representing a majority of the
outstanding capital stock of the corporation must be
present, either in person or by a representative
authorized to act by written proxy;
2. The election must be by ballot, if requested by any
voting stockholder or member;
3. The total number of votes cast by him must not
exceed the number of shares owned by him as shown
in the books of the corporation multiplied by the
whole number of directors to be elected;
4. No delinquent stock shall vote or be voted for.
Limitations on the election of directors/ trustees
1. At a meeting of stockholders or members called for
the election of directors or trustees, there must be
present either in person or by representative
authorized to act by written proxy, the owners of the
majority of the outstanding capital stock or majority
of the members entitled to vote;
2. The election must be by ballot if requested;
3. A stockholder cannot be deprived in the articles of
incorporation or in the by-laws of his statutory right
to use any of the methods of voting in the election of
directors;
4. No delinquent stock shall be voted;
5. The candidates receiving the highest number of votes
shall be declared elected (CC, Sec. 24).
Permanent representation is not allowed in the BOD
The board of directors of corporations must be elected
from among the stockholders or members directors every
year. Estoppel does not set in to legitimize what is
wrongful (Grace Christian High School v. CA, G.R. No.
108905, October 23, 1997).
Jurisdiction over election contests in stock and non-
stock corporations
As amended by R.A. 8799 (The Securities Regulation
Code), the jurisdiction of the SEC under Sec. 5 P.D. No.
902‐A (SEC Reorganization Act) is now transferred to
Courts of General Jurisdiction (Regional Trial Court).
Thus, RTC now has jurisdiction over election contest.
Q: In case where there are 2 lists of BOD submitted to
SEC, which one is controlling?
A: It is the list of directors in the latest general
information sheet as filed with the SEC which is
controlling (Premium Marble Resources, Inc. v. CA, G.R. No.
96551, Nov. 4, 1996).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
CUMULATIVE VOTING/ STRAIGHT VOTING
Different methods of voting
1. Straight voting – every stockholder may vote such
number of shares for as many persons as there are
directors to be elected.
2. Cumulative voting for one candidate – a stockholder
is allowed to concentrate his votes and give one
candidate, as many votes as the number of directors
to be elected multiplied by the number of his shares
shall equal.
3. Cumulative voting by distribution – a stockholder may
cumulate his shares by multiplying the number of his
shares by the number of directors to be elected and
distribute the same among as many candidates as he
shall see fit.
NOTE: Cumulative voting in case of non-stock
corporations is allowed only if it is provided in the AOI.
The members of non-stock corporations may cast as many
votes as there are trustees to be elected but may cast not
more than one vote for one candidate.
QUORUM
Quorum required in a stock or non-stock corporation
Unless otherwise provided for in the by-laws, a quorum
shall consist of the stockholders representing a majority
of the outstanding capital stock entitled to vote or a
majority of the members in the case of non-stock
corporations (CC, Sec. 52).
When the stock and transfer book is inaccurate and
deficient, it cannot be the sole basis of the quorum.
The AOI may be used as the basis of the quorum.
To base the computation of quorum solely on the
obviously deficient, if not inaccurate stock and transfer
book, and completely disregarding the issued and
outstanding shares as indicated in the articles of
incorporation would work injustice to the owners and/or
successors in interest of the said shares. This case is one
instance where resort to documents other than the stock
and transfer books is necessary. The stock and transfer
book of PMMSI cannot be used as the sole basis for
determining the quorum as it does not reflect the totality
of shares which have been subscribed, more so when the
articles of incorporation show a significantly larger
amount of shares issued and outstanding as compared to
that listed in the stock and transfer book (Lanuza, et al. v.
CA, et al., G.R. No. 131394, March 28, 2005).
REMOVAL
Power to remove directors or trustees
The power to remove belongs to the stockholders
exclusively (Sec. 28, CC).
GR: Removal may be with or without cause
XPN: If the director was elected by the minority, there
must be cause for removal because the minority may not
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
204
be deprived of the right to representation to which they
may be entitled under Sec. 24 of the Code (Sec. 28, CC).
Requisites for removal of directors or trustees
1. It must take place either at a regular meeting or
special meeting of the stockholders or members
called for the purpose;
2. Previous notice to the stockholders or members of
the intention to remove a director;
3. A vote of the stockholders representing 2/3 of
outstanding capital stock or 2/3 of members.
Q: In 1999, Corporation A passed a board resolution
removing X from his position as manager of said
corporation. The by‐laws of A corporation provide
that the officers are the president, vice‐president,
treasurer and secretary. Upon complaint filed with
the SEC, it held that a manager could be removed by
mere resolution of the board of directors. On motion
for reconsideration, X alleged that he could only be
removed by the affirmative vote of the stockholders
representing 2/3 of the outstanding capital stock. Is
X's contention legally tenable. Why? (2001 Bar)
A: No. Stockholders' approval is necessary only for the
removal of the members of the Board. For the removal of
a corporate officer or employee, the vote of the Board of
Directors is sufficient for the purpose.
FILLING OF VACANCIES
Ways of filling up the vacancies in the board
1. Vacancies to be filled up by stockholders or
members: (ERORI)
a. Expiration of term;
b. Removal;
c. Grounds Other than removal or expiration of
term, where the remaining directors do not
constitute a quorum for the purpose of filling the
vacancy;
d. If the vacancy may be filled by the remaining
directors or trustees but the board Refers the
matter to stockholders or members; or
e. Increase in the number of directors results to
vacancy.
2. Vacancies filled up by members of the board -If still
constituting a quorum, at least a majority of the
members are empowered to fill any vacancy
occurring in the board other than by removal by the
stockholders or members or by expiration of term
(CC, Sec. 29).
NOTE: The phrase “may be filled” in Sec. 29 indicates that
the filling of vacancies in the board by the remaining
directors constituting a quorum is merely permissive.
Corporations may choose how vacancies in their boards
may be filled up, either by the remaining directors or
trustees constituting a quorum or by all stockholders or
members.
However, if the by-laws prescribe the specific mode of
filling up existing vacancies, the provisions of the by-laws
should be followed (De Leon, supra).
 CORPORATION CODE
Q: In June 2012, two (2) of Greenville Corporation's
Duration of the term of a replacement director directors- Director A and Director B -resigned from
the board. Relying on Section 29 of the Corporation
A director elected to fill vacancy shall serve the unexpired Code, the remaining six (6) directors elected two (2)
term of the director he replaced (CC, Sec. 29). new directors to fill in the vacancy caused by the
resignation of Directors A and B.
Filling-up a vacancy caused by resignation of a
director in a hold-over position Stockholder X questioned the election of the new
directors, initially, through a letter-complaint
addressed to the board, and later (when his letter-
The vacancy caused by resignation of a director in a hold-
complaint went unheeded), through a derivative suit
over position can only be filled up by the stockholders or
filed with the court. He claimed that the vacancy in the
members, for the cause of vacancy is not resignation but
board should be filled up by the vote of the
by expiration of term because the hold-over period is not
stockholders of Greenville Corporation. Greenville
a part of the director’s original term of office, nor is it a
Corporation's directors defended the legality of their
new term (De Leon, supra).
action, claiming as well that Stockholder X's
derivative suit was improper. Rule on the issues
Q: During the Annual Stockholders’ Meeting of Valle
raised. (2013 Bar)
Verde Country Club, Inc. (VVCC), Jaime Dinglasan and
Eduardo Makalintal were elected as new members of
A: The remaining directors cannot elect new directors to
the board of directors. In the succeeding years
fill in the two vacancies. The board of directors may fill up
however, the requisite quorum for the holding of the
stockholders’ meeting could not be vacancy only if the ground is not due to expiration of term,
removal or increase in the number of board seats. In this
obtained. Consequently, Dinglasan and Makalintal
case, the term of the two directors expired after one year.
continued to serve in the VVCC Board in a hold-over
They remained in office in a hold-over period is not part
capacity. Subsequently, Dinglasan resigned from his
of their term. The vacancies should be filled up by election
position as member of the VVCC Board. In a meeting,
by the stockholders (Valle Verde Country Club, Inc. v.
the remaining directors, still constituting a quorum of
Africa, G.R. No. 151969, September 4, 2009).
VVCC’s nine-member board, elected Eric Roxas to fill
in the vacancy created by the resignation of
The derivative suit was improper. In a derivative suit, the
Dinglasan. A year later, Makalintal also resigned as
corporation, not the individual stockholder, must be the
member of the VVCC Board. He was replaced by Jose
aggrieved party and that the stockholder is suing on
Ramirez, who was elected by the remaining members
behalf of the corporation. What stockholder X is asserting
of the VVCC Board. Victor Africa, a member of VVCC,
is his individual right as a stockholder to elect the two
questioned the election of Roxas and Ramirez as
directors. The case partake more of an election contest
members of the VVCC Board with the SEC and the RTC.
May the remaining directors of the corporation’s under the rules on intra-corporate controversy (Legaspi
Towers 300, Inc. v. Muer, G.R. No. 170783, June 18, 2012).
Board, still constituting a quorum, elect another
director to fill in a vacancy caused by the resignation
COMPENSATION
of a hold-over director?
Compensation of directors
A: No. The remaining directors of the corporation’s Board,
even if still constituting a quorum, cannot elect another
GR: Directors, in their capacity as such, are not entitled to
director to fill in a vacancy caused by the resignation of a
receive any compensation except for reasonable per
hold-over director. Section 23 of the CC means that
diems.
the term of the members of the board of directors shall be
only for one year; their term expires one year after
XPNs:
election to the office. The holdover period – that time
1. When their compensation is fixed in the by-laws.
from the lapse of one year from a member’s election to the
2. When granted by the vote of stockholders
Board and until his successor’s election and qualification
– is not part of the director’s original term of office, nor is representing at least a majority of the outstanding
capital stock at a regular or special meeting.
it a new term; the holdover period, however, constitutes
3. If they perform services other than as directors of the
part of his tenure. Corollary, when an incumbent member
corporation (i.e. where directors are also corporate
of the board of directors continues to serve in a holdover
officers or employees of the corporation) (Sec. 30,
capacity, it implies that the office has a fixed term, which
CC).
has expired, and the incumbent is holding the succeeding
term. With the expiration of Makalintal’s term of office, a
NOTE: Per diems are paid attendance in board meetings.
vacancy resulted which, by the terms of Section 29 of the
Other benefits and emoluments of directors fall within the
Corporation Code, must be filled by the stockholders of
term “compensation.”
VVCC in a regular or special meeting called for the
BOD is not prohibited from securing an insurance
purpose. His resignation as a hold-over director did not
policy for the life of its members and making the
change the nature of the vacancy; the vacancy due to the
directors the beneficiaries instead of the corporation
expiration of Makalintal’s term had been created long
before his resignation (Valle Verde Country Club, Inc., et al.,
The Insurance Code does not contain any prohibition as
v. Victor Africa, G.R. No. 151969, September 4, 2009).
to such. However, the premium paid thereon is analogous
to a continuing bonus and gift and thus falls within the
UNIVERSITY OF SANTO TOMAS
205 FACULTY OF CIVIL LAW
 MERCANTILE LAW
context of additional compensation. A corporation may
not be used by its officers or stockholders as a means of
diverting profits or proceeds to the payment of premium
on insurance policies to the enrichment of its
beneficiaries at the expense of, or to the detriment of, its
creditors (SEC Opinion, December 8, 1987).
Limitation on the amount of compensation to be
received by the directors
In no case shall the total yearly compensation of directors,
as such directors exceed 10% of the net income before
income tax of the corporation during the preceding year
(CC, Sec. 30).
Remedy of the stockholders if there was no proper
authorization for the grant of compensation to the
directors
Compensation to the directors of a corporation without
proper authorization in the by-laws or by the vote of the
stockholders may be recovered in a stockholders’ suit (De
Leon, supra).
Q: Is the general rule that directors are not entitled to
compensation applicable to corporate officers, who
are not directors?
A: No. Such officers, not being directors and having no
control over the funds and property of the corporation,
even though they may be stockholders, do not occupy the
relation of trustees to the corporation (De Leon, supra,
citing Cheeney vs. Lafayette, BOR Co., 61 III. 570).
Q: Ricardo T. Salas, et al., are the majority and
controlling members of the Board of Trustees of
Western Institute of Technology, Inc. (WIT), a stock
corporation engaged in the operation of an
educational institution. According to Homero Villasis,
et al., the minority stockholders of WIT, a special
board meeting was held whereby the the Board of
Trustees passed resolution granting monthly
compensation to Salas, et al., as corporate officers.
Villasis, et al., filed an affidavit-complaint against
Salas, et al., for falsification of a public document and
estafa. After trial, Salas, et al., were acquitted. Villasis,
et al., would like to hold Salas, et al., civilly liable
despite their acquittal in the criminal cases. They
base their claim on the alleged illegal issuance by
Salas, et al., of the resolution ordering the
disbursement of corporate funds representing the
retroactive compensation in favor of the board
members of WIT. They maintain that this grant of
compensation is proscribed under Section 30 of the
Corporation Code. Is the resolution granting Salas, et
al., compensation for services rendered as officers of
WIT valid?
A: Yes. The resolution is valid. There is no argument that
directors or trustees, as the case may be, are not entitled
to salary or other compensation when they perform
nothing more than the usual and ordinary duties of their
office. This rule is founded upon a presumption that
directors /trustees render service gratuitously and that
the return upon their shares adequately furnishes the
UNIVERSITY OF SANTO TOMAS
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206
motives for service, without compensation. Under Section
30, there are only two (2) ways by which members of the
board can be granted compensation apart from
reasonable per diems: (1) when there is a provision in the
by-laws fixing their compensation; and (2) when the
stockholders representing a majority of the outstanding
capital stock at a regular or special stockholders’ meeting
agree to give it to them. This proscription, however,
against granting compensation to directors/trustees of a
corporation is not a sweeping rule. Section 30 states that
the directors shall not receive any compensation, as such
directors. The phrase “as such directors” is not without
significance for it delimits the scope of the prohibition to
compensation given to them for services performed
purely in their capacity as directors or trustees. The
unambiguous implication is that members of the board
may receive compensation, in addition to reasonable per
diems, when they render services to the corporation in a
capacity other than as directors/trustees. In the case at
bench, the resolution granted monthly compensation to
Salas, et al., not in their capacity as members of the board,
but rather as officers of the corporation, more particularly
as Chairman, Vice-Chairman, Treasurer and Secretary of
Western Institute of Technology (Western Institute of
Technology, Inc., v. Ricardo T. Salas, et al., G.R. No. 113032,
August 21, 1997).
FIDUCIARY DUTIES AND LIABILITY RULES
Nature of the obligation of the directors to the
corporation
The directors’ character is that of a fiduciary insofar as the
corporation and the stockholders as a body are
concerned. As agents entrusted with the management of
the corporation for the collective benefit of the
stockholders, they occupy a fiduciary relation, and in this
sense the relation is one of trust.
The ordinary trust relationship of directors of a
corporation and stockholders springs from the fact that
directors have the control and guidance of corporate
affairs and property and hence of the property interests
of the stockholders. Equity recognizes that stockholders
are the proprietors of the corporate interests and are
ultimately the only beneficiaries thereof (Gokongwei vs.
SEC, supra).
Majority Rule Doctrine in the dealings of directors
with stockholders
The majority rule states that a director has a fiduciary
duty with respect to the corporation as an entity, and not
to the stockholders as individuals. Consequently, he is
subject to the duty to disclose all material facts only to the
corporation and not to the stockholders (American T. Co.
v. California etc. Ins. Co., 15 Cal.2d 42, 1940).
Special Fact Doctrine
The special fact doctrine is an exception to the majority
rule doctrine. It states that where special circumstances
or facts are present which make it inequitable for the
director to withhold information from the stockholder,
 CORPORATION CODE
the duty to disclose arises, and concealment is fraud
(ibid).
Instances where the Special Fact Doctrine has been
applied
In foreign US jurisprudence, the special fact doctrine was
applied in the following cases:
1. Where a director actively participates in the
negotiations for a transfer of the corporate property
(Strong v. Repide, 213 U.S. 419, 29 S.Ct. 521, 53 L.Ed.
853).
2. Where a director undertakes to speak or become
active in inducing the sale, he must speak fully,
frankly, and honestly, and conceal nothing to the
disadvantage of the selling stockholder (Poole v.
Camden, 79 W. Va. 310).
3. Where a director personally seeks a stockholder for
the purpose of buying his shares without making
disclosure of material facts within his peculiar
knowledge and not within reach of the stockholders,
the transaction will be closely scrutinized and relief
may be granted in appropriate instances (Strong v.
Repide, Ibid).
Liability of the directors/ trustees or officers of a
corporation for their official acts
GR: The officers of a corporation are not personally liable
for their official acts.
XPNs: If it is shown that they exceeded their authority.
In the following instances, the directors/ trustees may be
held personally liable for damages:
1. When they willfully and knowingly vote for or assent
to patently unlawful acts of the corporation; or
2. When they are guilty of gross negligence or bad faith
in directing the affairs of the corporation;
NOTE: Bad faith or negligence is a question of fact.
Bad faith does not simply mean bad judgment or
negligence. It imparts a dishonest purpose or some
moral obliquity and conscious doing of wrong. It
means breach of a known duty through some motive
or interest or ill-will; it partakes of the nature of
fraud (Ford Phils., Inc., et al. vs. CA, GR 99039, Feb. 3,
1997).
3. When they acquire any personal or pecuniary
interest in conflict with their duty as such directors
or trustees (CC, Sec. 31);
4. When they consent to the issuance of watered stocks
or who, having knowledge thereof, does not
forthwith file with the corporate secretary his
written objection thereto (CC, Sec. 65);
5. When they are made, by a specific provision of law,
to personally answer for their corporate action (CC,
Sec. 144; PD 115, Sec.13; Uichico v. NLRC, G.R. No.
121434, June 2, 1997);
6. When they agree to hold themselves personally and
solidarily liable with the corporation (Tramat
Mercantile, Inc. vs. CA, G.R. No. 111008, November 7,
1994).
207
7. When the corporate fiction is used to defeat public
convenience, justify wrong, protect fraud, or defend
crime (Carag v. NLRC, GR No. 147590, April 2, 2007).
NOTE: When the officers of the corporation exceeded
their authority, their actions are not binding upon the
corporation unless ratified by the corporation or is
estopped from disclaiming them (Reyes v. RCPI Credit
Employees Union, G.R. No. 146535, August 18, 2006).
Q: BF Corporation, in a collection complaint filed
against Shangri-La and its Board of Directors, alleged
that Shangri-La induced BF Corporation to continue
with the construction of the buildings using its own
funds and credit despite Shangri-La’s default. It
claims that Shangri-La misrepresented that it had
funds to pay for its obligations with BF Corporation.
The latter eventually completed the construction of
the buildings. Shangri-La took possession of the same
while still owing BF Corporation an outstanding
balance. Shangri‐La’s BoD based their defense on the
separate personality given to juridical persons vis‐à -
vis their directors, officers, stockholders, and agents.
Since they did not sign the arbitration agreement in
any capacity, they cannot be forced to submit to the
jurisdiction of the Arbitration Tribunal in accordance
with the arbitration agreement. The Arbitral Tribunal
rendered a decision, finding that BF Corporation
failed to prove the existence of circumstances that
render Shangri-La and the other directors solidarily
liable. It ruled that Shangri-La’s Board of Directors is
not liable for the contractual obligations of Shangri-
La to BF Corporation.
Are Shangri-La’s directors liable for the contractual
obligations of Shangri-La to BF Corporation?
A: No. Indeed, as petitioners point out, their personalities
as directors of Shangri-La are separate and distinct from
Shangri-La. A corporation is an artificial entity created by
fiction of law. This means that while it is not a person,
naturally, the law gives it a distinct personality and treats
it as such. A corporation, in the legal sense, is an individual
with a personality that is distinct and separate from other
persons including its stockholders, officers, directors,
representatives, and other juridical entities. As a general
rule, therefore, a corporation’s representative who did
not personally bind himself or herself to an arbitration
agreement cannot be forced to participate in arbitration
proceedings made pursuant to an agreement entered into
by the corporation. He or she is generally not considered
a party to that agreement.
However, there are instances when the distinction
between personalities of directors, officers, and
representatives, and of the corporation, are disregarded.
The Court calls this piercing the veil of corporate fiction.
When there are allegations of bad faith or malice against
corporate directors or representatives, it becomes the
duty of courts or tribunals to determine if these persons
and the corporation should be treated as one (Lanuza, Jr.
v. BF Corporation, et. al., G.R. No. 174938, October 01,
2014).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Requisites before a Director or Officer of a corporation (Equitable Banking Corporation vs. NLRC, GR
Corporation can be held personally liable for No. 02467, June 13, 1997; Rolando DS Torres v. Rural Bank
corporate obligations: of San Juan, Inc., et al., GR No. 184520, March 13, 2013).

Before a director or officer of a corporation can be held Article 212(e) does not state that corporate officers are
personally liable for corporate obligations, however, the personally liable for the unpaid salaries or separation pay
following requisites must concur: of employees of the corporation. The liability of corporate
officers for corporate debts remains governed by Section
1. The complainant must allege in the complaint that
31 of the CC. A director is not personally liable for the
the director or officer assented to patently unlawful
debts of the corporation, which has a separate legal
acts of the corporation, or that the officer was guilty
personality of its own. A director is personally liable for
of gross negligence or bad faith; and
corporate debts only if he wilfully and knowingly votes for
2. The complainant must clearly and convincingly
or assents to patently unlawful acts of the corporation or
prove such unlawful acts, negligence or bad faith
he is guilty of gross negligence or bad faith in directing the
(Heirs of Fe Tan Uy vs. International Exchange Bank,
affairs of the corporation. However, to hold a director
G.R. No. 166282, G.R. No. 166283, February 13, 2013).
personally liable for debts of the corporation, and thus
The fact that the corporation ceased operations the
pierce the veil of corporate fiction, the bad faith or
day after the promulgation of the SC resolution
wrongdoing of the director must be established clearly
finding the corporation liable does not prove bad
and convincingly. Bad faith is never presumed. Moreover,
faith on the part of the incorporator of the
bad faith does not automatically arise just because a
corporation (Polymer Rubber Corporation v. Ang, G.R.
corporation fails to comply with the notice requirement
No. 185160, July 24, 2013, in Divina, 2014). of labor laws on company closure or dismissal of
employees. The failure to give notice is not an unlawful
Q: Rana and Burgos are the President and General
act because the law does not define such failure as
Manager of SKILLEX. The latter entered into a service
unlawful. Such failure to give notice is a violation of
contract with Robinsons Land Corporation. Halfway
procedural due process but does not amount to an
through the service contract, Skillex asked the
unlawful or criminal act. Patently unlawful acts are those
respondents-employees Seva, et al. to execute
declared unlawful by law which imposes penalties for
individual contracts which stipulated that their
commission of such unlawful acts. There must be a law
respective employments shall end at the last day of
declaring the act unlawful and penalizing the act (Carag v.
the year. Skillex and Robinsons no longer extended
NLRC, G.R. No. 147590, April 2, 2007, in Divina, 2014).
their contract of janitorial services. Consequently, the
Skillex dismissed Seva, et al. as they were project
Q: Jacob and Fernandez are STI officers, the former
employees whose duration of employment was
being the President and CEO and the latter as the
dependent on the former's service contract with
Senior VP. Ico was hired as Faculty Member by STI
Robinsons. Seva, et al. filed a complaint for illegal College Makati, Inc., a wholly-owned subsidiary of STI.
dismissal with the NLRC.
Ico was subsequently promoted as Dean of STI
College-Parañaque and, thereafter, as COO of STI-
Should Rana and Burgos be held solidarily liable with
Makati. However, after the merger between STI and
the corporation for respondents-employees’
STI College Makati (Inc.), Ico received a memorandum
monetary claims against the corporation?
cancelling her COO assignment, citing the
management’s decision to undertake an
A: No. In the present case, Seva, et al. failed to show the
"organizational restructuring" in line with the
existence of the first requisite. They did not specifically
merger, and further ordering Ico to turn over her
allege in their complaint that Rana and Burgos willfully
work to one Victoria Luz, who shall function as STI-
and knowingly assented to petitioner's patently unlawful
Makati’s School Administrator. Based on a report, it
act of forcing the respondents to sign the dubious
was recommended that an investigation committee
employment contracts in exchange for their salaries. The
be formed to investigate Ico for grave abuse of
respondents also failed to prove that Rana and Burgos had
authority, falsification, gross dishonesty, maligning
been guilty of gross negligence or bad faith in directing and causing intrigues, and other charges. The LA
the affairs of the corporation.
found Ico to have been illegally, constructively and in
bad faith, dismissed by STI, Jacob and Fernandez. On
To hold an officer personally liable for the debts of the
appeal, the NLRC reversed the ruling of the LA. CA
corporation, and thus pierce the veil of corporate fiction,
affirmed the ruling of the NLRC.
it is necessary to clearly and convincingly establish the
bad faith or wrongdoing of such officer, since bad faith is
Is Jacob solidarily liable with STI?
never presumed (FVR Skills and Services Exponents, Inc.
[SKILLEX], et. al. v. Seva, et. al., G.R. No. 200857, October 22,
A: No. The Court fails to discern any bad faith or
2014).
negligence on the part of respondent Jacob. The principal
character that figures prominently in this case is
Liability of a director for termination of employees
Fernandez; he alone relentlessly caused petitioner’s
hardships and suffering. He alone is guilty of persecuting
Without any evidence of bad faith or malice, directors may petitioner. His superior, Jacob, may have been, for the
not be held personally liable. Only when the termination
most part, clueless of what Fernandez was doing to
is done with malice or in bad faith on the part of the
petitioner. A corporation, as a juridical entity, may act
director may the director be held solidarily liable with the

UNIVERSITY OF SANTO TOMAS

2016 GOLDEN NOTES
208
 CORPORATION CODE
only through its directors, officers and employees.
Obligations incurred as a result of the directors’ and
officers’ acts as corporate agents, are not their personal
liability but the direct responsibility of the corporation
they represent. As a rule, they are only solidarily liable
with the corporation for the illegal termination of services
of employees if they acted with malice or bad faith (Girly
G. Ico v. STI, Inc., et. al, G.R. No. 185100, July 9, 2014).
Q: Pasawilan, et al. were all employed by Alert
Security as security guards and were assigned at the
DOST. Claiming that they were underpaid, Pasawilan,
et al. filed a complaint for money claims (and later on
for illegal dismissal) against Alert Security and its
president and general manager, Manuel D. Dasig, with
the Labor Arbiter. The LA ruled that Pasawilan, et al.
were illegally dismissed and held Alert and Dasig
solidarily laible. The NLRC dismissed the complaint
for illegal dismissal. The CA reinstated the LA decision
and held that Alert Security and Dasig are solidarily
liable for payment of the monetary awards in favor of
Pasawilan, et al.
Is the CA correct?
A: No. Basic is the rule that a corporation has a separate
and distinct personality apart from its directors, officers,
or owners. In exceptional cases, courts find it proper to
breach this corporate personality in order to make
directors, officers, or owners solidarily liable for the
companies’ acts. Section 31 of the Corporation
Code provides for the basis of the liability of directors,
trustees or officers. Article 212(e) of the Labor Code, by
itself, does not make a corporate officer personally liable
for the debts of the corporation. The governing law on
personal liability of directors for debts of the corporation
is still Section 31 of the Corporation Code. In the present
case, there is no evidence to indicate that Manuel D. Dasig,
as president and general manager of Alert Security, is
using the veil of corporate fiction to defeat public
convenience, justify wrong, protect fraud, or defend crime
(Alert Security and Investigation Agency, Inc., et al., Saidali
Pasawilan, G.R. No. 182397, September 14, 2011).
Liability of directors for the issuance of watered
stocks
Any director or officer of a corporation consenting to the
issuance of stocks for a consideration less than its par or
issued value or for a consideration in any form other than
cash, valued in excess of its fair value, or who, having
knowledge thereof, does not forthwith express his
objection in writing and file the same with the corporate
secretary, shall be solidarily, liable with the stockholder
concerned to the corporation and its creditors for the
difference between the fair value received at the time of
issuance of the stock and the par or issued value of the
same (CC, Sec. 65).
NOTE: The prohibition to issue “watered stock” refers
only to the original issue of stocks but not to a subsequent
transfer of such stocks by the corporation, for then it
would no longer be an “issue” but a sale thereof (Rochelle
Roofing Co v. Burley as cited in De Leon, Corporation Code
of the Philippines Annotated).
209
Liability of the director, trustee or officer who
attempts to acquire or acquires any interest adverse
to the corporation in respect of any matter which has
been reposed in him in confidence
When a director, trustee, or officer attempts to acquire or
acquires, in violation of his duty, any interest adverse to
the corporation in respect of any matter which has been
reposed in him in confidence, as to which equity imposes
a disability upon him to deal in his own behalf, he shall be
liable as a trustee for the corporation and must account
for the profits which otherwise would have accrued to the
corporation (CC, Sec. 31).
NOTE: Private or secret profits obtained must be
accounted for, even though the transaction on which they
are made is advantageous or is not harmful to the
corporation, or even though the director/ trustee or
officer acted without intent to injure the corporation.
Q: Is the above rule changed by the fact that the
agreement whereby the director/ trustee or officer is
to receive a secret profit is made prior to the time he
becomes as such director/ trustee or officer?
A: No. Even though the agreement to receive a secret
profit is made prior to the time the recipient becomes a
director/ trustee or officer, he is still liable under the
above rule (De Leon, supra).
Q: Is the above rule changed by the fact that the secret
profits were obtained from ultra vires transactions?
A: No. Notwithstanding the fact that the profits were
derived from transaction ultra vires, the director/ trustee
or officer is still liable (ibid).
Q: Hi Yielding Corporation filed a complaint against
five of its officers for violation of Section 31 of the
Corporation Code. The corporation claimed that he
said officers were guilty of advancing their personal
interests to the prejudice of the corporation, and that
they were grossly negligent in handling its affairs.
Aside from documents and contracts, the corporation
also submitted in evidence records of the officers’ U.S.
Dollar deposits in several banks overseas – Boston
Bank, Bank of Switzerland, and Bank of New York.
For their part, the officers filed a criminal complaint
against the directors of Hi Yielding Corporation for
violation of Republic Act No. 6426, otherwise known
as the Foreign Currency Deposit Act of the
Philippines. The officers alleged that their bank
deposits were illegally disclosed for want of court
order, and that such deposits were not even the
subject of the case against them.
Will the complaint filed against the directors of Hi
Yielding Corporation prosper? Explain.
A: No. Foreign Currency Deposits law applies to foreign
currency deposit accounts constituted in the Philippines
and not when constituted abroad. In this instance, the
foreign currency deposit was made abroad.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Doctrine of Corporate Opportunity
Where a director, by virtue of his office, acquires for
himself a business opportunity which should belong to
the corporation, thereby obtaining profits to the prejudice
of such corporation (CC, Sec. 34).
A director shall refund to the corporation all the profits he
realizes on a business opportunity which:
1. The corporation is financially able to undertake;
2. From its nature, is in line with corporations business
and is of practical advantage to it; and
3. The corporation has an interest or a reasonable
expectancy (ibid).
NOTE: The rule shall be applied notwithstanding the fact
that the director risked his own funds in the venture
(ibid).
However, if such act is ratified by a vote of the
stockholders representing at least 2/3 of the outstanding
capital stock, the director is excused from remitting the
profit realized (ibid).
Non-applicability of the Doctrine of Corporate
Opportunity
The doctrine is not applicable to the following instances:
1. When a director engages in a distinct enterprise of
the same general class of business as that which his
corporation is engaged in, so long as he acts in good
faith.
2. The opportunity is one which is not essential to the
corporation’s business, or employment of company’s
resources, or where the director or officer embracing
opportunity personally is not brought into direct
competition with the corporation.
3. When the property or business opportunity has
ceased to be a “corporate opportunity” and has
transformed into a “personal opportunity”. In such a
case the corporation is definitely no longer able to
avail itself of the opportunity, which may “arise from
financial insolvency”, or from legal restrictions, or
from any other factor which prevents it from acting
upon the opportunity for its own advantage (SEC
Opinion, March 4, 1982).
Q: Malyn, Schiera and Jaz are the directors of Patio
Investments, a close corporation formed to run the
Patio Cafe, an al fresco coffee shop in Makati City. In
2000, Patio Cafe began experiencing financial
reverses, consequently, some of the checks it issued
to its beverage distributors and employees bounced.
In October 2003, Schiera informed Malyn that she
found a location for a second cafe in Taguig City.
Malyn objected because of the dire financial condition
of the corporation.
Sometime in April 2004, Malyn learned about Fort
Patio Cafe located in Taguig City and that its
development was undertaken by a new corporation
known as Fort Patio, Inc., where both Schiera and Jaz
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
210
are directors. Malyn also found that Schiera and Jaz,
on behalf of Patio Investments, had obtained a loan of
P500, 000.00, from PBCom Bank, for the purpose of
opening Fort Patio Cafe. This loan was secured by the
assets of Patio Investments and personally
guaranteed by Schiera and Jaz.
Malyn then filed a corporate derivative action before
the Regional Trial Court of Makati City against Schiera
and Jaz, alleging that the two directors had breached
their fiduciary duties by misappropriating money and
assets of Patio Investments in the operation of Fort
Patio Cafe.
Did Schiera and Jaz violate the principle of corporate
opportunity? Explain. (2005 Bar)
A: Yes, Shciera and Jaz violated the Principle of Corporate
Opportunity, because they used Patio Investments to
obtain a loan, mortgaged its assets and used the proceeds
of the loan to acquire a coffee shop through a corporation
they formed. (CC, Sec. 34).
RESPONSIBILITY FOR CRIMES
Where a law requires a corporation to do a particular act,
failure of which on the part of the responsible officer to do
so constitutes an offense, the responsible officer is
criminally liable therefore. The reason is that a
corporation can act through its officers and agents and
where the business itself involves a violation of law all
who participate in it are liable. While the corporation may
be fined for such criminal offense if the law so provides,
only the responsible corporate officer can be imprisoned
(People vs. Tan Boon Kong, GR L-35262, March 15, 1930).
However, a director or officer can be held liable for a
criminal offense only when there is a specific provision of
law making a particular officer liable because being a
corporate officer by itself is not enough to hold him
criminally liable.
The Trust Receipts Law recognizes the impossibility of
imposing the penalty of imprisonment on a corporation.
Hence, if the entrustee is a corporation, the law makes the
officers or employees or other persons responsible for the
offense liable to suffer the penalty of imprisonment (Ong
v. the Court of Appeals, G.R. No. 119858, April 29, 2003).
Though the entrustee is a corporation, nevertheless, the
law specifically makes the officers, employees or other
persons responsible for the offense, without prejudice to
the civil liabilities of such corporation and or board of
directors, officers, or other officials or employees
responsible for the offense. The rationale is that such
officers or employees are vested with the authority and
responsibility to devise means necessary to ensure
compliance with the law and, if they fail to do so, are held
criminally accountable; thus, they have a responsible
share in the violations of the law (Ching v. the Secretary of
Justice, et al., G.R. No. 164317, February 6, 2006).
 CORPORATION CODE
INSIDE INFORMATION
Inside Information
Any material non-public information about the issuer of
the securities (corporation) or the security obtained by
being an insider, which includes:
(ID-ReGoL)
1. The Issuer;
2. A Director or officer (or any person performing
similar functions) of, or a person controlling the
issuer;
3. A person whose RElationship or former relationship
to the issuer gives or gave him access to material
information about the issuer or the security that is
not generally available to the public;
4. A GOvernment employee, director, or officer of an
exchange, clearing agency and/or self-regulatory
organization who has access to material information
about an issuer or a security that is not generally
available to the public; or
5. A person who Learns such information by a
communication from any forgoing insiders (SRC, Sec.
3.8).
CONTRACTS
BY SELF-DEALING DIRECTORS
WITH THE CORPORATION
Dealings of directors, trustees or officers with the
corporation
A contract of the corporation with one or more of its
directors or trustees or officers is voidable, at the option
of the corporation unless all the following conditions are
present:
1. That the presence of such director or trustee in the
board meeting in which the contract was approved
was not necessary to constitute a quorum for such
meeting;
2. That the vote of such director or trustee was not
necessary for the approval of the contract;
3. That the contract is fair and reasonable under the
circumstances; and
4. That in the case of an officer, the contract with the
officer has been previously authorized by the board
of directors (CC, Sec. 32, par. 1).
Contract entered with a director or trustee may be
ratified by the vote of stockholders
A contract of the corporation with one or more of its
directors or trustees or officers may be ratified by the vote
of the stockholders representing at least 2/3 of the
outstanding capital stock or 2/3 of the members in a
meeting called for the purpose. However, the following
should be concur:
1. Any of the first 2 conditions set forth in the 1st
paragraph of Sec. 32, CC is absent;
2. Contract is with a director or trustee;
211
NOTE: If the contract is with an officer of the
corporation, there must be a prior board resolution
authorizing the same.
3. Full disclosure of the adverse interest of the directors
or trustees involved is made at the stockholders’
meeting called for the purpose;
4. The contract is fair and reasonable under the
circumstances (CC, Sec. 32, par. 2).
NOTE: Hence, in all such instances, the element that the
contract is fair and reasonable cannot be dispensed with
for the transaction is to be valid and enforceable.
Q: Suppose that the by-laws of X Corporation, a mining
firm, provides that "The directors shall be relieved
from all liability for any contract entered into by the
corporation with any firm in which the directors may
be interested." Thus, director A acquired claims
which overlapped with X's claims and were necessary
for the development and operation of X's mining
properties. Is the by-law provision valid? Why? (2001
Bar)
A: No. It is in violation of Sec. 32 of the Corporation Code.
Q: What happens if director "A" is able to consummate
his mining claims over and above that of the
corporation's claims?(2001 Bar)
A: "A" should account to the corporation for the profits
which he realized from the transaction. He grabbed the
business opportunity from the corporation (CC, Sec. 34).
BETWEEN CORPORATIONS WITH
INTERLOCKING DIRECTORS
Contracts between corporations with interlocking
directors
A contract between two or more corporations having
interlocking directors shall not be invalidated on that
ground alone. Provided that:
1. Contract is not fraudulent;
2. Contract is fair and reasonable under the
circumstances; and
3. If the interest of the interlocking director in one
corporation or corporations is merely nominal (not
exceeding 20% of the outstanding capital stock), he
shall be subject to the provisions of Sec. 32 insofar as
the latter corporation or corporations are concerned
(CC, Sec. 33).
When a mortgagee bank foreclosed the mortgage on the
real and personal property of the debtor and thereafter
assigned the properties to a corporation it formed to
manage the foreclosed assets, the unpaid seller of the
debtor cannot complain that the assignment is invalid
simply because the mortgagee and the assignee have
interlocking directors. There is no bad faith on the part of
DBP by its creation of Nonoc Mining, Maricalum and
Island Cement as the creation of these three corporations
was necessary to manage and operate the assets acquired
in the foreclosure sale lest they deteriorate from non-use
and lose their value (DBP v. Court of Appeals, G.R. No.
126200, August 16, 2001).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
MANAGEMENT CONTRACTS
Management contract
A management contract is any contract whereby a
corporation undertakes to manage or operate all or
substantially all of the business of another corporation,
whether such contracts are called service contracts,
operating agreements or otherwise. A corporation under
management is bound by the acts of the managing
corporation and is estopped to deny its authority
(National Bank vs. Producers’ Warehouse Association, G.R.
No. L-16510, January 9, 1922).
EXECUTIVE COMMITTEE
An executive committee is a body created by the by-laws
and composed of not less than three members of the
board which, subject to the statutory limitations, has all
the authority of the board to the extent provided in the
board resolution or by-laws. The committee may act by a
majority vote of all of its members (CC, Sec. 35).
NOTE: An executive committee can only be created by
virtue of a provision in the by-laws and that in the absence
of such by-law provision, the board of directors cannot
simply create or appoint an executive committee to
perform some of its functions (SEC Opinion, Sept. 27,
1993).
In such a case where there was an unauthorized creation
of executive committee by the board, the principle of de
facto officers may be applied insofar as third persons are
concerned. However, insofar as the corporation is
concerned, the unauthorized act of appointment of an
executive committee may be subject to Sec. 144, which
provides for penalties in violation of the Code (ibid).
Non-members of the board may be appointed as
members of the executive committee
Non-members of the board may be appointed as members
of the executive committee provided that there are at
least 3 members of the board who are members of the
committee (SEC Opinion, Sept. 16, 1986). A person not a
director can be a member of the executive committee but
only in a recommendatory or advisory capacity.
A foreigner is allowed to be a member of the executive
committee
A foreigner can be allowed representation in the
executive committee since he can be allowed in the BOD.
An Executive Committee is a governing body which
functions as the board itself. Thus, membership therein
shall be governed by the same law/ rules applicable to the
BOD as provided in Sec. 35 (SEC Opinion, June 3, 1998).
Executive committees provided in the Revised Code
of Corporate Governance
1. Audit Committee
2. Nomination Committee
3. Compensation and Remuneration Committee
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
212
Limitations on the powers of the executive committee
The executive committee cannot act on the following:
1. Matters needing stockholder approval;
2. Filling up of board vacancies;
3. Amendment, repeal or adoption of by-laws;
4. Amendment or repeal of any resolution of the Board
which by its express terms is not amendable or
repealable;
5. Cash dividend declaration (CC, Sec. 35).
Quorum required of the executive committee
The quorum requirement for executive committee is the
same as that of the BOD.
Decisions of the executive committee are not subject
to appeal to the board
Decisions of the executive committee are not subject to
appeal to the board. However, if the resolution of the
Executive Committee is invalid, i.e. not one of the powers
conferred to it, it may be ratified by the board (SEC
Opinion, July 29, 1995).
Stockholdings exceeding 20% of the outstanding capital
stock shall be considered substantial for purposes of
interlocking directors (ibid).
Q: Pursuant to its By-Laws, Soei Corporation’s Board
of Directors created an Executive Committee to
manage the affairs of the corporation in between
board meetings. The Board of Directors appointed the
following members of the Executive Committee: the
President, Sarah L; the Vice-President, Jane L; and a
third member from the board, Juan Riles. On
December 1, 2013, the Executive Committee, with
Sarah L and Jane L present, met and decided on the
following matters:
1. Purchase of a delivery van for use in the
corporation’s retail business;
2. Declaration and approval of the 13th month
bonus;
3. Purchase of an office condominium unit at the
Fort; and
4. Declaration of P10.00 per share cash dividend.
Are the actions of the Executive Committee valid?
(2014 Bar)
A: All the actions taken by the Executive Committee in the
problem are not valid. The Executive Committee was not
properly created and, therefore, its acts are invalid. Sec.
35 of the Corporation Code requires that at least three
members of an Executive Committee be directors of the
corporation. In the problem, only Member Sarah L (who
is a director as she is the president) and Member Juan
Riles (who is clearly identified in the problem as a
director) are directors of Soei Corporation. Member Jane
L is not identified as a director. As the Executive
Committee in the problem was not properly created, it
could not act at all as the minimum quorum would be
 CORPORATION CODE
three. As stated earlier, the Executive Committee lacks
one qualified member (UPLC).
If the Executive Committee were properly organized and
a quorum was present, all the actions taken by the
Executive Committee in the problem, except the
declaration of P10.00 per share cash dividend, would
have been valid. The distribution of cash dividends to the
shareholders may not be delegated by the Board of
Directors to the Executive Committee pursuant to Sec. 35
of the CC.

MEETINGS

REGULAR OR SPECIAL

Meetings of BOD/BOT

REGULAR MEETING SPECIAL MEETING

WHEN: The date fixed in the by-laws; or WHEN: At any time deemed necessary or as may be
provided in the bylaws.
If there is no date in the by-laws – shall be held monthly.
NOTICE REQUIREMENT:
A. State the date, time and place of the meeting;
B. Be sent to every director or trustee
i. Within the period provided in the by- laws.
ii. In the absence of provision in the by-laws, at least 1 day prior to the scheduled meeting.

A director or trustee may waive this requirement, either expressly or impliedly.

VENUE:
A. Venue fixed by the by-laws; or
B. If venue is not provided by the by-laws, anywhere in or outside of the Philippines.

Meeting of Stockholders or Members

REGULAR MEETING SPECIAL MEETING

WHEN: Annually on a date fixed in the by-laws. WHEN: At any time deemed necessary or as may be
provided in the bylaws.
If not so fixed, on any date in April of every year as
determined by the BOD/ BOT
NOTICE REQUIREMENT:

Written notice shall be sent to all stockholders or members of record at least 2 weeks prior to the meeting, unless a different
period is required by the law.

Notice of any meeting may be waived , expressly or impliedly

VENUE: In the city or municipality where the principal office of the Corporation is located, and if practicable in the principal
office of the corporation.

Q: Lopez Realty, Inc. issued a Board Resolution
authorizing Arturo, a member of the Board of
Directors of the corporation, to negotiate with the
Tanjanco spouses for the sale of the ½ shares of Lopez
Realty Corporation. Because of this, Arturo and the
spouses executed a Deed of Sale for the shares for
Php3.6M. However, Asuncion, another Board of
Director of the said corporation, submitted a letter
requesting the Board to defer any transaction with
Tanjanco as she was not apprised and given notice of
the said transaction. Despite this, the execution of the
Deed of Absolute Sale between Arturo and spouses
Tanjanco proceeded. Asuncion then filed a complaint
for the Annulment of the Deed of Sale with a prayer
for a writ of preliminary injuction in the RTC.
Asuncion alleges that she was neither notified nor
apprised of the on-going sale of the shares of LRI. Is
Asuncion’s contention correct?
A: No. 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 corporation's
by-laws, otherwise, any action taken therein may be
questioned by any objecting director or shareholder.
However, the actions taken in such a meeting by the
directors or trustees may be ratified expressly or
impliedly. In the present case, the ratification was
expressed through the July 30, 1982 Board Resolution.
Asuncion claims that the July 30, 1982 Board Resolution
did not ratify the Board Resolution dated August 17, 1981
for lack of the required number of votes because Juanito
is not entitled to vote while Leo voted "no" to the
ratification of the sale even if the minutes stated
otherwise. The Court takes into account that majority of
the board of directors except for Asuncion, had already
approved of the sale to the spouses Tanjangco prior to this
meeting. As a consequence, the power to ratify the
previous resolutions and actions of the board of directors
in this case lies in the stockholders, not in the board of
directors. It would be absurd to require the board of

UNIVERSITY OF SANTO TOMAS

213 FACULTY OF CIVIL LAW
 MERCANTILE LAW
directors to ratify their own acts—acts which the same
directors already approved of beforehand. Hence, Juanito,
as the administrator of Teresita’s estate even though not
a director, is entitled to vote on behalf of Teresita’s estate
as the administrator thereof. (Lopez Realty, Inc. et. al. v.
Spouses Tanjangco, G.R. No. 154291, November 12, 2014).
Meeting held in the absence of some of the directors
and without any notice given to them is illegal
It is illegal, and the action at such meeting although by a
majority of the directors, is invalid unless:
1. Subsequently ratified or waived, expressly or
impliedly, by the absent directors or
2. Rights have been acquired by innocent third persons,
as against whom the corporation must be held
estopped to set up the failure to observe formalities
(De Leon, supra).
Directors or trustees cannot attend or vote by proxy
at board meetings
Directors or trustees cannot attend or vote by proxy at
board meetings (CC, Sec. 25). The members of the BOD are
required to exercise their judgment and discretion in
running the affairs of the corporation and they cannot be
substituted by others (SEC Opinion, May 27, 1970).
Requisites for a valid tele/videoconferencing
R.A. 8792, as implemented by SEC Memo. Circular No. 15,
Nov 30, 2001, provides that:
1. Directors must express their intent on
teleconferencing;
2. Proper identification of those attending;
3. The corporate secretary must safeguard the integrity
of the meeting by recording it. There is no violation
of the Anti-Wire Tapping Act (R.A. 4200) because all
the parties to the board meeting are aware that all
the communications are recorded.
NOTE: The basic types of teleconferencing are:
1. Video conferencing;
2. Computer conferencing;
3. Audio conferencing.
Contents of the notice, which should be sent to every
director in case of a tele/videoconferencing
The Corporate Secretary shall send out the notices of the
meeting to all directors in accordance with the manner of
giving notice as stated in the corporate by-laws.
The notice shall include the following:
1. Inquiry on whether the director will attend
physically or through tele/videoconferencing;
2. Contact number/s of the Secretary and office staff
whom the director may call to notify and state
whether he shall be physically present or attend
through tele/videoconferencing;
3. Agenda of the meeting;
4. All documents to be discussed in the meeting,
including attachments, shall be numbered and duly
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2016 GOLDEN NOTES
214
marked by the Secretary in such a way that all the
directors, physically or electronically present, can
easily follow, refer to the documents and participate
in the meeting (SEC Memo Circ. No. 15, Series of 2001).
If the director chooses tele/videoconferencing, he shall
give notice of at least five days prior to the scheduled
meeting to the Secretary. The latter shall be informed of
his contact number/s. In the same way, the Secretary shall
inform the director concerned of the contact number/s he
will call to join the meeting. The Secretary shall keep the
records of the details, and on the date of the scheduled
meeting, confirm and NOTE such details as part of the
minutes of the meeting (ibid). In the absence of an
arrangement, it is presumed that the director will
physically attend the Board meeting (ibid).
WHO PRESIDES
The president shall preside at all meetings of the directors
or trustees as well as of stockholders or members unless
the by-laws provide otherwise (CC, Sec. 54).
Q: Under the articles of incorporation of Manila
Industrial Corp., its principal place of business shall
be in Pasig, Metro Manila. The principal corporate
offices are at Ortigas Center, Pasig, Metro Manila,
while factory processing leather products is in
Manila. The corporation holds its annual
stockholders’ meeting at the Manila Hotel in Manila
and its BOD meeting at a hotel in Makati, Metro
Manila. The by-laws are silent as to the place of
meeting of the stockholders and directors.
a. Who shall preside at the meeting of the directors?
b. Can Ting, a stockholder, who did not attend the
stockholders’ annual meeting in Manila, question
the validity of the corporate resolutions passed
at such meeting?
c. Can the same stockholder question the validity of
the resolutions adopted by the BOD at the
meeting held in Makati? (1993 Bar)
A:
a. Section 54 of the Code provides that it is the
President who shall preside over the directors’
meeting, unless the by-laws provide otherwise.
However, in practice, it is the Chairman who presides
because the President only reports to the Chairman.
Only in the absence of a Chairman can a President
preside over directors’ meetings.
b. No. Section 51 provides that the annual stockholders’
meeting shall be held in the city or municipality
where the principal office is located. For this
purpose, the law also provides that Metro Manila is
considered a city or municipality. Since the principal
office or business of MIC is Pasig, Metro Manila, the
holding of the annual stockholders’ meeting in
Manila is proper.
c. No. Ting cannot question the validity of corporate
resolutions passed in the BOD meeting because
Section 53 of the Code does not require that the
meeting must be held within the city or municipality
where the principal office of the corporation is
 CORPORATION CODE
located. The directors’ meeting can be held anywhere
in or outside the Philippines.
QUORUM
Quorum in board meetings
GR: Majority of the number of directors or trustees.
XPN: If AOI or the by-laws provide for a greater number
(CC, Sec. 25).
The quorum is the same even if there is vacancy in the
board.
Rule as to the decision of the quorum
GR: Every decision of at least a majority of the directors
or trustees present at a meeting at which there is quorum
shall be valid as a corporate act (ibid).
XPNs:
1. The election of officers which shall require the vote
of a majority of all the members of the board (ibid).
2. No board approval is necessary where there is
custom, usage and practice in the corporation not
requiring prior board approval or where subsequent
approval is sufficient (Board of Liquidators v. Kalaw,
G.R. No. L‐18805, August 14, 1967).
Three out of five directors of the board of directors
present in a special meeting do not constitute a quorum
to validly transact business when its by-laws requires at
least four members to constitute a quorum. Under Section
25 of the CC, the articles of incorporation or by-laws may
fix a greater number than the majority of the number of
directors to constitute a quorum. Any number less than
the number provided in the articles or by-laws cannot
constitute a quorum; any act therein would not bind the
corporation; all that the attending directors could do is to
adjourn (Pena vs. CA, G.R. No. 91478, February 7, 1991, in
Divina, 2014).
RULE ON ABSTENTION
Effect of Abstention
No inference can be drawn in a vote of abstention. When
a director or trustee abstains, it cannot be said that he
intended to acquiesce in the action taken by those who
voted affirmatively. Neither, for that matter, can such
inference be drawn from the abstention that he was
abstaining because he was not then ready to make a
decision (Lopez v. Ercita, G.R. No. L-32991, June 29, 1972).
Instances when a director is required to abstain in
voting
Whenever a director believes he/she has a conflict of
interest, the director should abstain from voting on the
issue and make sure his/her abstention is noted in the
minutes (Robert's Rules, 10th ed.). The other reason a
director might abstain is that he/she believes there was
insufficient information for making a decision. Otherwise,
215
directors should cast votes on all issues put before them.
Failure to do so could be deemed a breach of their
fiduciary duties.
Example where a director needs to abstain
To avoid “Insider Trading”, Insiders are obligated to
abstain from trading the shares of his corporation. This
duty to abstain is based on two factors:
1. The existence of a relationship giving access, directly
or indirectly, to information intended to be available
only for a corporate purpose and not for the personal
benefit of anyone;
2. The inherent unfairness involved when a party takes
advantage of such information knowing it is
unavailable to those with whom he is dealing (SEC v.
Interport Resources Corporation, G.R. No. 135808,
October 6, 2008).
STOCKHOLDERS AND MEMBERS
A person becomes a shareholder the moment he:
1. Enters into a subscription contract with an existing
corporation (he is a stockholder upon acceptance of
the corporation of his offer to subscribe whether the
consideration is fully paid or not);
2. Purchase treasury shares from the corporation; or
3. Acquires shares from existing shareholders by sale
or any other contract, or acquires shares by
operation of law like succession (Sundiang Sr. &
Aquino, 2009).
RIGHTS OF A STOCKHOLDER AND MEMBER
1. Management Right:
a. To attend and vote in person or by proxy at a
stockholders’ meetings (CC, Secs. 50, 58);
b. To elect and remove directors (CC, Secs. 24, 28);
c. To approve certain corporate acts (CC, Sec. 58);
d. To adopt and amend or repeal the by-laws of
adopt new by-laws (CC, Secs. 46, 48);
e. To compel the calling of the meetings (CC, Sec.
50);
f. To enter into a voting trust agreement (CC, Sec.
59);
g. To have the corporation voluntarily dissolved
(CC, Secs. 118, 119).
2. Proprietary rights
a. To transfer stock in the corporate book (CC, Sec.
63);
b. To receive dividends when declared (CC, Sec.
43);
c. To the issuance of certificate of stock or other
evidence of stock ownership (CC, Sec. 64);
d. To participate in the distribution of corporate
assets upon dissolution (CC, Sec. 118, 119);
e. To pre-emption in the issue of shares (CC, Sec.
39).
3. Remedial rights
a. To inspect corporate books (CC, Sec. 74);
b. To recover stock unlawfully sold for delinquent
payment of subscription (CC, Sec. 69);
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
c. To be furnished with most recent financial
statements or reports of the corporation’s
operation (CC, Sec. 74, 75);
d. To bring suits (derivative suit, individual suit,
and representative suit);
e. To demand payment in the exercise of appraisal
right (CC, Secs. 41, 81).
DOCTRINE OF EQUALITY OF SHARES
Where the articles of incorporation do not provide for any
distinction of the shares of stock, all shares issued by the
corporation are presumed to be equal and enjoy the same
rights and privileges and are also subject to the same
liabilities (CC, Sec. 6).
PARTICIPATION IN MANAGEMENT
Under the CC, stockholders or members periodically elect
the board of directors or trustees, who are charged with
the management of the corporation. The board, in turn,
periodically elects officers to carry out management
functions on a day-to-day basis. As owners, though, the
stockholders or members have residual powers over
fundamental and major corporate changes.
While stockholders and members (in some instances) are
entitled to receive profits, the management and direction
of the corporation are lodged with their representatives
and agents -- the board of directors or trustees. In other
words, acts of management pertain to the board; and
those of ownership, to the stockholders or members. In
the latter case, the board cannot act alone, but must seek
approval of the stockholders or members (Tan v. Sycip,
G.R. No. 153468, August 17, 2006).
PROXY
The term “proxy” designates the formal written authority
given by the owner or holder of the stock, who has a right
to vote it, or by a member, as principal, to another person,
as agent, to exercise the voting rights of the former.
It is also used to apply to the holder of the authority or
person authorized by an absent stockholder or member
to vote for him at a stockholders’ or members’ meeting.
It also refers to the instrument which evidences the
authority of the agent (De Leon, supra).
NOTE: A proxy is a special form of agency. A proxy holder
is an agent and as such a fiduciary (De Leon, supra). Since
a proxy acts for another, he may act as such although he
himself is disqualified to vote his shares. A proxy-
stockholder disqualified to vote because his stock has
been declared delinquent may vote the stocks of his
principal which is not delinquent.
Purposes of proxies
The purposes and use of proxies are as follows:
1. Assures the presence of a quorum in meetings of
stockholders of large corporations;
2. Enables those who do not wish to attend a
stockholders’/ members’ meeting to protect their
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
216
interest by exercising their right to vote through a
representative; and
3. One of the devices in securing voting control or
management control in the corporation (ibid.).
Who may be a proxy
Any person whom the stockholder or member sees fit to
represent him.
NOTE: By-laws restricting the stockholder’s or member’s
right in this respect are void (De Leon, supra). Further,
same person may act as proxy for one or several
stockholders or members.
Duration of proxy
1. Specific proxy – authority granted to the proxy holder
to vote only for a particular meeting on a specific
date.
2. Continuing proxy – grants authority to a proxy to
appear and vote for and in behalf of a shareholder for
a continuing period which should not be more than 5
years at any one time. By-laws may provide for a
shorter duration of a continuing proxy.
Extent of authority of a proxy
1. General proxy – A general discretionary power to
attend and vote at an annual meeting, with all the
powers the undersigned would possess if personally
present, to vote for directors and all ordinary matters
that may properly come before a regular meeting.
NOTE: A holder of a general proxy has no authority
to vote for a fundamental change in the corporate
charter or other unusual transactions such as merger
or consolidation.
2. Limited proxy – Restrict the authority to vote to
specified matters only and may direct the manner in
which the vote shall be cast (ibid.)
Requirements of a valid proxy
1. Proxies shall be in writing and shall be signed by the
stockholder or member concerned. Oral proxies are
NOT valid.
2. The proxy shall be filed before the scheduled meeting
with the corporate secretary;
3. Unless otherwise provided (continuing in nature) in
the proxy, it shall be valid only for the meeting for
which it is intended; and
The authority may be general or limited.
4. No proxy shall be valid and effective for a period
longer than 5 years at any one time (CC, Sec. 58, as
amended by SRC, Sec. 20).
Instances when the right to vote by proxy may be
exercised
1. Election of the BOD/BOT (CC, Sec. 24);
 CORPORATION CODE
When proxies are solicited in relation to the election
of corporate directors, the resulting controversy,
even if it ostensibly raised the violation of the SEC
rules on proxy solicitation, should be properly seen
as an election controversy within the original and
exclusive jurisdiction of the trial courts by virtue of
Section 5.2 of the SRC in relation to Section 5(c) of
Presidential Decree No. 902-A. From the language of
Section 5(c) of Presidential Decree No. 902-A, it is
indubitable that controversies as to the qualification
of voting shares, or the validity of votes cast in favor
of a candidate for election to the board of directors
are properly cognizable and adjudicable by the
regular courts exercising original and exclusive
jurisdiction over election cases (GSIS v. Court of
Appeals, G.R. No. 183905, April 6, 2009).
2. Voting in case of joint ownership of stock (CC, Sec.
56);
3. Voting by trustee under VTA (CC, Sec. 59, last par.);
4. Voting by members in non-stock corps (CC, Sec. 89,
par. 2)
In non-stock corporations the right to vote by proxy,
or even the right to vote may be denied to members
in the articles of incorporation or the by-laws as long
as the denial is not discriminatory.
5. In considering other matters:
a. Pledge or mortgage of shares (CC, par. 2, Sec. 55).
b. In all other matters as may be provided in the
by-laws (CC, Sec. 47[4]).
c. In all meetings of stockholders or members (CC,
Sec. 58).
Power to appoint a proxy is a personal right
The right to vote is inseparable from the right of
ownership of stock. The appointment of proxy is,
therefore, purely personal and to be valid, a proxy to vote
stock must have been given by the person who is the legal
owner of the stock entitled to vote the same at the time it
is be voted (SEC Opinion, Dec. 3, 1993, citing 5 Fletcher, Sec.
2053).
Unless the stockholder or member who executed a proxy
gives his consent in writing, a designated proxy may not
further re-designate another under the same proxy. An
alternate proxy can only act as proxy in case of non-
attendance of the other designated proxy (De Leon, supra).
Revocation of proxy
A proxy may be revoked in writing, orally or by conduct.
GR: One who has given a proxy the right to vote may
revoke the same at anytime.
XPN: Said proxy is coupled with interest, even if it may
appear by its terms to be revocable (De Leon, supra)
Last proxy given revokes all previous proxies. (SEC
Opinion, October 14, 1991).
217
SEC may pass upon the validity of the issuance and use
of proxies
PD 902-A empowers the SEC, among others, “to pass upon
the validity of the issuance and use of proxies and voting
trust agreements for absent stockholders or members”
(Sec. 6[g]).
VOTING TRUST
Voting trust agreement
A voting trust agreement (VTA) is an agreement whereby
one or more stockholders transfer their shares of stocks
to a trustee, who thereby acquires for a period of time the
voting rights (and/or any other specific rights) over such
shares; and in return, trust certificates are given to the
stockholder/s, which are transferable like stock
certificates, subject, to the trust agreement.
Principal purpose: acquire control of the corporation.
Other purposes of a VTA
1. VTA makes possible a unified control of the affairs of
the corporation and a consistent policy by binding
stockholders to vote as a unit;
2. To assure continuity of policy and management
especially of a new corporation desirous of attracting
investors;
3. To enable the owners of the majority of the stock of
the corporation to control the corporation;
4. To vest and retain the management of the
corporation in the persons originally promoting it;
5. To prevent a rival concern from acquiring control of
the corporation;
6. To carry out a proposed sale of the corporation’s
assets and to facilitate its dissolution;
7. To enable two holding companies to operate jointly a
corporation controlled by them;
8. To effect a plan for reorganization of a corporation in
financial difficulty or in bankruptcy proceedings; and
9. To aid a financially embarrassed corporation to
obtain a loan and protect its creditors (De Leon,
supra).
Procedural requirements and limitations imposed on
VTA’s
1. The agreement must be in writing and notarized and
specify the terms and conditions thereof.
2. A certified copy of such agreement shall be filed with
the corporation and with the SEC, otherwise, it is
ineffective and unenforceable.
3. The certificate/s of stock covered by the VTA shall be
cancelled.
4. A new certificate shall be issued in the name of the
trustee/s stating that they are issued pursuant to the
VTA.
5. The transfer shall be noted in the books of the
corporation, that it is made pursuant to said VTA.
6. The trustee/s shall execute and deliver to the
transferors voting trust certificates, which shall be
transferable in the same manner and with the same
effect as certificates of stock.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
7. No VTA shall be entered into for a period exceeding
5 years at any one time (i.e., for every voting trust)
except in the case of a voting trust specifically
requiring a longer period as a condition in a loan
agreement, in which case, the period may exceed 5
years but shall automatically expire upon full
payment of the loan.
8. No VTA shall be entered into for the purpose of
circumventing the law against monopolies and illegal
combinations in restraint of trade.
9. The agreement must not be used for purposes of
fraud (CC, Sec. 59).
Unless expressly renewed, all rights granted in a voting
trust agreement shall automatically expire at the end of
the agreed period, and the voting trust certificates as well
as the certificates of stock in the name of the trustee or
Voting trust agreement vs. Proxy
VOTING TRUST
If validly executed, VTA is intended to be irrevocable for a
definite and limited period of time.
Trustee acquires legal title to the shares of the transferring
stockholder
Right to vote as well as other rights may be given except the
right to receive dividends. The trustee may vote in person or
by proxy unless the agreement provides otherwise
The agreement must be notarized
Trustee is not limited to act at any particular meeting
The stock certificate shall be cancelled and a new one in the
name of the trustee shall be issued stating that they are
issued pursuant to a VTA.
A trustee can vote and exercise all the rights of the
stockholder even when the latter is present.
An agreement must not exceed 5 years at any one time
except when the same is made a condition of a loan.
Governed by the law on trust
A trustee has the right to inspect corporate books.
Pooling agreement
This is an agreement, also known as voting agreement,
entered into by and between 2 or more stockholders to
make their shares as one unit (ex: Shareholders A,B,C,D,E,
hold 50% of the outstanding capital stock, entered into a
pooling agreement to vote for F as a member of the board
of director). This usually relates to election of directors
where parties often provide for arbitration in case of
disagreement. This does not involve a transfer of stocks
but is merely a private agreement (CC, Sec. 100).
Pooling or voting agreements are agreements by which
two or more stockholders agree that their shares shall be
voted as a unit. They are usually concerned with the
election of directors to gain control of the management.
The parties remain the legal owners of their stocks with
the right to vote them (De Leon)
Validity of pooling agreements
Pooling agreements are valid as long as they do not limit
the discretion of the BOD in the management of corporate
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218
trustees shall thereby be deemed cancelled and new
certificates of stock shall be reissued in the name of the
transferors (CC, Sec. 59).
In case of voting trust required as a condition in a loan
agreement, it shall continue until full payment of the loan.
Effect of a voting trust agreement with respect to the
rights of the trustor and the trustee
It is the trustee of the shares who acquires legal title to the
shares under the voting trust agreement and thus entitled
to the right to vote and the right to be elected in the board
of directors while the trustor-stockholder has the
beneficial title which includes the right to receive
dividends (Lee v. CA, G.R. No. 93695, February 4, 1992).
PROXY
A proxy, unless coupled with interest, is revocable at anytime.
Proxy has no legal title to the shares of the principal
Only right to vote is given. The proxy must vote in person.
Proxy need not be notarized
Proxy can only act at a specified stockholder’s meeting (if not
continuing)
No cancellation of the certificate shall be made
A proxy can only vote in the absence of the owner of the stocks
A proxy is usually of shorter duration although under Sec. 58 it
cannot exceed 5 years at any one time
Governed by the law on agency
A proxy does not have a right of inspection of corporate books.
affairs or work any fraud against stockholders not party
to the contract.
Test: the validity and legality of such pooling agreements
depend upon the objects sought to be attained and the
acts which are done under them, and the other
circumstances. There is some authority for holding
pooling agreements to be invalid if the consideration for
entering into the same gives a private benefit to the
stockholder.
Pooling agreement v. Voting Trust Agreement
In Pooling Agreement, the stockholders themselves
exercise their right to vote. On the other hand, the trustees
are the ones who exercise the right to vote under the
Voting Trust Agreement.
Q: A distressed corporation executed a VTA for a
period of three years over 60% of its outstanding paid
up shares in favor of a bank to which it was indebted,
with the Bank named as trustee. Additionally, the
Company mortgaged all its properties to the Bank.
Because of the insolvency of the Company, the Bank
 CORPORATION CODE
foreclosed the mortgaged properties, and as the
highest bidder, acquired said properties and assets of
the Company.
The three-year period prescribed in the Voting Trust
Agreement having expired, the company demanded
the turn-over and transfer of all its assets and
properties, including the management and operation
of the Company, claiming that under the Voting Trust
Agreement, the Bank was constituted as trustee of the
management and operations of the Company. (1992
Bar)
A: The company’s demand does not tally with the concept
of a VTA because such agreement merely conveys to the
trustee the right to vote the shares of the grantor. The
consequence of the foreclosure of the mortgaged
properties would not be in consonance with the VTA and
its effects.

CASES WHEN STOCKHOLDERS’ ACTION IS REQUIRED

Corporate powers exercised jointly by the BOD and stockholders (I.4PA.2G.E2-SMAV)

CORPORATE ACT
Amendments, repeal, or
adoption of new by-laws
Entering into management
contract
BOARD OF DIRECTORS
Majority vote of the BOD
Majority of the quorum of the
BOD
VOTE REQUIREMENT
STOCKHOLDERS
GR: Majority vote of the outstanding capital stock
XPN: If delegated by the stockholders to the board
GR: Vote of the majority of the outstanding shares of
stock or members of both the managing and the
managed corporation.

XPN: The vote required for the managed corporation is

not merely majority but 2/3 of the outstanding capital
stock in cases where:

1. A stockholder or stockholders representing the

Issuance of stock dividends
Amendment to articles of
incorporation
Grant of compensation to
directors
Extending or shortening the
corporate term
Increase or decrease of
capital stock
To incur, create, or increase
bonded indebtedness
Deny Pre-emptive Right
(CC, Sec. 39).
Investment of corporate
funds in another corporation
or business or for any other
purpose other than the
primary purpose
The sale or other disposition
of all or substantially all of
the corporate assets
Merger or consolidation
Majority of the quorum of the
BOD
Majority vote of the BOD
Approval of the Board
Majority vote of the BOD
Majority vote of the BOD
Majority vote of the BOD
Majority vote of the BOD
Majority vote of the BOD
Majority vote of the board
Majority vote of the BOD
same interest of both the managing and the
managed corporations own or control more than
one-third (1/3) of the total outstanding capital
stock entitled to vote of the managing corporation;
or
2. Majority of the members of the board of directors of
the managing corporation also constitute a majority
of the members of the board of directors of the
managed corporation.
Vote representing 2/3 of the outstanding capital stock
Vote representing 2/3 of the outstanding capital stock
Majority vote of the outstanding capital stock
Vote representing 2/3 of the outstanding capital stock
Vote representing 2/3 of the outstanding capital stock
Vote representing 2/3 of the outstanding capital stock
Vote representing 2/3 of the outstanding capital stock
Vote representing 2/3 of the outstanding capital stock
Vote representing 2/3 of the outstanding capital stock
Vote representing 2/3 of the outstanding capital stock

UNIVERSITY OF SANTO TOMAS

219 FACULTY OF CIVIL LAW
 MERCANTILE LAW
Voluntary dissolution Majority vote of the BOD Vote representing 2/3 of the outstanding capital stock

To adopt a plan of Majority vote of the Trustees 2/3 of the members having voting rights
distribution of assets of a
non-stock corporation

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 CORPORATION CODE
Corporate powers exercised solely by the stockholders
CORPORATE ACT
Election of directors or trustees; filling up of vacancies by
the stockholders due to the expiration of term, removal from
office or increase in the number of board seats
To elect officers of the corporation
Fixing the issued price of no-par value shares
Declaration of cash and other dividends other than stock
dividends
To adopt by laws
To revoke the power delegated to the BOD to amend or
repeal the by-laws or adopt new by laws
To call a special meeting to remove directors or trustees
Removal of directors
Delegation of the power to amend by-laws to the board of
directors
Ratification of corporate contract with a director
To delegate to the BOD the power to amend or repeal the by-
laws or adopt new by laws
221
APPROVAL OF STOCKHOLDERS
Candidates receiving the highest number of votes from the
outstanding capital stock or members entitled to vote
(plurality, NOT majority)
Plurality vote of the BOD listed in the AOI, not merely those
present constituting a quorum
Majority of the quorum of the BOD if authorized by the AOI
or in the absence of such authority, by a majority of the
outstanding capital stock
Majority of the quorum of the board
Majority of the outstanding capital stock or of the members
Majority of the outstanding capital stock or of the members
Majority of the outstanding capital stock or of the members
entitled to vote
Vote representing 2/3 of the outstanding capital stock or of
members entitled to vote
Vote representing 2/3 of the outstanding capital stock
Vote representing 2/3 of the outstanding capital stock
2/3 of the outstanding capital stock or of the members
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
PROPRIETARY RIGHTS
The following are the proprietary rights of the
stockholders:
1. Right to Dividend
2. Right of First Refusal
3. Pre-emptive Right
RIGHT TO DIVIDENDS
Right to dividend of a stockholder
It is the right of the stockholder to demand payment of
dividends after the board’s declaration. Stockholders are
entitled to dividends pro rata based on the total number
of shares that they own and not on the amount paid for
the shares (SEC Opinion, October 10, 1992 and July 16,
1996).
Entitlement to receive dividends
GR: Those stockholders at the time of declaration are
entitled to dividends (Sundiang Sundiang Sr. & Aquino,
2009, citing SEC Opinion, July 15, 1994).
NOTE: Dividends declared before the transfer of shares
belong to the transferor and those declared after the
transfer, belong to the transferee (ibid).
XPNs:
1. In case a record date is provided for.
A record date is the date fixed in the resolution
declaring dividends, when the dividend shall be
payable to those who are stockholders of record on a
specified future date or as of the date of the meeting
declaring said dividend (De Leon, supra).
2. Holders of shares not fully paid which are not
delinquent shall have all the rights of a stock holder.
GR: Prior to the declaration of a dividend, a
stockholder cannot maintain an action at law to
recover his share of the accumulated profits because
such stockholder has no individual interest in the
profits of a corporation until a dividend has been
declared.
XPN: An action at law may be maintained where it is
alleged that sufficient net profits have been earned to
obligate the corporation to pay, however, there must
be a prior application with the directors for the relief
sought. If it appears that the directors have wantonly
violated their duty, and such application would be
inefficacious, such application need not be made.
Rule in applying dividends in delinquent shares
Cash Cash dividends due on delinquent stock
shall first be applied to the unpaid
balance on the subscription plus cost and
expenses.
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Stock Stock dividends are withheld from the
delinquent stockholder until his unpaid
subscription is fully paid.
APPRAISAL RIGHT
It refers to the right of the stockholder to demand
payment of the fair value of his shares, after dissenting
from a proposed corporate action involving a
fundamental change in the charter or articles of
incorporation in the cases provided by law (De Leon,
2010).
Instances where a stockholder may exercise his
appraisal right
Any stockholder of a corporation shall have the right to
dissent and demand payment of the fair value of his
shares in the following instances:
1. In case any amendment to the articles of
incorporation has the effect of changing or restricting
the rights of any stockholder or class of shares, or of
authorizing preferences in any respect superior to
those of outstanding shares of any class, or of
extending or shortening the term of corporate
existence.
2. In case of sale, lease, exchange, transfer, mortgage,
pledge or other disposition of all or substantially all
of the corporate property and assets as provided in
the Code.
3. In case of merger or consolidation (CC, Sec. 81).
4. In case the corporation decides to invest its funds in
another corporation or business for any purpose
other than its primary purpose as provided in Sec. 42
of the CC.
5. Under Sec. 105, any stockholder of a close
corporation may, for any reason, compel said
corporation to purchase his shares at their fair value,
which shall not be less than their par or issued value,
when the corporation has sufficient assets in its
books to cover its debts and liabilities exclusive of
capital stock.
Limitations on the exercise of appraisal right
1. Any of the instances provided by law for the exercise
of the right by a dissenting stockholder must be
present (CC, Secs. 81, 42);
2. The dissenting stockholder must have voted against
the proposed corporate action (CC, Sec. 82);
The right is not available to a stockholder who was
either absent at the meeting where the corporate
action was approved, or was present at such meeting
but abstained from casting his vote;
3. A written demand on the corporation for payment of
his shares must be made by him within 30 days after
the date the vote was taken. (ibid.);
Failure to make the demand within such period shall
be deemed a waiver of the appraisal right.
 CORPORATION CODE
4. The price must be based on the fair value of the
shares as of the day prior to the date on which the
vote was take (ibid.);
If the proposed corporate action is implemented or
effected, the payment shall be made upon surrender
of the certificates of stock representing his shares.
5. Such fair value must be determined as provided in
Sec. 82 (ibid);
The fair value shall exclude any appreciation or
depreciation in anticipation of such corporate action.
6. Payment of the shares must be made only out of the
unrestricted earnings of the corporation (ibid); and
7. Upon such payment, the stockholder must transfer
his shares to the corporation (ibid.).
Q: Assuming a stockholder disagrees with the
issuance of new shares and the pricing for the shares,
may the stockholder invoke his appraisal rights and
demand payment for his shareholdings? (1999 Bar)
A: No, the stockholder may not invoke his appraisal right
because disagreement with the issuance of new shares
and its pricing do not fall under any of the instances where
the appraisal right is available.
Q: Philip Turner, et al., held 1,010,000 shares of stock
of Lorenzo Co. The latter decided to amend its articles
of incorporation to remove the stockholders’ pre-
emptive rights to newly issued shares of stock.
Turner, et al., voted against the amendment and
demanded payment of their shares. The appraisal
committee reported its valuation of P2.54/share.
Turner, et al., demanded payment based on the
valuation of the appraisal committee, plus 2%/month
penalty from the date of their original demand for
payment, as well as the reimbursement of the
amounts advanced as professional fees to the
appraisers. Lorenzo Co. refused Turner, et al.’s
demand, explaining that pursuant to the Corporation
Code, the dissenting stockholders exercising their
appraisal rights could be paid only when the
corporation had unrestricted retained earnings to
cover the fair value of the shares, but that it had no
retained earnings at the time of the Turner, et al.’s
demand. Is Lorenzo Co. obliged to pay the value of the
shares of a dissenting stockholder even if at the time
of demand, the corporation has no unrestricted
retained earnings?
A: No. The corporation need not pay the value of the
shares of a dissenting stockholder if at the time of the
demand, the corporation has no unrestricted retained
earnings. No payment shall be made to any dissenting
stockholder unless the corporation has unrestricted
retained earnings in its books to cover the payment.
The trust fund doctrine backstops the requirement of
unrestricted retained earnings to fund the payment of the
shares of stocks of the withdrawing stockholders. In this
case Lorenzo Co. had indisputably no unrestricted
retained earnings in its books at the time Turner, et al.,
commenced the complaint. This proved that Lorenzo Co.’s
223
legal obligation to pay the value of Turner, et al.’s shares
did not yet arise. The fact that the Corporation
subsequent to the demand for payment and during the
pendency of the collection case posted surplus profit did
not cure the prematurity of the cause of action (Philip
Turner, et al., v. Lorenzo Shipping Corporation, G.R. No.
157479, November 24, 2010).
Effects of the exercise of the right of appraisal
1. Once the dissenting stockholder demands payment
of the fair value of his shares:
a. All rights accruing to such shares including
voting and dividend rights shall be suspended;
and
b. He shall be entitled to receive payment of the
fair value of his shares as agreed upon between
him and the corporation or as
determined by the appraisers chosen by him;
c. GR: He is not allowed to withdraw his demand
for payment of his shares
XPN: Unless the corporation consents thereto.
2. If the dissenting stockholder was not paid the value
of his shares within 30 days after the award, his
voting and dividend rights shall be immediately
restored until payment of his shares (CC , Sec. 83).
Even if his rights as stockholder are suspended after
his demand in writing is made, he cannot be
considered as an ordinary creditor of the corporation
(SEC Opinion, Jan. 11, 1982).
3. But, upon payment of the stockholder’s shares, all his
rights as stockholders are terminated, not merely
suspended (CC, Sec. 82).
4. If before the stockholder is paid, the proposed
corporate action is abandoned, his rights and status
as a stockholder shall thereupon be permanently
restored (CC, Sec. 84).
Rule if there is a disagreement between the
withdrawing stockholder and the corporation as to
the fair value of the shares
If within a period of 60 days from the date the corporate
action was approved by the stockholders, the
withdrawing stockholder and the corporation cannot
agree on the fair value of the shares, it shall be determined
and appraised by three (3) disinterested persons, one of
whom shall be named by the stockholder, another by the
corporation, and the third by the two thus chosen.
The findings of the majority of the appraisers shall be
final, and their award shall be paid by the corporation
within 30 days after such award is made (CC, Sec. 82).
Cost of appraisal
The costs and expenses of appraisal shall be borne as
follows:
1. By the corporation—
a. Where the price which the corporation offered
to pay the dissenting stockholder is lower than
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
the fair value as determined by the appraisers
named by them;
b. Where an action is filed by the dissenting
stockholder to recover such fair value and the
refusal of the stockholder to receive payment is
found by the court to be justified.
2. By the dissenting stockholder—
a. Where the price offered by the corporation is
approximately the same as the fair value
ascertained by the appraisers;
b. Where the same action is filed by the dissenting
stockholder and his refusal to accept payment is
found by the court to be unjustified (De Leon,
2010).
Q: In case of disagreement between the corporation
and a withdrawing stockholder who exercises his
appraisal right regarding the fair value of his shares,
a three-member group shall by majority vote resolve
the issue with finality. May the wife of the
withdrawing stockholder be named to the three
member group? (2011 Bar)
A: No, the wife of the withdrawing shareholder is not a
disinterested person.
Q: When does the right to payment cease?
A: The right of the dissenting stockholder to be paid the
fair value of his shares shall cease, his status as a
stockholder shall thereupon be restored, and all dividend
distributions which would have accrued on his shares
shall be paid to him if:
1. Demand for payment is withdrawn with the consent
of the corporation or
2. The proposed corporate action is abandoned by the
corporation or
3. The proposed corporate action is rescinded by the
corporation or
4. The proposed corporate action is disapproved by the
SEC where such approval is necessary or
5. The SEC determines that the dissenting stockholder
is not entitled to the appraisal right (CC, Sec. 84).
A dissenting stockholder who demands payment of his
shares is no longer allowed to withdraw from his decision
unless the corporation consents thereto.
RIGHT TO INSPECT
Books and records required to be kept by the
corporation
The following are the books and records required to be
kept by private corporations:
1. A record of all business transactions, which shall
include contract, memoranda, journals, ledgers, etc;
2. Minutes of all meetings of stockholders or members;
3. Minutes of all meetings of directors or trustees; and
4. Stock and transfer book, in case of stock corporations
(CC, Sec. 74).
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NOTE: The duty to keep these books is imperative and
mandatory. The stockholder can likewise inspect the
financial statements of the corporation (CC, Sec. 75).
Place where the books and records shall be kept
GR: All the above books and records must be kept at the
principal office of the corporation (ibid).
XPN: The stock and transfer book may be kept in the
principal office of the corporation or in the office of its
stock transfer agent, if one has been appointed by the
corporation (ibid).
Requirement in order for the minutes of the board
meetings be given probative value
The minutes of board meetings should be signed by the
corporate secretary. Without such signature, neither
probative value nor credibility could be accorded such
minutes (Union of Supervisors [RB]- NATU v. Sec. of Labor,
G.R. No. L- 39889, November 12, 1981).
Minutes of meetings without the signature of the
corporate secretary have no probative value, and
therefore cannot be demanded for inspection or
examination (Villanueva).
Right to inspect
The right to inspect is the right of a stockholder to inspect
the books of the corporation is subject to the following
limitations:
1. The right must be exercised during reasonable hours
on business days.
2. The person demanding the right has not improperly
used any information obtained through any previous
examination of the books and records of the
corporation.
3. The demand is made in good faith or for legitimate
purpose germane to his interest as a stockholder (CC,
Sec. 74). Good purposes may be: (a) to investigate
acts of management; (b) to investigate financial
conditions; fix value of shares; (c) mailing list for
proxies; or (d) information for litigation. (Villanueva)
4. It should follow the formalities that may be required
in the by-laws.
5. The right does not extend to trade secrets.
6. It is subject to limitations under special laws, e.g.
Secrecy of Bank Deposits and FCDA or the Foreign
Currency Deposits Act.
NOTE: The right extends, in compliance with equity, good
faith, and fair dealing, to a foreign subsidiary wholly-
owned by the corporation.
However, this right does not apply where the corporation
is not organized under the Philippine law as in such a case,
the right of the stockholder is governed by the inspection
requirements in the jurisdiction in which the corporation
was organized (De Leon, 2010).
The right to inspect extends to the books and records
of the wholly-owned subsidiary of the corporation.
 CORPORATION CODE
It would be more in accord with equity, good faith and fair
dealing to construe the statutory right of the stockholder
to inspect the books and records of the corporation as
extending to books and records of its wholly-owned
subsidiary which are in the corporation’s possession and
control (Gokongwei v. SEC, supra).
Rationale behind the right of inspection of a
corporation
The stockholder's right of inspection of the corporation's
books and records is based upon their ownership of the
assets and property of the corporation. It is, therefore, an
incident of ownership of the corporate property (Republic
v. Sandiganbayan, G.R. No. 88809, July 10, 1991).
Persons entitled to inspect corporate books
The following are entitled to inspect the corporate books:
1. Any director, trustee, or stockholder or member of
the corporation at reasonable hours on business day
(CC, Sec. 74).
2. Voting trust certificate holder – The term
“stockholder”, as used in Sec. 74 means not only a
stockholder of record; it includes a voting trust
certificate holder who has become merely an
equitable owner of the shares transferred (CC, Sec. 59
[3]).
3. Stockholder of a sequestered company (Republic vs.
Sandiganbayan, supra).
4. Beneficial owner of shares- pledgee, judgment
debtor, buyer from record owner. This is provided
that his interest is clearly established by evidence.
Q: The deceased Carlos L. Puno, was an incorporator
of Puno Enterprises, Inc. (Puno, Inc). Joselito Musni
Puno, claiming to be an heir of Carlos L. Puno,
initiated a complaint for specific performance against
Puno, Inc. Joselito averred that he is the son of the
deceased with the latter’s common-law wife, Amelia
Puno. As surviving heir, he claimed entitlement to the
rights and privileges of his late father as stockholder
of Puno, Inc. The complaint thus prayed that Joselito
be allowed to inspect its corporate book, and be given
an accounting and all the profits pertaining to the
shares of Puno. Puno, Inc. filed a motion to dismiss on
the ground that Joselito did not have the legal
personality to sue because his birth certificate names
him as “Joselito Musni Muno.” As proposed, there was
yet a need for a judicial declaration that “Joselito
Musni Puno” and “Joselito Musni Muno” were one and
the same.
May an heir of a stockholder can automatically
exercise the rights (inspection, accounting,
dividends) pertaining to the deceased?
A: No. The stockholder’s right of inspection of the
corporation’s books and records is based upon his
ownership of shares in the corporation and the necessity
for self-protection. After all, a shareholder has the right to
be intelligently informed about corporate affairs. Such
right rests upon the stockholder’s underlying ownership
of the corporation’s assets and property. Similarly, only
225
stockholders of record are entitled to receive dividends
declared by the corporation, a right inherent in the
ownership of the shares. Upon the death of a shareholder,
the heirs do not automatically become stockholders of the
corporation and acquire the rights and privileges of the
deceased as shareholder of the corporation. The stocks
must be distributed first to the heirs in estate
proceedings, and the transfer of the stocks must be
recorded in the books of the corporation. During such
interim period, the heirs stand as the equitable owners of
the stocks, the executor or administrator duly appointed
by the court being vested with the legal title to the stock
(Joselito Musni Puno v. Puno Enterprises, Inc., G.R. No.
177066, September 11, 2009).
Q: Who are the persons who may be held liable under
Section 74?
A: The first, second and fourth paragraphs of Section 74
are provisions that enumerates the obligations of a
corporation, such as what books or records required to be
kept, where it shall be kept, and other obligations of the
corporation to its stockholders or members in relation to
such books and records. Hence, by parity of reasoning,
such provisions can only be violated by a corporation.
It is clear that 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 wherein a corporation, acting
thru one of its officers or agents, denies the right of any of
its stockholders to inspect the records, minutes and the
stock and transfer book of such corporation (Aderito Z.
Yujuico and Bonifacio C. Sumbilla v. Cezar T. Quiambao and
Eric C. Pilapil, G.R. No. 180416, June 2, 2014).
Remedies for enforcement of right to inspect
1. Action for mandamus or damages
2. Civil and criminal liability
Liability of a corporate officer or agent in case he
violates the stockholder’s right to inspection
Any officer or agent of the corporation who shall refuse to
allow any director, trustees, stockholder or member of the
corporation to examine and copy excerpts from its
records or minutes, shall be liable to such director,
trustee, stockholder or member for damages, and in
addition, shall be liable for by a fine of not less than one
thousand (P1,000.00) pesos but not more than ten
thousand (P10,000.00) pesos or by imprisonment for not
less than thirty (30) days but not more than five (5) years,
or both, in the discretion of the court (CC, Sec 75 and Sec
144).
Requisites for existence of probable cause to file a
criminal case of violation of a stockholder’s right to
inspect corporate books
1. A director, etc. has made a prior demand in writing
for a copy or excerpts from the corporation’s records
or minutes;
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
2. Any officer or agent of the concerned corporation
shall refuse to allow the said director, etc., to examine
and copy said excerpts;
3. If such refusal is made pursuant to a resolution or
order of the BOD’s the liability for such action shall
be imposed upon the directors or trustees who voted
such refusal; and
4. Where the officer or agent of the corporation sets up
the defense that the person demanding to examine
and copy excerpts from the records and minutes has
improperly used any information secured through
any prior examination of the same or was not acting
in good faith or for a legitimate purpose in making his
demand, the contrary must be shown or proved (De
Leon, supra, citing Ang-Abaya v. Ang, G.R. No. 178511,
December 4, 2008).
The Corporation Code has granted to all stockholders the
right to inspect the corporate books and records, and in
so doing has not required any specific amount of interest
for the exercise of the to inspect (Terelay Investment and
Development Corporation v. Yulo, G.R. No. 160924, August
05, 2015).
Refusal to allow inspection is a criminal offense
We find inaccurate the pronouncement of the RTC that the
act of refusing to allow inspection of the stock and
transfer book is not a punishable offense under the
Corporation Code. Such refusal, when done in violation of
Section 7 4(4) of the Corporation Code, properly falls
within the purview of Section 144 of the same code and
thus may be penalized as an offense (Aderito Z. Yujuico
and Bonifacio C. Sumbilla v. Cezar T. Quiambao and Eric C.
Pilapil, supra).
Defenses that can be set up:
1. Improper use of the information obtained in the past
2. There was bad faith
3. Use the information for an illegitimate purpose
(Villanueva).
PRE-EMPTIVE RIGHT
It is the preferential right of shareholders to subscribe to
all issues or disposition of shares of any class in
proportion to their present shareholdings (CC, Sec. 39)
Purpose of pre-emptive right
To enable the shareholder to retain his proportionate
control in the corporation and to retain his equity in the
surplus.
Exercise of pre-emptive right
Pre-emptive right must be exercised in accordance with
the Articles of Incorporation or the By-Laws. When the
Articles of Incorporation and the By-Laws are silent, the
Board may fix a reasonable time within which the
stockholders may exercise the right.
Stock Transactions covered includes: (a) the re-issuance
of treasury shares which would cover the increase in the
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226
authorized capital stock; (b) opening for subscription the
unissued portion of existing capital stock; and (c)
disposition of treasury shares.
Pre-emptive right on the re-issuance of treasury
shares
When a corporation reacquires its own shares which
thereby become treasury shares, all shareholders are
entitled to pre-emptive right when the corporation
reissues or sells these treasury shares. The re-issuance of
treasury shares is not among the exception provided by
Sec. 39 when pre-emptive right does not exist.
Transferability of pre-emptive right
Pre-emptive right is transferable unless there is an
express restriction in the AOI.
Waiver of pre-emptive right by the stockholder
The stockholder may waive his pre-emptive right either
expressly or impliedly as when the stockholder fails to
exercise his pre-emptive right after being notified and
given an opportunity to avail of such right.
Denial by the corporation of the pre-emptive right
The corporation can deny pre-emptive right if the articles
of incorporation or amendment thereto denies such right.
The stockholder must be given a reasonable time within
which to exercise their preemptive rights. Upon the
expiration of said period, any stockholder who has not
exercised such right will be deemed to have waived it
(Majority Stockholders of Ruby Industrial Corporation vs.
Lim and the Minority Stockholders of Ruby Industrial
Corporation, G.R. Nos. 165887 & 165929, June 6, 2011).
Q: A special meeting of the Board of Directors of
LIMPAN approved a resolution making a partial
payment for the legal services of Gilda C. Lim in the
handling of various cases on behalf of, or involving the
corporation to be paid in equivalent value in shares of
stock of the corporation. Patricia Lim Yu, a sister of
the Lim filed a complaint against the members of the
Board of Directors of LIMPAN who approved the
resolution. In their answer, the Board of Directors
and Lim asserted that Yu had no legal capacity to sue
and that the issuance of the shares in LIM’s favor was
bona fide and valid pursuant to law and LIMPAN’s By-
Laws. In support of their ground that Yu had no legal
capacity to sue, the Lim pointed out that she had
previously filed a petition for guardianship praying
for the issuance of letters of guardianship over
Yu. The judge issued an order, enjoining Yu from
entering into, or signing, contracts or documents on
her behalf or on behalf of others. Does Yu have legal
capacity to file the complaint before the SEC?
A: Yes. Simply put, the TRO allows Respondent Patricia
Lim-Yu to act for herself and to enter into any contract on
her own behalf. However, she cannot transact in
representation of or for the benefit of her parents,
brothers or sisters, or the Limpan Investment
 CORPORATION CODE
Corporation. Contrary to what Lim suggest, all that is
prohibited is any action that will bind them. In short, she
can act only on and in her own behalf, not that of
petitioners or the Corporation. There appears to be a
confusion on the nature of the suit initiated before the
SEC. Lim describe it as a derivative suit. If the suit filed by
Yu was indeed derivative in character, then Yu may not
have the capacity to sue. The reason is that she would be
acting in representation of the corporation, an act which
the TRO enjoins her from doing. However, that the suit of
Yu cannot be characterized as derivative, because she
was complaining only of the violation of her preemptive
right under Section 39 of the Corporation Code. She was
merely praying that she be allowed to subscribe to the
additional issuances of stocks in proportion to her
shareholdings to enable her to preserve her percentage of
ownership in the corporation. She was therefore not
acting for the benefit of the corporation. Quite the
contrary, she was suing on her own behalf, out of a desire
to protect and preserve her preemptive
rights. Unquestionably, the TRO did not prevent her from
pursuing that action (Gilda C. Lim, et al., v. Patricia Lim-Yu,
in her capacity as a minority stockholder of Limpan
Investment Corporation, G.R. No. 138343, February 19,
2001).
RIGHT TO VOTE
Exercise the right to vote
The stockholders can exercise their right to vote through
the election, replacement and removal of Board of
Directors or Trustees and on other corporate acts which
require stockholders’ approval.
Nature of the right to vote
One of the rights of a stockholder is the right to participate
in the control and management of the corporation that is
exercised through his vote. The right to vote is a right
inherent in and incidental to the ownership of corporate
stock, and such is a property right [Castillo v. Balinghasay,
440 SCRA 442 (2004]).
Conditions for the issuance of non-voting shares
The issuance of non- voting shares is subject to the
following conditions under Section 6 of the Corporation
Code:
1. Only preferred or redeemable shares may be made
non-voting shares;
2. There must remain other shares with full voting
rights
Instances when non-voting shares are entitled to vote
The non-voting shares may still vote in the following
matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other
disposition of all or substantially all of the corporate
property;
4. Incurring, creating or increasing bonded
indebtedness;
227
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with
another corporation or other corporations;
7. Investment of corporate funds in another
corporation or business in accordance with the
corporation code;
8. Dissolution of the corporation (CC, Sec 6).
Treasury shares are not entitled to vote
Treasury shares shall have no voting right as long as such
shares remain in treasury.
Rule in case of joint ownership of stock
GR: In case of shares of stock owned jointly by two or
more persons, in order to vote the same, the consent of all
the co-owners shall be necessary.
XPN: If there is a written proxy, signed by all the co-
owners, authorizing one or some of them or any other
person to vote such share or shares. Provided, that when
the shares are owned in an "and/or" capacity by the
holders thereof, any one of the joint owners can vote said
shares or appoint a proxy therefor (CC, Sec. 56).
Rule in case of pledged or mortgaged shares
GR: The pledgor or mortgagor shall have the right to
attend and vote at meetings of stockholders even though
their shares are pledged or mortgaged
XPN: The pledgee or mortgagee has the right to vote and
attend meetings if he is expressly given by the pledgor or
mortgagor such right in writing which is recorded on the
appropriate corporate books (CC, Sec. 55).
RIGHT OF FIRST REFUSAL
A right that grants to the corporation or another
stockholder the right to buy the shares of stock of another
stockholder at a fixed price and only valid if made on
reasonable terms and consideration.
Provisions in articles of incorporation requiring
stockholders desiring to sell their stocks to offer them
first to the corporation or to the existing stockholders at a
given reasonable date before disposing of them to third
persons may be considered valid and enforceable (SEC
Opinion, Feb. 23, 1993).
Right of first refusal is not a substantive right under
the Corporation Code
GR: The right of first refusal can only arise by means of a
contractual stipulation, or when it is provided for in the
AOI
XPN: In the case of a close corporation, the right of first
refusal is required to be found in the AOI.
When only the by-laws provide a right of first refusal
without the corresponding provision in the AOI and not
printed in the stock certificate, it is null and void. There is
no authority to create property restrictions in by-laws
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
provisions (Hodges v. Lezama, G.R. No. L-17327, August 30, REPRESENTATIVE SUIT
1963).
A representative suit is one filed by the shareholder
AOI may validly grant a right of first refusal in favor of individually, or on behalf of a class of shareholders to
other stockholders which he or she belongs, for injury to his or her interest
as a shareholder (Cua v. Tan, GR 182008, December 4,
The SEC, as a matter of policy, allows restrictions on 2009).
transfer of shares in the AOI if the same is necessary and
convenient to the attainment of the objective for which It is proper where the wrong is done to a group of
the company was incorporated, unless palpably stockholders, as where preferred stockholders’ rights are
unreasonable under the circumstances (SEC Opinion, Feb. violated, a class or representative suit will be proper for
20, 1995). the protection of all stockholders belonging to the same
group (ibid).
Pre-emptive right vs. Right of first refusal
NOTE: Right of pre-emption is personal to each
RIGHT OF FIRST stockholder. While a stockholder may maintain a suit to
PRE-EMPTIVE RIGHT
REFUSAL compel the issuance of his proportionate share of stock, it
Arises only by virtue of has been ruled, nevertheless, that he may not maintain a
May be exercised even contractual stipulations representative action on behalf of other stockholders who
when there is no express but is also granted are similarly situated.
provision of law under the provisions on
close corporation Representative suit vs. Derivative suit
Pertains to unsubscribed
portion of the authorized Exercisable against REPRESENTATIVE SUIT DERIVATIVE SUIT
capital stock. A right that another stockholder of Initiated by the Initiated by the stockholder
may be claimed against the the corporation of his stockholder under his own on behalf of the corporation
corporation. It includes shares of stock name or on behalf of other
treasury shares. stockholders
Seeks vindication for Seeks to recover for the
REMEDIAL RIGHTS injury to his or her interest benefit of the corporation
as a shareholder and its whole body of
Actions that the stockholders or members can bring shareholders when injury is
caused to the corporation
1. Derivative suit – one brought by one or more that may not otherwise be
stockholders or members in the name and on behalf redressed because of failure
of the corporation to redress wrongs committed of the corporation to act
against it or to protect or vindicate corporate rights, Deals with individual Deals with corporate rights
whenever the officials of the corporation refuse to stockholders or a class of (ibid.)
sue or are the ones to be sued or hold control of the stockholder’s rights
corporation.
2. Individual suit – an action brought by a stockholder Remedies of representative suit and derivative suit
against the corporation for direct violation of his are mutually exclusive
contractual rights as such individual stockholder,
such as the right to vote and be voted for, the right to The two actions are mutually exclusive: i.e., the right of
share in the declared dividends, the right to inspect action and recovery belongs to either the shareholders
corporate books and records, and others. (direct action) or the corporation (derivative action)
3. Representative suit – one brought by a person in his (ibid.)
own behalf and on behalf of all similarly situated.
DERIVATIVE SUIT
INDIVIDUAL SUIT
Stockholder’s right to institute a derivative suit is not
When the injury is suffered directly by an individual based on any express provision of the Corporation Code,
shareholder as to affect his proprietary rights, as when his or even the Securities Regulation Code, but is impliedly
right to vote is unlawfully withheld or his right to inspect recognized when the said laws make corporate directors
corporate books arbitrarily denied, an action may be or officers liable for damages suffered by the corporation
brought by the injured stockholder in his own name and and its stockholders for violation of their fiduciary duties
for his own benefit against the corporation (Salonga, [Yu v. Yukayguan, 607 Phil. 581, 610 (2009)].
1968).
Requisites for the existence of a derivative suit (C-
Authorization from the board of directors is not SENA)
necessary. Since the wrong is done to him personally and
not to the other stockholder or the corporation, the cause 1. Corporate cause of action: the cause of action must
of action belongs to him alone. devolve upon the corporation itself; the wrongdoing
or harm having been caused to the corporation and
not to the particular stockholder brining the suit

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2016 GOLDEN NOTES
228
 CORPORATION CODE
(Reyes v. Hon. RTC of Makati Br. 142, G.R. No. 165744, (2) He exerted all reasonable efforts, and alleges the
August 11, 2008); same with particularity in the complaint, to exhaust
2. Stockholder: the party bringing the suit must be a all remedies available under the articles of
stockholder incorporation, by-laws, laws or rules governing the
a. At the time the acts or transactions subject of the corporation or partnership to obtain the relief he
action occurred and desires;
b. at the time the action was filed (3) No appraisal rights are available for the act or
acts complained of; and
NOTE: if the cause of action is continuing in nature, (4) The suit is not a nuisance or harassment suit.
the only requisite is that the party is a stockholder at
the time the action was filed (Dean Divina’s Lecture, With regard to the second requisite, we find that
April 29, 2015). petitioners failed to state with particularity in the
Complaint that they had exerted all reasonable efforts to
3. Exhaustion of all intra-corporate remedies available
exhaust all remedies available under the articles of
under the AOI, By-Laws, laws or rules governing the
incorporation, by-laws, and laws or rules governing the
corporation or partnership to obtain the relief he
corporation to obtain the relief they desire. The
desires;
Complaint contained no allegation whatsoever of any
4. Not a Nuisance or Harassment suit;
effort to avail of intra-corporate remedies. Indeed, even if
5. Appraisal right is not available (Rule 8 of the Interim
petitioners thought it was futile to exhaust intra-
Rules of Procedure Governing Intra-Corporate
corporate remedies, they should have stated the same in
Controversies, cited in Anthony S. Yu, et al., v. Joseph S.
the Complaint and specified the reasons for such opinion.
Yukayguan, et al., G.R. No. 177549, June 18, 2009). Failure to do so allows the RTC to dismiss the Complaint,
even motu proprio, in accordance with the Interim Rules.
Q: Nestor Ching and Andrew Wellington filed a
The requirement of this allegation in the Complaint is not
Complaint with the RTC on behalf of the members of
a useless formality which may be disregarded at will
Subic Bay Golf and Country Club, Inc. (SBGCCI) against
(Ching et. al. v. Subic Bay Golf and Country Club, Inc., et. al.,
the said country club and its Board of Directors and
G.R. No. 174353, September 10, 2014).
officers. The complaint alleged that the latter sold
shares to Ching and Wellington at US$22,000.00 per
Q: PPC obtained an option to lease portions of Mid-
share, presenting to them the Articles of
Pasig Development's property, including the
Incorporation. However, SBGCCI amended its AOI and
Rockland area which was being occupied by MC Home
the same was approved by the SEC.
Depot. PPC, represented by Villamor, entered into a
MOA with MC Home Depot where the latter would
Ching and Wellington claimed that SBGCCI did not
continue to occupy the area as PPC's sub-lessee for 4
disclose to them the above amendment which makes
years.
the shares non-proprietary, as it takes away the right
of the shareholders to participate in the pro-rata
MC Home Depot issued 20 post-dated checks which
distribution of the assets of the corporation after its
were given to Villamor who neither turned over the
dissolution. According to them, this is in fraud of the
same nor the equivalent amount over to PPC.
stockholders who only discovered the amendment
Balmores, a director of PPC, wrote a letter addressed
when they filed a case for injunction to restrain the
to PPC's directors informing them that Villamor
corporation from suspending their rights to use all
should be made to deliver to PPC and account for MC
the facilities of the club. RTC, finding that the
Home Depot's checks or their equivalent value. Due to
complaint is a derivative suit, dismissed the same and
the alleged inaction of the directors, Balmores filed
held that the petitioners failed to comply with the
with the RTC a complaint against Villamor for his
third and fourth requisites of a derivative suit. The CA
alleged devices or schemes amounting to fraud or
affirmed the decision of the RTC. Is the action a
misrepresentation alleging that because of his
derivative suit?
actions, PPC's assets have actually been dissipated.
The RTC denied Balmores' prayer ratiocinating that
A: Yes. While there were allegations in the Complaint of PPC's entitlement to the checks was doubtful. It added
fraud in their subscription agreements, such as the
that PPC should have been impleaded as an
misrepresentation of the Articles of Incorporation,
indispensable party, without which, there would be
petitioners do not pray for the rescission of their
no final determination of the action. The CA reversed
subscription or seek to avail of their appraisal rights.
the RTC ruling that the case filed by Balmores was a
Instead, they ask that defendants be enjoined from
derivative suit because there were allegations of
managing the corporation and to pay damages for their
fraud or ultra vires acts by PPC's directors. Does a
mismanagement. Petitioners’ only possible cause of
derivative suit exist in this case?
action as minority stockholders against the actions of the
Board of Directors is the common law right to file a
A: No. Balmores' action in the trial court failed to satisfy
derivative suit. Section 1, Rule 8 of the Interim Rules of
all the requisites of a derivative suit. Balmores failed to
Procedure Governing Intra Corporate Controversies
exhaust all available remedies to obtain the reliefs he
imposes the following requirements for derivative suits:
prayed for. Though he tried to communicate with PPC's
directors about the checks in Villamor's possession before
(1) He was a stockholder or member at the time the
he filed an action with the trial court, Balmores was not
acts or transactions subject of the action occurred
able to show that this comprised all the remedies
and at the time the action was filed;
UNIVERSITY OF SANTO TOMAS
229 FACULTY OF CIVIL LAW
 MERCANTILE LAW
available under the articles of incorporation, by-laws,
laws, or rules governing PPC. Neither did Balmores
implead PPC as party in the case nor did he allege that he
was filing on behalf of the corporation. Balmores did not
bring the action for the benefit of the corporation. Instead,
he was alleging that the acts of PPC’s directors, specifically
the waiver of rights in favor of Villamor’s law firm and
their failure to take back the MC Home Depot checks from
Villamor, were detrimental to his individual interest as a
stockholder. In filing an action, therefore, his intention
was to vindicate his individual interest and not PPC’s or a
group of stockholders’ (Villamor, Jr. v. Umale, in
substitution of Balmores, G.R. No. 172843, September 24,
2014).
Rationale for a derivative suit
Under the CC, where a corporation is an injured party, its
power to sue is lodged with its board of directors or
trustees. But an individual stockholder may be permitted
to institute a derivative suit on behalf of the corporation
in order to protect or vindicate corporate rights whenever
the officials of the corporation refuse to sue, or are the
ones to be sued, or hold control of the corporation (Hi-
Yield Realty v. CA, G.R. No. 168863, June 23, 2009).
Stockholder is not a real party in interest in a
derivative suit
The corporation is the real party-in-interest while the
suing stockholder, on behalf of the corporation, is only a
nominal party (Ibid).
Time when a person must be a stockholder for him to
be justified in filing a derivative suit
He must be a stockholder at the time the cause of action
accrued. If the cause of action is general and continuing,
said person must be a stockholder at the time of filing of
the suit and at the time the cause of action accrued.
The implicit argument — that a stockholder, to be
considered as qualified to bring a derivative suit, must
hold a substantial or significant block of stock — finds no
support whatever in the law. The bona fide ownership by
a stockholder of stock in his own right suffices to invest
him with standing to bring a derivative action for the
benefit of the corporation. The number of his shares is
immaterial since he is not suing in his own behalf, or for
the protection or vindication of his own particular right,
or the redress of a wrong committed against him,
individually, but in behalf and for the benefit of the
corporation (San Miguel Corporation v. Khan, G.R. No.
85339, August 11, 1989).
Q: A became a stockholder of Prime Real Estate
Corporation (PREC) on July 10, 1991, when he was
given one share by another stockholder to qualify him
as a director. A was not re-elected director in the July
1, 1992 annual meeting but he continued to be a
registered shareholder of PREC.
When he was still a director, A discovered that on Jan
5, 1991, PREC issued free of charge 10,000 shares to X
a lawyer who assisted in a court case involving PREC.
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
230
a. Can A now bring an action in the name of the
corporation to question the issuance of the
shares to X without receiving any payment?
b. Can X question the right of A to sue him in behalf
of the corporation on the ground that A has only
one share in his name?
c. Can the shares issued to X be considered as
watered stock? (1993 Bar)
A:
a. As a general rule, A cannot bring a derivative suit in
the name of the corporation concerning an act that
took place before he became a stockholder. However,
if the act complained of is a continuing one, A may do
so.
b. No. In a derivative suit, the action is instituted/
brought in the name of a corporation and reliefs are
prayed for therein for the corporation, by a minority
stockholder. The law does not qualify the term
“minority” in terms of the number of shares owned
by a stockholder bringing the action in behalf of the
corporation (SMC v. Khan, G.R. No. 85339, August 11,
1989).
c. No. Watered shares are those sold by the corporation
for less than the par/book value. In the instant case,
it will depend upon the value of services rendered in
relation to the total par value of the shares.
Allegation of tort can co-exist with a derivative suit in
the same petition
Personal injury suffered by a stockholder cannot
disqualify him from filing a derivative suit on behalf of the
corporation. It merely gives rise to an additional cause of
action for damages against the erring directors (Goachan
v. Young, G.R. No. 131889, March 12, 2001).
Jurisdiction over a derivative suit
A derivative suit is an intra-corporate controversy hence
under the jurisdiction of the RTC acting as a special
commercial court.
Q: AA, a minority stockholder, filed a suit against BB,
CC, DD, and EE, the holders of majority shares of MOP
Corporation, for alleged misappropriation of
corporate funds. The complaint averred, inter alia,
that MOP Corporation is the corporation in whose
behalf and for whose benefit the derivative suit is
brought. In their capacity as members of the Board of
Directors, the majority stockholders adopted a
resolution authorizing MOP Corporation to withdraw
the suit. Pursuant to said resolution, the corporate
counsel filed a Motion to Dismiss in the name of the
MOP Corporation. Should the motion be granted or
denied? Reason briefly.
A: The motion to dismiss should be denied. The requisites
for a valid derivative suit exist in this case. First, AA was
exempt from exhausting his remedies within the
corporation and did not have a demand on the Board of
Directors for the latter to sue. Here, such a demand would
be futile, since the directors who comprise the majority
(namely BB, CC, DD and EE are the ones guilty of the
 CORPORATION CODE
wrong complained of. Second, AA appears to be a
stockholder at the time of the alleged misappropriation of
corporate funds. Third, the suit is brought on behalf and
for the benefit of MOP Corporation. In this connection, it
was held in Commart (Phils.) Inc. v. SEC, G.R. No. 85318,
June 3, 1991, that to grant to the corporation concerned
the right of withdrawing or dismissing the suit, at the
instance of the majority stockholders and directors who
themselves are the persons alleged to have committed the
breach of trust against the interests of the corporation
would be to emasculate the right of the minority
stockholders to seek redress for the corporation. Filing
such action as a derivative suit even by a lone stockholder
is one of the protections extended by law to minority
stockholders against abuses of the majority.
Q: Oscar and Rodrigo C. Reyes are two of the four
children of the spouses Pedro and Anastacia Reyes.
Pedro, Anastacia, Oscar, and Rodrigo each owned
shares of stock of Zenith Insurance Corporation
(Zenith), a domestic corporation established by their
family. Pedro and Anastacia died. Pedro’s estate was
judicially partitioned among his heirs, however, no
similar settlement and partition appear to have been
made with Anastacia’s estate, which included her
shareholdings in Zenith. Zenith and Rodrigo filed a
complaint with the SEC against Oscar. The complaint
stated that it is a derivative suit initiated and filed by
the complainant Rodrigo to obtain an accounting of
the funds and assets of Zenith which are now or
formerly in the control, custody, and/or possession of
Oscar and to determine the shares of stock of
deceased spouses Pedro and Anastacia Reyes that
were arbitrarily and fraudulently appropriated by
Oscar. Oscar denied the charge. Furthermore, Oscar
claimed that the suit is not a bona fide derivative suit
because the requisites therefor have not been
complied with. Is the complaint filed by Rodrigo a
derivative suit?
A: No. First, Rodrigo is not a shareholder with respect to
the shareholdings originally belonging to Anastacia; he
only stands as a transferee-heir whose rights to the share
are inchoate and unrecorded. Second, in order that a
stockholder may show a right to sue on behalf of the
corporation, he must allege with some particularity in his
complaint that he has exhausted his remedies within the
corporation by making a sufficient demand upon the
directors or other officers for appropriate relief with the
expressed intent to sue if relief is denied. Lastly, the Court
finds no injury, actual or threatened, alleged to have been
done to the corporation due to Oscar’s acts. If indeed he
illegally and fraudulently transferred Anastacia’s shares
in his own name, then the damage is not to the
corporation but to his co-heirs; the wrongful transfer did
not affect the capital stock or the assets of Zenith (Oscar C.
Reyes v. RTCof Makati, Branch 142, et al., G.R. No. 165744,
August 11, 2008).
Q: Pursuant to the by-laws of Legaspi Towers 300, Inc.
(Legaspi), petitioners Lilia Marquinez Palanca,et al.,
the incumbent Board of Directors, fixed the annual
meeting of the members of the condominium
corporation and the election of the new Board of
Directors. Out of a total number of 5,723 members
231
who were entitled to vote, 1,358 were supposed to
vote through their respective proxies and their votes
were critical in determining the existence of a
quorum. The Committee on Elections of Legaspi,
however, found most of the proxy votes, at its face
value, irregular, thus, questionable; and for lack of
time to authenticate the same, Palanca, et al.,
adjourned the meeting for lack of quorum. Despite
Palanca et al.'s insistence that no quorum was
obtained during the annual meeting, Muer, et al.,
pushed through with the scheduled election and were
elected as the new Board of Directors and officers of
Legaspi. Subsequently, they submitted a General
Information Sheet to the Securities and Exchange
Commission (SEC) with the new set of officers.
Palanca, et al., filed a complaint for the declaration of
nullity of elections against Muer, et al., in a form of a
derivative suit. Is the derivative suit proper?
A: No. The derivative suit is not proper. The complaint for
nullification of the election is a direct action by Palanca, et
al., who were the members of the Board of Directors of the
corporation before the election, against Muer, et al., who
are the newly-elected Board of Directors. The cause of
action devolves on Palanca, et al., not the condominium
corporation, which did not have the right to vote. Hence
the same is improper for derivative suit (Legaspi Towers
300, Inc., et al., v. Amelia P. Muer, et al., G.R. No. 170783,
June 18, 2012).
Q: Sunrise Marketing (Bacolod), Inc. (SMBI) is owned
by the Ang family and among its stockholders are
Juanito Ang and Roberto Ang. Nancy Ang (Nancy), the
sister of Juanito and Roberto, and her husband,
Theodore Ang (Theodore), agreed to extend a loan to
settle the obligations of SMBI and other corporations
owned by the Ang family. Nancy and Theodore issued
a check payable to Juanito (and his spouse Anecita)
and/or respondents Roberto and Rachel (Roberto’s
wife).
Nancy and Theodore demanded payment after
payments to them ceased. Roberto and Rachel replied
that they will not comply with the demand as they
have not personally contracted the loan. Juanito and
Anecita, on the other hand, affirmed that he and
Theodore obtained a loan, which shall be secured by
their properties. Juanito filed a complaint for
derivative suit against Theodore and Rachel, alleging
that the latter’s refusal to pay the loan will affect the
financial viability of SMBI.
Is the action a derivative suit?
A: No. The Complaint is not a derivative suit. The
Complaint failed to show how the acts of Rachel and
Roberto resulted in any detriment to SMBI. The CA-Cebu
correctly concluded that the loan was not a corporate
obligation, but a personal debt of the Ang brothers and
their spouses. The check was issued to "Juanito Ang
and/or Anecita Ang and/or Roberto Ang and/or Rachel
Ang" and not SMBI. The proceeds of the loan were used
for payment of the obligations of the other corporations
owned by the Angs as well as the purchase of real
properties for the Ang brothers. SMBI was never a party
to the Settlement Agreement or the Mortgage. It was
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
never named as a co-debtor or guarantor of the loan. Both
instruments were executed by Juanito and Anecita in their
personal capacity, and not in their capacity as directors or
officers of SMBI. Thus, SMBI is under no legal obligation
to satisfy the obligation.
Records show that Juanito, apart from being Vice
President, owns the highest number of shares, equal to
those owned by Roberto. Also, as explained earlier, there
appears to be no damage to SMBI if the loan extended by
Nancy and Theodore remains unpaid. The CA-Cebu
correctly concluded that a plain reading of the allegations
in the Complaint would readily show that the case was
mainly filed to collect a debt allegedly extended by the
spouses Theodore and Nancy Ang to SMBI. Thus, the
aggrieved party is not SMBI but the spouses Theodore and
Nancy Ang, who are not even stockholders (Juanito Ang,
for and in behalf of Sunrise Marketing (Bacolod) v. Sps.
Roberto and Rachel Ang, G.R. No. 201675, June 19, 2013).
OBLIGATIONS OF A STOCKHOLDER
The following are the obligations of the stockholder:
1. Liability to the corporation for unpaid subscription
(CC, Sec. 67-70);
2. Liability to the corporation for interest on unpaid
subscription if so required by the by laws (CC, Sec.
66);
3. Liability to the creditors of the corporation for
unpaid subscription (CC, Sec. 60);
4. Liability for watered stock (CC, Sec. 65);
5. Liability for dividends unlawfully paid (CC, Sec. 43);
6. Liability for failure to create corporation (CC, Sec. 10)
(Sundiang Sr. & Aquino, 2014).
While a stockholder has no personal liability for the debts
of the corporation beyond the amount of his capital
investment, he is personally liable for the above
obligations. In addition, he may become personally liable
for damages or otherwise for any wrongful disposition of
corporate assets, breaches of fiduciary duties, fraud, gross
negligence, unauthorized acts, violations of law, or
improper us of the corporate form.

MEETINGS

REGULAR OR SPECIAL

Meeting of stockholders/members

DATE AND PLACE OF MEETING REQUIRED WRITTEN NOTICE

Regular meeting
The notice of meetings shall be in writing, and the time and
1. Annually on date fixed in the by-laws; or place thereof stated therein.
2. If there is no date in the by-laws – any date in April as
determined by the board. The notice shall be sent to the stockholder:
1. Within the period provided in the by-laws
Venue: In the city or municipality where the principal office is 2. In the absence of provision in the by-laws – at least 2
located, and if practicable in the principal office of the weeks prior to the meeting.
corporation: Provided, that Metro Manila shall be considered
a city or municipality. Notice may be waived, expressly or impliedly, by any
stockholder or member.
Special meeting
The notice of meetings shall be in writing, and the time and
place thereof stated therein.
1. Any time deemed necessary; or
2. As provided in the by-laws
The notice shall be sent to the stockholder:
1. Within the period provided in the by-laws
Venue: In the city or municipality where the principal office is
2. If no provision in the by-laws – at least 1 week prior to the
located, and if practicable in the principal office of the
meeting
corporation: Provided, that Metro Manila shall be considered
a city or municipality.
Notice may be waived, expressly or impliedly, by any
stockholder or member.

Requirements for a valid meeting whether a. The person or persons designated in the by-laws
stockholders/members or the board have authority to call stockholders’ or members’
meeting;
1. It must be held in the proper place; b. In the absence of such provision in the by-laws
2. It must be held at the stated date and at the appointed it may be called by a director or trustee or by an
time or at a reasonable time thereafter; officer entrusted with the management of the
3. It must be called by the proper person: corporation;

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2016 GOLDEN NOTES
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 CORPORATION CODE
c. A stockholder or member may make the call on
order of the SEC whenever for any cause there is
no person authorized to call a meeting.
4. The special meeting for the removal of directors or
trustees may be called by the secretary or by
stockholder or member:
a. There must be a previous notice;
b. There must be a quorum
Rules on meeting or voting which are applicable to
certain kinds of shares
1. Delinquent shares shall not be entitled to vote.
2. Treasury shares have no voting rights while they
remain in the treasury (CC, Sec. 57).
3. Fractional shares shall not be entitled to vote.
4. Escrow shares shall not be entitled to vote before the
fulfillment of the condition imposed thereon.
5. Unpaid shares, if not delinquent, are entitled to all the
rights of a stockholder including the right to vote.
6. Sequestered shares-
GR: The registered owner of the shares of a
corporation, even if they are sequestered by the
government through the PCGG, exercises the right
and the privilege of voting on them.
The PCGG as a mere conservator cannot, as a rule,
exercise acts of dominion by voting these shares.
XPN: Two-tiered test: The registered owner of
sequestered shares may only be deprived of these
voting rights, and the PCGG authorized to exercise
the same, only if it is able to establish that:
a. There is prima facie evidence showing that the
said shares are ill-gotten and thus belong to the
State; and
b. There is an imminent danger of dissipation, thus
necessitating the continued sequestration of the
shares and authority to vote thereupon by the
PCGG while the main issue is pending before
the Sandiganbayan (Trans Middle East [Phils.] v.
Sandiganbayan, GR 172556, June 9, 2006).
Under the two-tiered test, the government, through
PCGG, may vote sequestered shares if there is a
prima facie evidence that the shares are ill-gotten
wealth and there is imminent danger of dissipation
of assets while the case is pending. However, the
two-tiered test contemplates a situation where the
registered stockholders were in control and had
been dissipating company assets and the PCGG
wanted to vote the sequestered shares to save the
company. It does not apply when the PCGG had
voted the shares and is in control of the sequestered
corporation (Africa v. Sandiganbayan and Migallos,
G.R. Nos. 172222, 174493 & 184636, November 11,
2013, in Divina, 2014).
XPN to the XPN: The two-tiered test does not apply
in cases involving funds of public character (public
character exception). In such cases, the government
is granted the authority to vote said shares, namely:
233
1. Where the government shares are taken over
by private persons or entities who or which
registered them in their own names; and
2. Where the capitalization of shares that were
acquired with public funds somehow landed in
private hands (Republic vs. Sandiganbayan, G.R.
No. 107789, April 30, 2003).
7. Pledgor, mortgagor, or administrator shares (CC, Sec.
55) – pledger or mortgagor has the right to attend
and vote at meetings unless pledge or mortgagee is
expressly given such right in writing, as recorded on
the books.
Executor, administrators, receivers, and other legal
representatives may attend and vote in behalf of the
stockholder or members without need of any written
proxy. In Gochan v. Young, G.R. No. 131889, Mar. 12,
2001, it was held that heirs are not prohibited from
representing the deceased with regard to shares of
stock registered in the name of the latter, especially
when no administrator has been appointed.
8. Shares jointly owned (CC, Sec. 56) – consent of all the
co-owners is necessary, unless there is a written
proxy signed by all the co-owners. If shares are
owned in an “and/or” capacity by the holders
thereof, any one of the joint owners can vote or
appoint a proxy thereof.
WHO CALLS THE MEETING
The “call” for a meeting is exercised by the person who has
the power to call the meeting.
The following persons may exercise the power to “call” for
a meeting:
1. The person or persons designated in the by-laws to
have the authority to call stockholders’/ members’
meeting;
2. In the absence of such provision in the by-laws, the
director/trustee or officer entrusted with the
management of the corporation unless otherwise
provided by law;
3. A stockholder/ member may make the call on order
of the SEC whenever for any cause, there is no person
authorized to call a meeting (CC, Sec. 50) or the
officers authorized fail or refuse to call a meeting.
SEC may compel the officers of any corporation
registered by it to call meetings of
stockholders/members thereof under its
supervision (PD No. 902-A, Sec. 6 [f]).
4. Corporate Secretary or a stockholder/member for a
special meeting intended for the removal of directors
or trustees (CC, Sec. 28).
QUORUM
GR: Shall consist of the stockholders representing
majority of the outstanding capital stock or a majority of
the actual and living members with voting rights, in the
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
case of non-stock corporation (Tan v. Sycip, G.R. No. Subscription vs. Purchase
153468, Aug. 17, 2006).
SUBSCRIPTION PURCHASE
XPNs: May be made before or May be made only after
1. A different quorum may be provided for in the by- after incorporation incorporation
laws; Buyer does not become a
2. The corporation code provides for certain Subscriber becomes a stockholder until the
resolutions that must be approved by at least 2/3 of stockholder even if he has fulfillment of the terms of
the outstanding capital stock, in which case, majority not fully paid the the sale and registration
of the outstanding capital stock is insufficient to subscription thereof in the books of the
constitute a quorum, presence of the stockholders corporation
representing 2/3 of the outstanding capital stock is Cannot be released from
necessary for such purpose. The corporation may rescind
his subscription unless all
or cancel the contract for
stockholders agree
MINUTES OF THE MEETINGS non-fulfillment of the
thereto and no creditor is
contract by the buyer
thereby prejudiced
The minutes are a brief statement not only of what Corporate creditors may
transpired at a meeting, usually of stockholders/ proceed against the Creditors may not proceed
members or directors/ trustees, but also at meeting of an subscriber for his unpaid against the buyer for the
executive committee. subscription in case the unpaid price as there is no
assets of the corporation privity of contract between
The minutes are usually kept in a book especially are not sufficient to pay them
designed for that purpose, but they may also be kept in their claims
the form of memoranda or in any other manner in which In purchase amounting to
they can be identified as minutes of a meeting (People v. Not covered by the
more than 500 pesos, the
Dumlao, GR 168918, March 2, 2009). Statute of Frauds
Statute of Frauds shall apply
Subscription price are
To have probative value and credibility, the minutes must considered assets of the Purchase price does not
be signed by the corporate secretary, notwithstanding corporation, hence, become assets of the
that the one taking the minutes was a mere clerk (Union creditors may go after corporation unless fully paid
of Supervisors [RB]-NATU v. Sec. of Labor, supra). them
CAPITAL STRUCTURE Stock option vs. Warrant
SUBSCRIPTION AGREEMENTS STOCK OPTION WARRANT
A privilege granted to a A type of security which
Subscription contract
party to subscribe to a entitles the holder the right
certain portion of the to subscribe to a pre-
It is a contract for the acquisition of unissued stock in an
unissued capital stock of a determined number of
existing corporation or a corporation still to be formed. It
corporation within a unissued capital stock of a
is considered as such notwithstanding the fact that the
certain period and under corporation (subscription
parties refer to it as purchase or some other contract (CC,
the terms and conditions of warrant), or to purchase a
Sec. 60).
the grant exercisable by the pre-determined number of
grantee at anytime within issued or existing shares in
Nature of a subscription contract
the period granted. the future (covered
warrant).
A subscription contract is indivisible. Consequently,
where stocks were subscribed and part of the NOTE: A warrant is
subscription contract price was not paid, the whole detachable if it may be
subscription shall be considered delinquent and not only
sold, transferred or
the shares which correspond to the amount not paid. assigned to any person by
the warrant holder
NOTE: This is called the Doctrine of Individuality separate from and
(Indivisibility) of Subscription. A subscription is one independent of the
entire and indivisible whole contract. It cannot be divided corresponding beneficiary
into portions (CC, Sec. 64). securities, or shares of
stock or other securities of
Subscription and purchase of stock the issuer which form the
basis of the entitlement in
The CC, under sec. 60 in defining subscription, abolished a warrant. It is non-
the distinction between subscription and purchase of detachable if it may not be
shares from an existing corporation by making all such
sold etc.
acquisitions a subscription notwithstanding that the
parties denominate it as a purchase or sale or some other (SEC Rules, in De Leon, 2010)
contract.

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 CORPORATION CODE
Subscription is an offer to acquire a specified number of
unissued shares of an existing corporation or one still to
be formed.
Kinds of subscription
1. Pre-incorporation subscription – entered into before
incorporation (CC, Sec. 61).
2. Post-incorporation subscription – entered into after
incorporation (Sundiang Sr. & Aquino, 2009).
Rules governing pre-incorporation subscription
contracts
GR: A pre-incorporation subscription agreement is
irrevocable for a period of six (6) months from the date of
subscription.
XPNs:
1. If all of the other subscribers consent to the
revocation,
2. If the incorporation of said corporation fails to
materialize within said period or within a longer
period as may be stipulated in the contract of
subscription.
XPN to XPN: No pre-incorporation subscription
may be revoked after the submission of the AOI to
the Securities and Exchange Commission (CC, Sec.
61).
Payment of a subscription contract cannot be
condoned by a corporation
A corporation has no power to release an original
subscriber to its capital stock from the obligation of
paying for his shares, without a valuable consideration for
such release (PNB v Bitulok Sawmill Inc, G.R. Nos. L-24177-
85, June 29, 1968).
Stockholder is entitled to the rights pertaining to
shares of stock subscribed although not fully paid
As long as the shares are not considered delinquent,
stockholders are entitled to all rights granted to it
whether or not the subscribed capital stocks are fully
paid.
Q: FLADC, which was owned by the Tius, encountered
dire financial difficulties. It was heavily indebted to
PNB for P190 million. Thus, the construction of the
Masagana Citimall was threatened with stoppage and
incompletion. To prevent foreclosure of the mortgage
on the two lots where the mall was being built, the
Tius invited the Ongs to invest in FLADC. Under the
Pre-Subscription Agreement they entered into, the
Ongs and the Tius agreed to maintain equal
shareholdings in FLADC. Accordingly, the Ongs
paid P100 million in cash for their subscription to
1,000,000 shares of stock while the Tius committed to
contribute to FLADC a four-storey building and two
parcels of land respectively to cover their additional
549,800 stock subscription therein. The business
harmony between the Ongs and the Tius in FLADC,
however, was short-lived because the Tius, rescinded
235
the Pre-Subscription Agreement. The Tius accused
the Ongs of violation of the terms of their agreement.
Because of this, the Tius filed a case at SEC, seeking
confirmation of their rescission of the Pre-
Subscription Agreement. The SEC granted the same.
Could the Tius legally rescind the Pre-Subscription
Agreement?
A: No. When a subscriber assigned properties and infused
capital to the corporation upon invitation of a majority
stockholder and in exchange for shares of stocks under a
pre-subscription agreement, the agreement cannot be
rescinded since the subject matter of the contract was the
unissued shares of the Corporation allocated to the
subscriber. Since these were unissued shares, the Pre-
Subscription Agreement was in fact a subscription
contract as defined under Section 60, Title VII of the
Corporation Code: “Any contract for the acquisition of
unissued stock in an existing corporation or a corporation
still to be formed shall be deemed a subscription within
the meaning of this Title, notwithstanding the fact the
parties refer to it as a purchase or some other contract.” A
subscription contract necessarily involves the
corporation as one of the contracting parties since the
subject matter of the transaction is property owned by the
corporation - its shares of stock. Thus, the subscription
contract was one between the subscriber and the
corporation and not between the stockholders.
The trust fund doctrine provides that subscriptions to the
capital stock of a corporation constitute a fund to which
the creditors have a right to look for the satisfaction of the
claims. This doctrine is the underlying principle in the
procedure for the distribution of corporate capital only in
three instances:
1. amendment of the articles of incorporation to reduce
the authorized capital stock;
2. purchase of redeemable shares by the corporation
regardless of the existence of unrestricted retained
earnings; and
3. Dissolution and eventual liquidation of the
corporation.
Furthermore, the doctrine is articulated in Section 41 of
the Corporation Code on the power of the corporation to
acquire its own shares and in Section 122 on the
prohibition against the distribution of corporate assets
and property unless the stringent requirements are
complied with (Ong, et al. v. Tiu, et al., G.R. Nos. 144476 &
144629, Apri 8, 2003).
CONSIDERATION FOR STOCKS
Valid considerations in a subscription agreement
1. Actual cash paid to the corporation;
2. Property, tangible or intangible (i.e. patents or
copyrights), provided:
a. The property is actually received by the
corporation
b. The property is necessary or convenient for its
use and lawful purposes
c. It must be subject to a fair valuation equal to the
par or issued value of the stock issued
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
d. The valuation thereof shall initially be
determined by the incorporators; and
e. The valuation is subject to the approval by the
SEC.
3. Labor or services actually rendered to the corporation
4. Prior corporate obligations or indebtedness
5. Amounts transferred from unrestricted retained
earnings to stated capital (in case of declaration of
stock dividends)
6. Outstanding shares in exchange for stocks in the event
of reclassification or conversion (CC, Sec. 6).
Promissory notes or future services are not valid
considerations.
In view of nos. 1 and 2 of sec 62, payment of shares of
stock must be actually received by the corporation. Hence,
receivables cannot be treated as cash actually received.
They may, however, be considered as property payment
subject to verification by SEC and the condition that it be
held in escrow until actual payment of the amount.
As to amount: shares of stock shall not be issued for a
consideration less than the par or issued price thereof,
except treasury shares so long as the price is reasonable.
Persons required to pay in full their subscription
upon incorporation
1. Non‐resident foreign subscribers upon
incorporation must pay in full their subscriptions
unless their unpaid subscriptions are guaranteed by
a surety bond or by an assumption by a resident
stockholder through an affidavit of liability.
2. In case of no‐par value shares, they are deemed fully
paid and non‐assessable (CC, Sec. 6).
NOTE: The issued price of no-par value shares may be
fixed in the AOI or by the BOD pursuant to authority
conferred upon it by the AOI or the by-laws, or in the
absence thereof, by the stockholders representing at least
a majority of the outstanding capital stock at a meeting
duly called for the purpose (CC, Sec. 62).
SHARES OF STOCK
Stock or share of stock is one of the units in which the
capital stock is divided. It represents the interest or right
which the owner has —
1. In the management of the corporation in which he
takes part through his right to vote (if voting rights
are permitted for that class of stock by the AOI);
2. In a portion of the corporate earnings, if and when
segregated in the form of dividends; and
3. Upon its dissolution land winding up, in the property
and assets of the corporation remaining after the
payment of corporate debts and liabilities to
creditors (De Leon, 2010, citing 11 Fletcher, 1971).
Q: In order to comply with the 60% capital
requirement for ownership by Filipinos of certain
corporations, what does the term capital refer to?
A. The term “capital” refers to shares with voting rights,
and with full beneficial ownership, which must be owned
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
236
and held by citizens of the Philippines (Heirs of Gamboa v.
Teves, G.R. No. 176579, October 9, 2012).
Rationale: the right to vote in the election of directors,
coupled with full beneficial ownership of stocks,
translates to effective control of a corporation. (Heirs of
Gamboa v. Teves, supra)
Legal title without beneficial title of stocks is not
sufficient to meet the ownership requirement
Mere legal title is insufficient to meet the 60% Filipino-
owned “capital” required in the Constitution. Full
beneficial ownership of 60% of the outstanding capital
stock, coupled with 60% of the voting rights, is required.
The legal and beneficial ownership of 60% of the
outstanding capital stock must rest in the hands of
Filipino nationals in accordance with the constitutional
mandate. Otherwise, the corporation is “considered as
non-Philippine nationals. Full beneficial ownership of the
stocks, coupled with appropriate voting rights, is
essential” (Heirs of Gamboa v. Teves, supra).
NOTE: Since the constitutional requirement of at least
60% Filipino ownership applies not only to voting control
of the corporation but also to the beneficial ownership of
the corporation, it is therefore imperative that such
requirement apply uniformly and across the board to all
classes of shares, regardless of nomenclature and
category, comprising the capital of a corporation.
Under the Corporation Code, capital stock consists of all
classes of shares issued to stockholders, that is, common
shares as well as preferred shares, which may have
different rights, privileges or restrictions as stated in the
articles of incorporation. The Corporation Code allows
denial of the right to vote to preferred and redeemable
shares, but disallows denial of the right to vote in specific
corporate matters. Thus, common shares have the right to
vote in the election of directors, while preferred shares
may be denied such right. Nonetheless, preferred shares,
even if denied the right to vote in the election of directors,
are entitled to vote on certain corporate matters.
Since a specific class of shares may have rights and
privileges or restrictions different from the rest of the
shares in a corporation, the 60-40 ownership
requirement in favor of Filipino citizens in Section 11,
Article XII of the Constitution must apply not only to
shares with voting rights but also to shares without voting
rights (This is because when only preferred shares
without voting rights are issued, the requirement of full
beneficial ownership will be used as the standard).
Preferred shares, denied the right to vote in the election
of directors are anyway still entitled to vote on the eight
specific corporate matters under Sec, 6. Thus, if a
corporation, engaged in a partially nationalized industry,
issues a mixture of common and preferred non-voting
shares, at least 60 percent of the common shares and at
least 60 percent of the preferred non-voting shares must
be owned by Filipinos. Of course, if a corporation issues
only a single class of shares, at least 60 percent of such
shares must necessarily be owned by Filipinos. In short,
the 60-40 ownership requirement in favor of Filipino
citizens must apply separately to each class of shares,
 CORPORATION CODE
whether common, preferred non-voting, preferred voting
or any other class of shares. This uniform application of
the 60-40 ownership requirement in favor of Filipino
citizens clearly breathes life to the constitutional
command that the ownership and operation of public
utilities shall be reserved exclusively to corporations at
least 60 percent of whose capital is Filipino-owned.
Applying uniformly the 60-40 ownership requirement in
favor of Filipino citizens to each class of shares, regardless
of differences in voting rights, privileges and restrictions,
guarantees effective Filipino control of public utilities, as
mandated by the Constitution. Moreover, such uniform
application to each class of shares insures that the
“controlling interest” in public utilities always lies in the
hands of Filipino citizens. This addresses and
extinguishes Pangilinan’s worry that foreigners, owning
most of the non-voting shares, will exercise greater
control over fundamental corporate matters requiring
two-thirds or majority vote of all shareholders (Heirs of
Gamboa v. Teves, supra)
NATURE OF STOCK
The ownership of share of stock confers no immediate
legal right or title to any of the property of the
corporation. Each share merely represents a distinct
undivided share or interest in the common property of
the corporation (De Leon, ibid., citing 18 Am. Jur. 2d 737).
The interest over the share is purely inchoate, or a mere
expectancy of a right in the management of the
corporation and to share in the profits thereof and in the
properties and assets thereof on dissolution, after
payment of the corporate debts and obligations (ibid.,
citing Saw vs. CA, supra). Further, the stockholder’s
interest in the corporate property is merely equitable or
beneficial in nature; hence he cannot be said to be a co-
owner of the corporate property (ibid., citing Stockholders
of F. Guanzon & Sons , Inc. vs. Register of Deeds).
Shares of stocks are personal property
Shares of stock are personal property. They are
incorporeal in nature (except treasury stock which
belongs to the Corporation, [Sec. 9, CC}) (NCC, Art. 417 and
2095).
Share of stock does not constitute an indebtedness of
the corporation to the shareholder
They are in the nature of choses in action but are not in a
strict sense. They do not constitute an indebtedness of the
corporation to the shareholder and are therefore, not
credits as to make the stockholder a creditor of the
corporation (De Leon, 2010).
The board of directors may issue additional shares of
stock without approval of the stockholders.
A stock corporation is expressly granted the power to
issue or sell stocks. The power to issue shares of stock in
a corporation is lodged in the board of directors and no
stockholders’ meeting is required to consider it because
237
additional issuances of shares of stock do not need
approval of the stockholders.
The only requirement is the board resolution approving
the additional issuance of shares. The corporation shall
also file the necessary application with the SEC to exempt
these from the registration requirements under the
Revised Securities Act (now the Securities Regulation
Code) (Majority Stockholders of Ruby Industrial
Corporation v. Lim and the Minority Stockholders of Ruby
Industrial Corporation, supra).
WATERED STOCK
DEFINITION
Watered stock
A watered stock is a stock issued in exchange for cash,
property, share, stock dividends, or services lesser than
its par value or issued value (CC, Sec. 65).
Watered Stocks include stocks:
1. Issued without consideration (bonus share)
2. Issued for a consideration other than cash, the fair
valuation of which is less than its par or issued value;
3. Issued as stock dividend when there are no sufficient
retained earnings to justify it; and
4. Issued as fully paid when the corporation has
received a lesser sum of money than its par or issued
value (discount share) (De Leon, supra)..
Watered stocks can either be par or no par value shares.
Reason behind the prohibition on the issuance of
watered stocks
It is to protect persons who may acquire stock and the
creditors of the corporation particularly those who may
become such on the faith of its outstanding capital stock
being fully paid. The prohibition secures equality among
subscribers and prevents discriminations against those
who have paid in full the par or issued value of their
shares (ibid.).
Not all exchanges of stocks worth less than their value
are considered watered stock
The watered stocks refer only to original issue of stocks
but not to a subsequent transfer of such stocks by the
corporation, for then it would no longer be an “issue” but
a sale thereof (De Leon,2010, citing Rochelle Roofing Co. vs.
Burley, 115 NE 478).
Treasury shares are not subject to the prohibition on
the issuance of watered stocks
Treasury shares are not original issuances. They are
shares of stocks which have been issued and fully paid for,
but subsequently reacquired by the issuing corporation
by purchase, redemption, donation, or through some
other lawful means (CC, Sec. 9). Since they do not lose their
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
status as issued shares, they cannot be treated as new
issues when disposed of or reissued.
Limitation on the re-disposal of treasury shares
Treasury shares may again be disposed of for a
reasonable price fixed by the BOD. Since they are not
subject to the prohibition on the issuance of watered
stock, they may be sold for less than their par or issued
value as long as the price for re-disposal is reasonable.
The issuance of watered stock cannot be ratified by
the stockholders
It is not merely ultra vires, but is illegal per se as it is a
violation of Sec. 62, CC.
LIABILITY OF DIRECTORS FOR
WATERED STOCKS
Liability of directors for watered stocks
Any director or officer of a corporation shall be solidarily
liable with stockholder concerned to the corporation and
its creditors for difference between the fair value received
at the time of the issuance of the stock and the par or
issued value of the same, if:
1. He consents to the issuance of stocks for
consideration less than its par or issued value; or
2. He consents to the issuance of stocks for a
consideration in any form other than cash, valued in
excess of its fair value; or
3. Who, having knowledge thereof, does not forthwith
express his objection in writing and file the same
with the corporate secretary (CC, Sec. 65).
credits, and which the corporation may not dissipate. The
creditors may sue the stockholders directly for the latter’s
unpaid subscription.
There is a violation of the trust fund doctrine when
stocks of the corporation are issued less than the par
value
GR: The trust fund doctrine is violated where stocks are
issued by the corporation for a consideration which is less
than its par value.
XPN: Trust fund doctrine is not violated in case treasury
shares are reacquired and subsequently re-issued for a
lesser consideration by the corporation. The only
limitation for the reissuance of treasury shares is that
their price must be reasonable.
SITUS OF SHARES OF STOCK
Generally, the situs of shares of stock is the country where
the corporation is domiciled (Wells Fargo Bank v. CIR, G.R.
No. L-46720, June 28, 1940).
Domicile of the corporation
The residence of the corporation is the place where the
principal office of the corporation is located as stated in
its AOI even though the corporation has closed its office
therein and relocated to another place (Hyatt Elevators
and Escalators Corp. v. Goldstar Elevator Phils., Inc.,
supra.).
Exception to the situs of shares

Basis for the solidary liability of directors consenting In property taxation – for that purpose, the situs of
to the issuance of watered stock intangible property, such as shares of stocks, is at the
domicile or residence of the owner. However, this
The solidary liability of the directors emanates from the exception admits of its own exceptions, i.e. —
fiduciary character of the position of director or corporate 1. When a nonresident alien has shares of stock in a
officer. domestic corporation, then the situs will be in the
Philippines.
Defenses that can be invoked in order that a director 2. For purposes of the estate tax, the gross estate of a
or an officer can escape liability for the issuance of resident decedent, whether citizen or alien, or a
watered stocks citizen decedent, whether resident or nonresident,
includes his intangible personal property wherever
1. The director or officer did not consent and did not situated (De Leon, 2010).
have knowledge in the issuance of the watered stock.
2. The director or officer objected to its issuance, CLASSES OF SHARES OF STOCK
provided:
a. Objection must be directed to the issuance of the Kinds or classifications of shares
watered stocks;
b. In writing; 1. Par value shares
c. File the same with the corporate secretary 2. No par value shares
d. Such objection must be done before the sale of 3. Common shares
stocks (CC, Sec. 65). 4. Preferred shares
5. Redeemable shares
TRUST FUND DOCTRINE FOR LIABILITY 6. Treasury shares
FOR WATERED STOCK 7. Founder’s share
8. Voting shares
Trust fund doctrine 9. Non-voting shares
10. Convertible shares
The subscribed capital stock of the corporation is a trust 11. Watered stock
fund for the payment of debts of the corporation which 12. Fractional share
the creditors have the right to look up to satisfy their 13. Shares in escrow

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 CORPORATION CODE
14. Over-issued stock
15. Street certificate
16. Promotion share
Who may classify shares
1. Incorporators – the classes and number of shares
which a corporation shall issue are first determined
by the incorporators as stated in the articles of
incorporation filed with the SEC.
2. Board of directors and stockholders – after the
corporation comes into existence, classification of
shares may be altered by the board of directors and
the stockholders by amending the articles of
incorporation pursuant to Sec. 16.
Par value shares
Shares with a value fixed in the articles of incorporation
and the certificates of stock. The par value fixes the
minimum issue price of the shares (CC, Sec. 62).
Rule on the issuance of shares less than its par value
GR: A corporation cannot issue shares at less than its par
value.
XPN: The prohibition applies only to original issuance of
shares and not to the subsequent sale of treasury shares
and sale of shares made by stockholders.
No par value shares
These are shares having no stated value in AOI.
Limitations on no par value shares (5DP - B2tip - AP)
1. Shares which have no par value, cannot have an
issued price of less than P5.00;
2. The entire consideration for its issuance constitutes
capital so that no part of it should be Distributed as
dividends;
3. They cannot be issued as Preferred stocks;
4. They cannot be issued by Banks, Building and loan
association, Trust companies, Insurance companies,
and Public utilities;
5. The Articles of incorporation must state the fact that
it issued no par value shares as well as the number of
said shares;
6. Once issued, they are deemed fully Paid and non-
assessable (CC, Sec. 6).
Common shares
These are ordinarily and usually issued stocks without
extraordinary rights and privileges, and entitle the
shareholder to a pro rata division of profits. It represents
the residual ownership interest in the corporation. The
holders of this kind of share have complete voting rights
and they cannot be deprived of the said rights except as
provided by law.
Preferred shares
239
These entitle the shareholder to some priority on
distribution of dividends and assets over those holders of
common shares. Preferred shares may be issued only with
a stated par value (CC, Sec. 6).
Kinds of preferred shares
1. Preferred shares as to assets – Shares which gives the
holder preference in the distribution of the assets of
the corporation in case of liquidation.
2. Participating preferred shares – Entitled to
participate with the common shares in excess
distribution
3. Non-participating preferred shares – Not entitled to
participate with the common shares in excess
distribution.
4. Preferred shares as to dividends– Shares which are
entitled to receive dividends on said share to the
extent agreed upon before any dividends at all are
paid to the holders of common stock.
5. Cumulative preferred shares – If a dividend is omitted
in any year, it must be made up in a later year before
any dividend may be paid on the common shares in
the later year.
6. Non-cumulative preferred shares – There is no need
to make up for undeclared dividends
Holders of preferred shares are not creditors
Holders of preferred shares cannot compel the
corporation to give them dividends. The preference only
applies once dividends are declared.
Preferred cumulative participating share of stock
This is a kind of share which gives the holder preference
in the payment of dividends ahead of common
stockholders and to be paid the dividends due for prior
years and to participate further with common
stockholders in dividend declaration.
Redeemable shares
These are shares of stocks issued by a corporation which
said corporation can purchase or take up from their
holders upon expiry of the period stated in certificates of
stock representing said shares (CC, Sec. 8).
Kinds of redeemable shares
1. Compulsory - the corporation is required to redeem
the shares.
2. Optional - the corporation is not mandated to redeem
the shares.
Limitations on redeemable shares (ATVI)
1. Issuance of redeemable shares must be expressly
provided in the Articles of incorporation;
2. The Terms and conditions affecting said shares must
be stated both in the articles of incorporation and in
the certificates of stock;
3. Redeemable shares may be deprived of Voting rights
in the articles of incorporation, unless otherwise
provided in the Code (CC, Sec. 6 [6])
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
4. Redemption cannot be made if it will cause 5. Close corporation.
Insolvency of the corporation.
Limitations on treasury shares
Reissuance of redeemed shares
1. They may be re-issued or sold again as long as it is for
Redeemable shares, once redeemed are retired unless a reasonable price fixed by the BOD.
reissuance is expressly allowed in the AOI. 2. Cannot participate in dividends.
3. It cannot be represented during stockholder’s
Q: Planters Bank issued preferred redeemable shares meetings.
with a feature that entitles them to be preferred in the 4. The amount of URE equivalent to the cost of treasury
payment of dividends. Subsequently, the bank shares being held shall be restricted from being
experienced liquidity problems. The Central Bank declared and issued as dividends.
ruled that the bank has a reserve deficiency. Despite
of the condition, one of the stockholders holding the NOTE: When treasury shares are sold below its par or
preferred shares filed an action against the issued value, there can be no watering of stock because
corporation to redeem his shares and pay the such watering of stock contemplates an original issuance
dividends due. Will the suit prosper? of shares.

A: No. While redeemable shares may be redeemed Treasury shares distributed by way of dividends
regardless of the existence of unrestricted retained
earnings, this is subject to the condition that the They can be distributed only as property dividends. They
corporation has, after such redemption, assets in its books cannot be declared as stock or cash dividends because
to cover debts and liabilities inclusive of capital stock. they are not considered part of earned or surplus profits.
Redemption, therefore, may not be made where the The distribution of cash or stock dividends out of treasury
corporation is insolvent or if such redemption will cause shares would be converting the corporation into both a
insolvency or inability of the corporation to meet its debts debtor and creditor for the same amount at the same time,
as they mature. or requiring it to take money or stock from one of its
pockets and putting it in another, which is absurd.
Furthermore, the declaration of dividends is dependent Treasury shares may be declared as property divided to
upon the availability of surplus profit or unrestricted be issued out of the retained earnings previously used to
retained earnings, as the case may be. Shareholders, both support their acquisition provided that the amount of the
common and preferred, are considered risk takers who said retained earnings has not been subsequently
invest capital in the business and who can look only to impaired by losses (SEC Opinion, July 17, 1984).
what is left after corporate debts and liabilities are fully
paid (Republic Planters Bank v. Judge Agana, G.R. No. Treasury shares vs. Redeemable shares
51765. March 3, 1997).
TREASURY REDEEMABLE
Treasury shares SHARES SHARES
Description Shares so
Shares that have been earlier issued as fully paid and have acquired by the
thereafter been acquired by the corporation by purchase, corporation Issued by the
donation, and redemption or through some lawful means through corporation
(CC, Sec. 9). purchase, when expressly
donation, so provided in
Rights that can be denied to treasury shares redemption or the AoI.
any other lawful
1. Voting Rights means.
2. Right to dividends Manner of Redeemable
acquisition shares may be
NOTE: Treasury shares are not retired shares. They do Can only be acquired even
not revert to the unissued shares of the corporation but acquired in the without
are regarded as property acquired by the corporation presence of unrestricted
which may be reissued or resold at a price to be fixed by Unrestricted retained earnings
the Board of Directors (SEC Rules Governing Redeemable retained for as long as it
and Treasury Shares, CCP No. 1-1982). earnings will not result to
the insolvency of
Other means in which a corporation may acquire its the Corporation.
own shares Applicability of Must comply Is an exception to
the trust fund with the trust the trust fund
1. To collect or compromise unpaid indebtedness to the doctrine fund doctrine doctrine
corporation;
2. To eliminate fractional shares;
3. To pay dissenting or withdrawing stockholders
entitled to payment for their shares;
4. Redemption; and

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 CORPORATION CODE
Founders' shares
Shares classified as such in the articles of incorporation
and which may be given special preference in voting
rights and dividend payments.
Limitations in the issuance of founders' shares
Where the exclusive right to vote and be voted for in the
election of directors is granted, such right must be for a
limited period not exceeding 5 years subject to approval
of the SEC, the period to commence from the date of said
approval (CC, Sec. 7).
Voting shares
Shares with a right to vote. If the stock is originally issued
as voting stock, it may not thereafter be deprived of the
right to vote without the consent of the holder.
Non-voting shares
Shares without right to vote. The law only authorizes the
denial of voting rights in the case of redeemable shares
and preferred shares, provided that there shall always be
a class or series of shares which have complete voting
rights (CC, Sec. 6).
Instances when holders of non-voting shares are
allowed to vote
These redeemable and preferred shares, when such
voting rights are denied, shall nevertheless be entitled to
vote on the following fundamental matters:
1. Amendment of articles of incorporation
2. Adoption and amendment of by-laws
3. Sale, lease, exchange, mortgage, pledge or other
disposition of all or substantially all of the corporate
property
4. Incurring, creating or increasing bonded
indebtedness
5. Increase or decrease of capital stock
6. Merger or consolidation of the corporation with
another corporation or other corporations
7. Investment of corporate funds in another
corporation or business in accordance with this Code
8. Dissolution of the corporation (CC, Sec. 6).
Convertible shares
Shares which are changeable by the stockholder from one
class to another (such as from preferred to common) at a
certain price and within a certain period.
GR: Stockholder may demand conversion at his pleasure.
XPN: Otherwise when restricted by the articles of
incorporation.
NOTE: in the absence of express provision in the AOI as to
their convertibility feature, preferred shares cannot be
converted into common. The terms of the preferred share
contract cannot be changed without the consent of the
stockholders.
241
The conversion of no par value shares to par value is
allowed by SEC provided there would be no change in the
stockholder’s percentage interest in the total assets of the
corporation.
Fractional share
A fractional share is a share of equity that is less than
one full share.
Shares in escrow
Subject to an agreement by virtue of which the share is
deposited by the grantor or his agent with a third person
to be kept by the depositary until the performance of
certain condition or the happening of a certain event
contained in the agreement.
Over-issued stock
It is a stock issued in excess of the authorized capital
stock. Stocks which are issued in this manner are null and
void.
Street certificate
It is a stock certificate endorsed by the registered holder
in blank and the transferee can command its transfer to
his name from issuing corporation.
Promotional share
This is a share issued to promoters or those in some way
interested in the company, for incorporating the
company, or for services rendered in launching or
promoting the welfare of the company.
Watered stock
Shares issued below its par value or issued value.
NOTE: Watered stocks pertain only to original issuance of
shares.
A corporation can designate other classes of stocks
There can be other classifications as long as they are
indicated in the AOI, stock certificate and not contrary to
law.
PAYMENT OF BALANCE OF SUBSCRIPTION
Time when the balance of the subscription should be
paid:
1. On the date specified in the subscription contract,
without need of demand or call, or
2. If no date of payment has been specified, on the date
specified on the call made by the BOD; (CC, Sec. 67)
3. If no date of payment has been specified on the call
made, within 30 days from the date of call;
4. When insolvency supervenes upon a corporation and
the court assumes jurisdiction to wind it up, all
unpaid subscriptions become payable on demand,
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
and are at once recoverable, without necessity of any become delinquent and shall be subject to public auction
prior call. sale.

Accrual of interest on unpaid balance Unpaid claim

Unpaid balance will accrue interest if so required by the
by‐laws and at the rate of interest fixed in the by‐laws. If
no rate of interest is fixed in the by‐laws, such rate shall
be deemed to be the legal rate (CC, Sec. 66).
The above interest is different from the interest
contemplated by Sec. 67, the unpaid balance involved in
which, will only accrue interest, by way of penalty, on the
date specified in the contract of subscription or on the
date stated in the call made by the board.
NOTE: Interest contemplated in Sec. 66 pertains to
moratory interest which is the interest on account of
subscription in an installment basis, while Sec. 67 speaks
of compensatory interest which is the interest on account
of delay
It refers to any unpaid subscription, and not to any
indebtedness which a subscriber or stockholder may owe
the corporation arising from any other transaction
(Sundiang Sr. & Aquino, 2009, citing China Bank v. CA, G.R.
No. 117604, March 26, 1997).
Requisites for a valid call
SEC opined on July 21, 1976 that the following are the
requisites for a valid call:
1. It must be made in the manner prescribed by law;
2. It must be made by the BOD; and
3. It must operate uniformly upon all the shareholders.
The call of the board of directors is not always
necessary to collect payment for unpaid subscription

Moratory vs. Compensatory interest The necessity for calls depends upon the provisions of the
contract of subscription. When no time is fixed for
Compensatory interest Moratory Interest payment, the subscription is payable only upon call by the
(CC, Sec. 67) (CC, Sec. 66) BOD which may be made at any time the board may
Interest which accrues by Interest on unpaid decide (De Leon, supra).
way of penalty, on the subscription by reason of
date specified in the amortization/ However, a call is not necessary where:
contract of subscription or installments. It can be 1. The subscription contract specifies the date of
on the date stated in the collected only if stipulated payment; or
call made by the board. and for the rate specified 2. The corporation becomes insolvent (Sundiang Sr. &
The stockholder liable for in the contract and fixed Aquino, 2009)
interest at the legal rate by the by-laws. If the rate 3. The subscriber becomes insolvent (De Leon, supra)
on such balance, unless a is silent the legal rate
different rate of interest is shall be followed. NOTICE REQUIREMENT
provided in the by-laws,
computed from such date The notice of the call has to be served on the stockholders
until full payment. concerned in the manner prescribed in the call, which
may either be by registered mail and/or personal delivery
Effect of failure to pay the subscription on the date it and publication.
is due
Notice of call is necessary to bind the stockholders (ibid.,
It shall render the entire balance due and payable and citing Baltazar v. Lingayen Gulf Electric Power, G.R. No. L-
shall make the shareholder liable for compensatory 16236, June 30, 1965).
interest at the legal rate on such balance, unless a
different rate of interest is provided in the by‐laws. SALE OF DELINQUENT SHARES

Remedies of corporations to enforce payment of If within 30 days from expiry of the date of payment or
stocks from the date stated in the call made by the board, and no
payment is made, all stocks covered by said subscription
1. Extra-judicial sale at public auction (CC, Sec. 67) shall thereupon become delinquent and shall be subject to
2. Judicial action (CC, Sec. 70). delinquency sale unless the BOD orders otherwise (CC,
Sec. 67).
CALL BY BOARD OF DIRECTORS
EFFECT OF DELINQUENCY
Call for the payment by the board of directors for
unpaid subscription Effects of stock delinquency

A call is made in a form of board resolution that unpaid 1. Upon the stockholder
subscription to the capital stock are due and payable and a. Accelerates the entire amount of the unpaid
the same or such percentage thereof shall be collected, subscription;
together with all accrued interest, on a specified date and b. Subjects the shares to interest expenses and
that if no payment is made within 30 days from said date, costs;
all stocks covered by said subscription shall thereupon

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 CORPORATION CODE
c. Disenfranchises the shares from any right that
inheres to a stockholder, except the right to
dividends (CC, Sec. 71) (but which shall be
applied to any amount due on said shares, or, in
the case of stock dividends, to be withheld by the
corporation until full payment of the delinquent
shares (CC, Sec. 43).
2. Upon the director owning delinquent shares
a. If the delinquent stockholder is a director, the
director shall continue to be a director but he
cannot run for re-election (Sundiang Sr. &
Aquino, 2009).
b. A delinquent stockholder seeking to be elected
as director may not be a candidate for, not be
duly elected to, the board.
Status of the stockholder from delinquency date
before auction sale
All the rights of the stockholder are suspended except the
right to dividends. With respect to dividends, Section 43
states that cash dividends should be applied against
unpaid subscription while stock dividends should be
withheld until full payment of the subscription.
Q: Ace Cruz subscribed to 100,000 shares of stock of
JP Development Corporation, which has a par value of
P 1 per share. He paid P25,000.00 and promised to
pay the balance before December 31, 2008. JP
Development Corporation declared cash dividends
on October 15, 2008 payable on December 1, 2008.
a. For how many shares is Ace Cruz entitled to be
paid cash dividends? Explain.
b. On December 1, 2008, can Ace Cruz compel JP
Development Corporation to issue to him the
stock certificate corresponding to the P25,000
paid by him? (2008 Bar)
A:
a. Ace is entitled to the whole amount of his shares
which is 100,000. A contract of subscription is an
indivisible contract. If only partial payment for the
subscription was made, it cannot be the basis for the
amount of cash dividend in favor of the stockholder.
Cash dividends due on delinquent stocks shall first be
applied to the unpaid balance on the subscription
plus cost and expenses. (Sec. 43) Stocks become
delinquent 30 days from the due date specified in the
contract of subscription or in the date stated in the
call made by the board (Sec 67). In this case, the cash
dividend is not yet delinquent. Ace Cruz, therefore
can claim the entire cash dividend payable on
December 1, 2008.
b. No. No certificate of stock shall be issued to a
subscriber until the full amount of subscription
together with interest and expenses (in case of
delinquent shares), if any is due, has been paid (Sec
64). Clearly, since Ace Cruz did not pay the full
subscription yet, the certificate of stock shall not be
issued to him.
243
CALL BY RESOLUTION OF THE
BOARD OF DIRECTORS
Stocks become delinquent when the unpaid subscription
and accrued interests thereon are not paid within 30 days
from their due date as specified in the subscription
contract or in the call by the board of directors.
The delinquency is automatic after said 30 day period and
does not need a declaration by the board making the stock
delinquent.
NOTICE OF SALE
The notice of sale and copy of the board resolution
ordering the sale shall be:
1. Sent to every delinquent stockholder either
personally or by registered mail or;
2. Published once a week for 2 consecutive weeks in a
newspaper of general circulation in the province or
city where the principal office of the corporation is
located (CC, Sec. 68).
AUCTION SALE AND THE HIGHEST BIDDER
Procedure for the sale of delinquent stocks
1. Resolution – the board shall issue resolution ordering
the sale of delinquent stock;
2. Notice – notice of said sale, with a copy of the
resolution, shall be sent to every delinquent
stockholder either personally or by registered mail;
3. Publication – the notice shall furthermore be
published once a week for two consecutive weeks in
a newspaper of general circulation in the province or
city where the principal office of the corporation is
located;
4. Sale – the delinquent stock shall be sold at the public
auction to be held not less than 30 days nor more
than 60 days from the date stocks become
delinquent;
5. Transfer – the stock so purchased shall be
transferred to such purchaser in the books of the
corporation and a certificate for such stock shall be
issued in his favor; and
6. Credit remainder – the remaining shares, if any, shall
be credited in favor of the delinquent stockholder
who shall likewise be entitled to the issuance of a
certificate of stock covering the same (CC, Sec. 68;
Aquino, 2014).
Discontinuance or cancellation of delinquency sale
Delinquency sale may be discontinued or cancelled if the
delinquent stockholder pays the unpaid balance plus
interest, costs and expenses on or before the date
specified for the sale or when the BOD orders otherwise
(CC, Sec. 68).
Winning bidder in a delinquency sale
1. The person participating in the delinquency sale who
offers to pay the full amount of the balance of the
subscription together with the accrued interest, costs
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
of advertisement and expenses of sale, for the
smallest number of shares;
2. If there is no bidder as mentioned above, the
corporation, subject to the provisions of Sec. 68 of CC,
may bid for the same, and the total amount due shall
be credited as paid in full in the books of the
corporation. The purchase by the corporation must
be made out of net earnings in view of the trust fund
doctrine. Thereafter, the reacquired shares shall be
considered as treasury shares (CC, Sec. 41; De Leon,
2010).
NOTE: The board is not bound to accept the highest bid
unless the contrary appears. The bidder is the one making
the offer to purchase, which the corporation is free to
accept or reject (ibid.).
Q: What happens to the remaining shares, if any, were
not sold?
A: The remaining shares, if any, shall be credited in favor
of the delinquent stockholder who shall likewise be
entitled to the issuance of a certificate of stock covering
such shares (CC, Sec. 68).
Rule on questioning the sale of delinquent share in
public auction
GR: The sale at public auction of delinquent share is
absolute and not subject to redemption.
XPN: An action may be filed to question the sale, the
requisites for which are:
1. There should be allegation and proof of irregularity
or defect in the notice of sale or in the sale itself.
2. The party filing the action must first pay the party
holding the stock the sum for which the stock was
sold with legal interest from the date of sale.
3. The action is filed within 6 months from the date of
sale (CC, Sec. 69).
Prescription period of the action to question a
delinquency sale
For stock corporations, the action prescribes 6 months
from such sale. However, in case of non-stock
corporations, the applicable period is 4 years under the
Civil Code.
CERTIFICATE OF STOCK
It is a written evidence of the shares of stock but it is not
the share itself (Sundiang Sr. & Aquino, 2009, citing Lincoln
Phils. Life v. CA, G.R. No. 118043, July 23, 1998).
A certificate of stock is a written instrument signed by the
proper officer of a corporation stating or acknowledging
that the person named therein is the owner of a
designated number of shares of its stock. It indicates the
name of the holder, the number, kind and class of shares
represented, and the date of issuance.
It is not stock in the corporation but is merely evidence of
the holder’s interest and status in the corporation.
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
244
Shares of stock vs. Certificates of stock
SHARE OF STOCK CERTIFICATE OF STOCK
Evidence of the holder’s
ownership of the stock
Unit of interest in a
and of his right as a
corporation
shareholder and of his
extent specified therein.
It is an incorporeal or
It is concrete and tangible
intangible property
It may be recognized by
It may be issued only if
the corporation even if
the subscription is fully
the subscription is not
paid.
fully paid.
NATURE OF THE CERTIFICATE
A certificate of stock is a prima facie evidence of
ownership and evidence can be presented to determine
the real owner of the shares (Bitong vs. CA, supra).
It is not essential to the existence of a share of stock or the
creation of the relation of the shareholder with the
corporation (Tan v. SEC, G.R. No. 95696, March 3, 1992)
A certificate of stock has a value separate and distinct
from the value of the shares represented.
UNCERTIFICATED SHARES
An uncertificated share is a subscription duly recorded in
the corporate books but has no corresponding certificate
of stock yet issued.
Stockholder may alienate his shares even if there is
no certificate of stock issued by the corporation
The absence of a certificate of stock does not preclude the
stock holder from alienating or transferring his shares of
stock.
Transfers of fully paid subscription but the
corporations has not yet issued a certificate of stock
In case of a fully paid subscription, without the
corporation having issued a certificate of stock, the
transfer may be effected by the subscriber or stockholder
executing a contract of sale or deed of assignment
covering the number of shares sold and submitting said
contract or deed to the corporate secretary for recording.
Transfers of subscription not fully paid
In case of subscription not fully paid, the corporation may
record such transfer, provided that the transfer is
approved by the board of directors and the transferee
executes a verified assumption of obligation to pay the
unpaid balance of the subscription.
NEGOTIABILITY
Stock certificate is not negotiable
Although a stock certificate is sometimes regarded as
quasi-negotiable, in the sense that it may be transferred
by delivery, it is well-settled that the instrument is NON-
 CORPORATION CODE
NEGOTIABLE, because the holder thereof takes it without
prejudice to such rights or defenses as the registered
owner or creditor may have under the law, except insofar
as such rights or defenses are subject to the limitations
imposed by the principles governing estoppel (Republic v.
Sandiganbayan,G.R. Nos. 107789 & 147214, April 30, 2003).
Certificates of stock may be issued only to registered
owners of stock. The issuance of “bearer” stock
certificates is not allowed under the law (SEC Opinion No.
05-02, Jan. 31, 2005).
Q: A is the registered owner of Stock Certificate No.
000011. He entrusted the possession of said
certificate to his best friend B who borrowed the said
endorsed certificate to support B's application for
passport (or for a purpose other than transfer). But B
sold the certificate to X, a bona fide purchaser who
relied on the endorsed certificates and believed him
to be the owner thereof. Can A claim the shares of
stocks from X? Explain. (2001 Bar)
A: No. Since the shares were already transferred to "B",
"A" cannot claim the shares of stock from "X". The
certificate of stock covering said shares have been duly
endorsed by "A" and entrusted by him to "B". By his said
acts, "A" is now estopped from claiming said shares from
"X", a bona fide purchaser who relied on the endorsement
by “A” of the certificate of stock.
REQUIREMENTS FOR VALID
TRANSFER OF STOCK
Requirements for valid transfer of stocks
The following are the requirements for valid transfer of
stocks:
1. If represented by a certificate, the following must be
strictly complied with:
a. Indorsement by the owner and his agent
b. Delivery of the certificate
c. To be valid to third parties and to the
corporation, the transfer must be recorded in
the books of the corporation (Rural Bank of Lipa
v. CA, G.R. No. 124535, Sepember 28, 2001).
2. If NOT represented by a certificate (such as when
the certificate has not yet been issued or where for
some reason is not in the possession of the
stockholder):
a. By means of deed of assignment; and
b. Such is duly recorded in the books of the
corporation (Sundiang Sr. & Aquino, 2009).
Effect of the non-payment of Documentary Stamp Tax
No sale, exchange, transfer or similar transaction
intended to convey ownership of, or title to any share of
stock shall be registered in the books of the corporation
unless the receipts of payment of the tax herein imposed
is filed with and recorded by the stock transfer agent or
secretary of the corporation (Revenue Regulations No. 6-
2008, Sec. 11).
245
Stockholder may bring suit to compel the corporate
secretary to register valid transfer of stocks
It is the corporate secretary’s ministerial duty and
obligation to register transfers of stocks provided all the
requirements for a valid transfer had been complied with.
Remedies where corporation refuses to transfer
certificate of stocks
1. Petition for mandamus
In case of wrongful refusal of the corporate secretary
to record the transfer, specific performance and
mandamus are the common remedies. However, by
the weight of authority, it is held that mandamus will
not lie in ordinary cases to compel a corporation or
its officers to transfer stock on its books and issue
new certificates to the transferee. Remedy of
mandamus is available if the following requisites are
present:
a. Due application therefor has been made;
b. Said application has been denied;
c. There are no unpaid claims against the stock by
the corporation;
d. An ordinary action for damages against the
corporation would be inadequate; and
e. An action in the nature of a suit in equity to
secure a decree ordering the transfer would also
be inadequate [Hager v. Bryan, 19 Phil. 138
(1912)].
2. Suit for specific performance of an express or implied
contract
3. May sue for damages where specific performance
cannot be granted
NOTE: There must be a special power of attorney
executed by the registered owner of the share authorizing
transferor to demand transfer in the stock and transfer
book (Ponce v. Alsons Cement, G.R. No. 139802, December
10, 2002).
The law does not prescribe a period within which the
registration of the transfer of shares should be effected.
Hence, the action to enforce the right does not accrue until
there has been a demand and a refusal concerning the
transfer.
Valid refusal by the corporation to register the
transfer of shares
The corporation may refuse to register the transfer of
shares if it has an existing unpaid claim over the shares to
be transferred. The “unpaid claim” refers to the unpaid
subscription on the shares transferred and not to any
other indebtedness that the transferor may have to the
corporation (CC, Sec. 63).
NOTE: If the contract of subscription is still not fully paid,
the consent of the corporation must be obtained first
since there would be a change of debtor. Hence, the
consent of the creditor (corporation) is necessary.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Kind of transfer that requires registration in the
books of the corporation
Only absolute transfers are required to be registered in
the books of the corporation. Hence, registration in the
stock and transfer book is not necessary if the conveyance
is by way of chattel mortgage. However, registration must
be had with the Register of Deeds (Chua Guan v. Samahan,
supra.).
Validity of a transfer that is not recorded
If the transfer is not recorded, it is valid but only insofar
as the parties to the transfer are concerned. To bind the
corporation, the deed affecting the transfer must be duly
recorded in the corporate books (CC, Sec. 63).
Q: Enrique Razon organized the E. Razon, Inc. for the
purpose of bidding for the arrastre services in South
Harbor, Manila. Stock certificate No. 003 for 1,500
shares of stock of E. Razon was issued in the name of
Juan T. Chuidian. From the time the certificate of stock
was issued, Razon had not questioned the ownership
by Juan of the shares of stock in question and had not
brought any action to have the certificate of stock
over the said shares cancelled. However, the
certificate of stock was in the possession of Razon
who refused to deliver said shares to Juan, until the
same was surrendered by Razon and deposited in a
safety box in Philippine Bank of Commerce. The CFI
declared that Razon is the owner of the said shares of
stock. The then IAC, however, reversed the trial
court's decision and ruled that Juan T. Chuidian, the
deceased father of Vicente B. Chuidian is the owner of
the shares of stock. Who is the owner of the subject
shares of stock?
A: Juan is the owner. In the instant case, there is no
dispute that the questioned 1,500 shares of stock of E.
Razon, Inc. are in the name of the late Juan Chuidian in the
books of the corporation. Moreover, the records show
that during his lifetime, Chuidian was elected member of
the Board of Directors of the corporation which clearly
shows that he was a stockholder of the corporation. From
the point of view of the corporation, therefore, Chuidian
was the owner of the 1,500 shares of stock. In such a case,
Razon who claims ownership over the questioned shares
of stock must show that the same were transferred to him
by proving that all the requirements for the effective
transfer of shares of stock in accordance with the
corporation's by laws, if any, were followed. The law is
clear that in order for a transfer of stock certificate to be
effective, the certificate must be and that title to such
certificate of stock properly indorsed is vested in the
transferee by the delivery of the duly indorsed certificate
of stock. Since the certificate of stock covering the
questioned 1,500 shares of stock registered in the name
of the late Juan Chuidian was never indorsed to Razon, the
inevitable conclusion is that the questioned shares of
stock belong to Chuidian. The Razon’s asseveration that
he did not require an indorsement of the certificate of
stock in view of his intimate friendship with the late Juan
Chuidian cannot overcome the failure to follow the
procedure required by law or the proper conduct of
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
246
business even among friends (Enrique Razon v. IAC, et al.,
G.R. No. 74306, March 16, 1992).
Q: Nemesio Garcia filed an action for injunction
against spouses Jose and Sally Atinon and Nicolas
Jomouad, ex-officio sheriff. Said action stemmed from
an earlier case for collection of sum of money, filed by
the spouses Atinon against Jaime Dico. In that case the
trial court rendered judgment ordering Dico to pay
the spouses Atinon. After said judgment became final
and executory, the sheriff proceeded with its
execution. In the course thereof, the Proprietary
Ownership Certificate (POC) in the Cebu Country
Club, which was in the name of Dico, was levied on and
scheduled for public auction. Claiming ownership
over the subject certificate, Garcia filed the action for
injunction to enjoin the spouses Antinon from
proceeding with the auction. The trial court
dismissed the complaint. The CA affirmed. Garcia
contends that the subject stock of certificate, albeit in
the name of Dico, cannot be levied upon the execution
to satisfy his judgment debt because even prior to the
institution of the case for collection of sum of money
against him, the spouses Atinon had knowledge that
Dico already conveyed back the ownership of the
subject certificate to Garcia and that Dico executed a
deed of transfer covering the subject certificate in
favor of Garcia.
Is a bona fide transfer of the shares of a corporation,
not registered or noted in the books of the
corporation, valid as against a subsequent lawful
attachment of said shares, regardless of whether the
attaching creditor had actual notice of said transfer or
not?
A: No. A transfer of shares not registered in the books of
the corporation is not valid as against subsequent
attachment of the shares. All transfers of shares not so
entered in the books of the corporation are invalid as to
attaching or execution creditors of the assignors, as well
as to the corporation and to subsequent purchasers in
good faith, and, indeed, as to all persons interested, except
the parties to such transfers. Hence, the transfer of the
subject certificate made by Dico to Garcia was not valid as
to the spouses Atinon, the judgment creditors, as the same
still stood in the name of Dico, the judgment debtor, at the
time of the levy on execution (Nemesio Garcia v. Nicolas
Jomouad, et al., G.R. No. 133969, January 26, 2000).
Q: Vicente C. Ponce acquired 239,500 shares of the
Alsons Cement Corporation (ACC) from its
incorporator, Fausto Gaid. Despite Gaid’s
endorsement and the repeated demands of Ponce,
ACC failed to issue the certificates of stock in Ponce’s
name. Ponce filed a petition for mandamus with the
SEC for the issuance of the certificates in his name.
Ponce contends that when a corporate secretary is
presented with a document of transfer of fully paid
shares, it is his duty to record the transfer in the stock
and transfer book of the corporation, issue a new
stock certificate in the name of the transferee, and
cancel the old one. Ergo, the failure to record the
transfer does not mean that the transferee cannot ask
 CORPORATION CODE
for the issuance of stock certificates. ACC, on the other
hand maintains that the transfer of shares of stock not
recorded in the stock and transfer book of the
corporation is non-existent insofar as the corporation
is concerned and no certificate of stock can be issued
in the name of the transferee.
May the corporate secretary be compelled to register
transfer of shares on the basis merely of an
indorsement of stock certificates?
A: No. Under Section 63 of the Corporation Code, a
transfer of shares of stock not recorded in the stock and
transfer book of the corporation is non-existent as far as
the corporation is concerned. As between the corporation
on the one hand, and its shareholders and third persons
on the other, the corporation looks only to its books for
the purpose of determining who its shareholders are. It is
only when the transfer has been recorded in the stock and
transfer book that a corporation may rightfully regard the
transferee as one of its stockholders. From this time, the
consequent obligation on the part of the corporation to
recognize such rights as it is mandated by law to
recognize arises. Hence, without such recording, the
transferee may not be regarded by the corporation as one
among its stockholders and the corporation may legally
refuse the issuance of stock certificates in the name of the
transferee even when there has been compliance with the
requirements of Section 64 of the Corporation Code. The
situation would be different if Ponce himself the
registered owner of the stock which he sought to transfer
to a third party, for then he would be entitled to the
remedy of mandamus (Vicente C. Ponce v. Alsons Cement
Corporation,et al., G.R. NO. 139802, December 10, 2002).
Q: Fil-Estate Golf and Development, Inc. (FEGDI) is a
stock corporation whose primary business is the
development of golf courses. Fil-Estate Land, Inc.
(FELI) is also a stock corporation, but is engaged in
real estate development. FEGDI was the developer of
the Forest Hills Golf and Country Club (Forest Hills)
and, in consideration for its financing support and
construction efforts, was issued several shares of
stock of Forest Hills.
FEGDI sold on installment, to RS Asuncion
Construction Corporation (RSACC) one common
share of Forest Hills. Prior to the full payment of the
purchase price, RSACC sold the share to respondent
Vertex Sales and Trading, Inc. (Vertex). RSACC
advised FEGDI of the sale to Vertex and FEGDI, in turn,
instructed Forest Hills to recognize Vertex as a
shareholder. For this reason, Vertex enjoyed
membership privileges in Forest Hills.
Despite Vertex’s full payment, the share remained in
the name of FEGDI. Vertex made several demands to
FEGDI to issue a stock certificate in its name. As the
demands went unheeded, Vertex filed a Complaint for
Rescission with Damages and Attachment against
FEGDI, FELI and Forest Hills. It averred that the
petitioners defaulted in their obligation as sellers
when they failed and refused to issue the stock
certificate covering the subject share despite
repeated demands. On the basis of its rights under
247
Article 1191 of the Civil Code, Vertex initiated a suit
for the rescission of the sale and demanded the
reimbursement of the amount it paid
(or P1,100,000.00), plus interest.
The RTC dismissed the case, and held that the delay in
the issuance of a stock certificate does not warrant
rescission. The CA reversed the RTC, holding that
under Section 63 of the Corporation Code, there can
be no valid transfer of shares when there is no
delivery of the stock certificate, and that that the
delay was a substantial breach that warranted
rescission.
Is the delay in the issuance of the stock certificate a
substantial breach of the sale which entitles Vertex
entitled to the rescission thereof?
A: Yes. Section 63 of the Corporation Code provides,
among others, that shares of stock may be transferred by
delivery of the certificate or certificates indorsed by the
owner or his attorney-in-fact or other person legally
authorized to make the transfer.
In this case, Vertex fully paid the purchase price by
February 11, 1999 but the stock certificate was only
delivered on January 23, 2002 after Vertex filed an action
for rescission against FEGDI.
Under these facts, considered in relation to the governing
law, FEGDI clearly failed to deliver the stock certificates,
representing the shares of stock purchased by Vertex,
within a reasonable time from the point the shares should
have been delivered. This was a substantial breach of
their contract that entitles Vertex the right to rescind the
sale under Article 1191 of the Civil Code. It is not entirely
correct to say that a sale had already been consummated
as Vertex already enjoyed the rights a shareholder can
exercise. The enjoyment of these rights cannot suffice
where the law, by its express terms, requires a specific
form to transfer ownership.
Mutual restitution is required in cases involving
rescission under Article 1191 of the Civil Code; such
restitution is necessary to bring back the parties to their
original situation prior to the inception of the
contract. Accordingly, the amount paid to FEGDI by
reason of the sale should be returned to Vertex (Fil-Estate
Golf and Development, Inc. and Fil-Estate Land, Inc. v.
Vertex Sales and Trading, Inc., G.R. No. 202079, June 10,
2013).
Q: May Forest Hills appeal the CA decision which
ordered the recisision of the sale?
A: No. While Forest Hills questioned and presented its
arguments against the CA ruling rescinding the sale of the
share in its petition, it is not the proper party to appeal
this ruling.
As correctly pointed out by Forest Hills, it was not a party
to the sale even though the subject of the sale was its
share of stock. The corporation whose shares of stock are
the subject of a transfer transaction (through sale,
assignment, donation, or any other mode of conveyance)
need not be a party to the transaction, as may be inferred
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
from the terms of Section 63 of the Corporation Code.
However, to bind the corporation as well as third parties,
it is necessary that the transfer is recorded in the books
of the corporation. In the present case, the parties to the
sale of the share were FEGDI as the seller and Vertex as
the buyer (after it succeeded RSACC). As party to the sale,
FEGDI is the one who may appeal the ruling rescinding
the sale. The remedy of appeal is available to a party who
has "a present interest in the subject matter of the
litigation and is aggrieved or prejudiced by the judgment.
A party, in turn, is deemed aggrieved or prejudiced when
his interest, recognized by law in the subject matter of
the lawsuit, is injuriously affected by the judgment, order
or decree." The rescission of the sale does not in any way
prejudice Forest Hills in such a manner that its interest
in the subject matter – the share of stock – is injuriously
affected. Thus, Forest Hills is in no position to appeal the
ruling rescinding the sale of the share. Since FEGDI, as
party to the sale, filed no appeal against its rescission, we
consider as final the CA’s ruling on this matter (Forest
Hills Golf & Country Club v. Vertex Sales and Trading, Inc.,
G.R. No. 202205, March 6, 2013).
Validity of stock transfer
1. As between the parties, the requisite for a valid
transfer is merely the delivery of the certificate
indorsed by the owner or his attorney-in-fact or
other person legally authorized to make the transfer.
2. As against third persons and the corporation, the
transfer of shares must be entered and noted upon
the books of the corporation so as to show the names
of the parties to the transaction, the date of the
transfer, the number of the certificate, and the
number of shares transferred.
Effects of an unregistered transfer of shares
1. It is valid and binding as between the transferor and
the transferee.
2. It is invalid or ineffective, as to the corporation, as
against corporate creditors, as to the attaching or
executing creditors of the transferor, subsequent
purchasers in good faith without notice of the
transfer, and as to all persons interested except the
parties to such transfers.
ISSUANCE
Issuance of certificate of stock
It may only be issued until the full amount of the
stockholder’s subscription together with the interest and
expenses (in case of delinquent shares) if due has been
paid (CC, Sec. 64).
Requisites for the issuance of the certificate of stock
1. The certificate must be signed by the president or
vice-president, countersigned by the corporate
secretary or assistant secretary (Bitong v. CA, G.R. No.
123553, July 13, 1998);
NOTE: Unless it complies with the foregoing, it is not
deemed issued.
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
248
2. The certificate must be sealed with the seal of the
corporation;
3. The certificate shall be issued in accordance with the
by-laws;
4. The certificate must be delivered;
5. The par value as to par value shares, or full
subscription as to no par value shares must be fully
paid, the basis of which is the doctrine of
indivisibility of subscription;
6. The original certificate must be surrendered where
the person requesting the issuance of a certificate is
a transferee from the stockholder (CC, Sec. 64.).
As to payment full or pro rata
Rule: Sec 64 prohibits the issuance of certificate of stock
to a subscriber who has not paid “the full amount of his
subscription together with interest and expenses (in case
of delinquent shares), if any is due.
NOTE: The provision enunciates the doctrine that a
subscription is one, entire and indivisible contract, and
therefore, it cannot be divided into portions so that the
stockholder shall not be entitled to the certificate of stock
until he has paid the full amount of his subscription
together with interest and expenses, if any is due.
Contrary view: Unless prohibited by the by-laws,
certificates of stock may be issued for less than the
number of shares subscribed provided the par value of
each of the stocks represented by said certificate has been
fully paid [Baltazar v. Lingayen Gulf Electric Co., 14 SCRA
522 (1965)].
In other words, in the absence of provisions in the by-laws
to the contrary, a corporation may apply payments made
by subscribers on account of their subscriptions, either
as: (a) full payment for the corresponding number of
shares, the par value of which is covered by such payment,
or (b) as payment pro rata to each and all the entire
number of shares subscribed for. This rule applies to all
kinds and classes of stock corporations. The two
alternatives cannot be availed of at the same time (SEC
Opinion, Feb. 7, 1968).
LOST OR DESTROYED CERTIFICATES
Procedure for the issuance of a new stock certificate
in lieu of those which have been lost, stolen or
destroyed
1. The registered owner of a certificate of stock in a
corporation or his legal representative shall file with
the corporation an affidavit in triplicate setting forth:
a. If possible, the circumstances as to how the
certificate was lost, stolen or destroyed;
b. The number of shares represented by such
certificate;
c. The serial number of the certificate and the
name of the corporation which issued the same.
He shall also submit such other information and
evidence which he may deem necessary.
 CORPORATION CODE
2. After verifying the affidavit and other information
and evidence with the books of the corporation, the
latter shall publish a notice in a newspaper of general
circulation published in the place where the
corporation has its principal office, once a week for
three (3) consecutive weeks at the expense of the
registered owner of the Certificate of Stock.
Contents of notice:
a. Name of the corporation;
b. Name of the registered owner;
c. Serial number of the certificate of stock.
d. Number of share represented by the certificate
of stock.
3. After the expiration of one (1) year from the date of
the last publication, if no contest has been presented
to said corporation regarding said certificate of stock,
the corporation shall cancel in its books the
certificate of stock which has been lost, stolen or
destroyed and issue in lieu thereof new certificate of
stock.
After the expiration of the 1 year period to contest,
such right shall be barred unless the registered
owner files a bond or other security in lieu thereof as
may be required, effective for a period of 1 year, for
such amount and in such form and with such sureties
as may be satisfactory to the BOD, in which case, a
new certificate may be issued even before the
expiration of the 1 year period provided herein.
4. Provided that if a contest has been presented to said
corporation or if an action is pending in court
regarding the ownership of said certificate of stock
which has been lost, stolen or destroyed, the issuance
of the new certificate of stock in lieu thereof shall be
suspended until the final decision by the court
regarding the ownership of said certificate of stock
which has been lost, stolen or destroyed (CC, Sec. 73).
Oppositions on the issuance of new certificates
If there are oppositions on the issuance of new
certificates, the corporation may file an interpleader
proceeding to compel the parties to litigate among
themselves.
Liability of the corporation for the issuance of new
certificates of stock in case of lost or destroyed
certificate
GR: No action may be brought against any corporation
which shall have issued certificate of stock in lieu of those
lost, stolen or destroyed pursuant to the procedure
above-described (safe harbor provision).
XPN: Where there is fraud, bad faith, or negligence on the
part of the corporation and its officers (ibid).
Q: A stockholder claimed that his stock certificate was
lost. After going through with the procedure for the
issuance of lost certificate, and no contest was
presented within 1 year from the last publication, the
corporation issued a new certificate of stock in lieu of
249
the supposed lost certificate. The stockholder
immediately sold his shares and endorsed the
replacement certificate to a buyer. It turned out that
the original certificate was not lost, but sold and
endorsed to another person.
a. May the corporation be made liable by the
aggrieved party?
b. Who will have a better right over the shares, the
endorsee of the original certificate or the
endorsee of the replacement certificate?
A:
a. No. The corporation cannot be made liable. Except in
cases of fraud, bad faith, or negligence on the part of
the corporation and its officers, no action may be
brought against any corporation which has issued
certificates of stock in lieu of those lost, stolen, or
destroyed pursuant to the procedure prescribed by
law.
b. The endorsee of the replacement certificate has a
better right to the shares. After expiration of 1 year
from the date of the last publication, and no contest
has been presented to said corporation regarding
said certificate, the right to make such contest has
been barred and said corporation already cancelled
in its books the certificate which have been lost,
stolen, or destroyed and issued in lieu thereof new
certificate.
Q: Juan was a stockholder of X Co. He owned a total of
500 shares evidenced by Cert of Stock No 1001. He
sold the shares to Pedro. After getting paid, Juan
indorsed and delivered said Certificate of Stock No
1001 to Pedro. The following day, Juan went to the
offices of the corporation and claimed that his
Certificate of Stock No 1001 was lost and that, despite
diligent efforts, the certificate could not be located.
The formalities prescribed by law for the
replacement of the lost certificate were complied
with. Eventually X Co issued in substitution of the lost
certificate, Cert of Stock No 2002. Juan forthwith
transferred for valuable consideration the new
certificate to Jose who knew nothing of the previous
sale to Pedro. In time, the corporation was confronted
with the conflicting claims of Jose and Pedro. The BOD
of X Co invited you to enlighten them on these
questions; viz:
a. If a suit were to be initiated in order to resolve
the controversy between Pedro and Jose, should
the matter be submitted to the SEC or to the
regular courts?
b. Between Jose and Pedro, whom should the
corporation so recognize as the rightful
stockholder? How would you respond to the
above queries? (1997 Bar)
A:
a. The jurisdiction of the matter belongs to the regular
courts. Under section 5.2 of the SRC as amended, the
jurisdiction for intra-corporate controversies was
transferred from the SEC to the regular courts.
b. The corporation should recognize both Pedro and
Jose as rightful stockholders if there is no over-
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
issuance of shares resulting from the two
transactions without prejudice to the right of the
corporation to claim against Juan for the value of the
shares sold to Jose.
STOCK AND TRANSFER BOOK
CONTENTS
1. All stocks in the name of the stockholders
alphabetically arranged
2. Amount paid and unpaid on all stocks and the date of
payment of any installment
3. Alienation, sale or transfer of stocks
4. Other entries as the by-laws may prescribe
(Sundiang Sr. & Aquino, 2009).
WHO MAY MAKE VALID ENTRIES
Entries in stock and transfer books
The obligation and duty to make proper entries in stock
and transfer books falls on the corporate secretary. If the
corporate secretary refuses to comply, the stockholder
may rightfully bring suit to compel performance. The
stockholder cannot take the law on to his hands;
otherwise such entry shall be void (Torres, Jr. v. CA, G.R.
No. 120138, Sept. 5, 1997).
Q: Judge Torres was the majority stockholder of
Tormil Realty & Development Corporation (Tormil)
while Antonio Torres, et al., who are the children of
Judge Torres’ deceased brother constituted the
minority stockholders. During the 1987 annual
stockholders meeting and election of directors of
Tormil, Judge Torres assigned from his own shares,
one (1) share each to Tobias, et al. These assigned
shares were in the nature of qualifying shares, for the
sole purpose of meeting the legal requirement to be
able to elect them to the Board of Directors as Torres’
nominees. The nominees were thereafter elected.
Consequently, Antonio, et al., instituted a complaint
with the SEC praying that the election of the nominees
to the Board of Directors be annulled. They alleged
that the petitioners-nominees were not legitimate
stockholders of Tormil because the assignment of
shares to them violated the minority stockholders’
right of pre-emption as provided in the corporation’s
articles and by-laws. Among others, the nominees
insist that the assignment of “qualifying shares” to
them of the late Judge Torres (herein petitioners)
does not partake of the real nature of a transfer or
conveyance of shares of stock as would call for the
“imposition of stringent requirements of recording of
the transfer of said shares.” Anyway, the nominees
add, there was substantial compliance with the
above-stated requirement since said assignments
were entered by the late Judge Torres himself in the
corporation’s stock and transfer book prior to the
annual stockholders meeting. Are the entries made by
Judge Torres in the stock and transfer book valid?
A: No. The entries are not valid. In the absence of any
provision to the contrary, the corporate secretary is the
custodian of corporate records. Corollarily, he keeps the
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
250
stock and transfer book and makes proper and necessary
entries therein. Contrary to the generally accepted
corporate practice, the stock and transfer book of TORMIL
was not kept by Ms. Maria Cristina T. Carlos, the corporate
secretary but by respondent Torres, the President and
Chairman of the Board of Directors of TORMIL. In
contravention Section 74, the stock and transfer book was
not kept at the principal office of the corporation either
but at the place of Torres. Any entries made in the stock
and transfer book on March 8, 1987 by Torres of an
alleged transfer of nominal shares to Pabalan and Co.
cannot therefore be given any valid effect (Manuel A.
Torres, Jr., et al., v. CA, et al., G.R. No. 120138, September 5,
1997).
Probative value of the stock and transfer book
The stock and transfer book is the best evidence of the
transactions that must be entered or stated therein.
However, the entries are considered prima facie evidence
only and may be subject to proof to the contrary (Bitong
vs. CA, supra).
DISPOSITION AND ENCUMBRANCE OF SHARES
Registration by the corporation of the transfer of
shares in case of alienation
As between the parties to the contract of sale, registration
of the transfer of shares is not required. However, until
the shares are fully paid, such transfer cannot be recorded
in the books of the corporation. Consequently, the
transferee will not be considered as a stockholder.
Reasons for the recording of the alienation of shares
1. To enable the corporation to know at all times their
actual stock holders;
2. To afford the corporation the opportunity to object
or refuse its consent to the transfer in case it has any
claim against the stock; and
3. To avoid fictitious and fraudulent transfer.
ALLOWABLE RESTRICTIONS ON
THE SALE OF SHARES
Requisites for a restriction to be valid
1. Restrictions are provided in the articles of
incorporation and
2. It must be printed at the back of the certificate of
stock.
3. Must not be more onerous than the right of first
refusal
Corporation can provide regulations to the
sale/transfer of the shares of stockholders
Corporation can provide regulations to the sale/transfer
of the shares of stockholders but the authority granted to
a corporation to regulate the transfer of its stock does not
empower it to restrict the right of a stockholder to
transfer his shares, but merely authorizes the adoption of
regulations as to the formalities and procedure to be
 CORPORATION CODE
followed in effecting transfer (Thomson v. CA, G.R. No.
116631, October 28, 1998).
SALE OF PARTIALLY PAID SHARES
A stockholder can transfer his shares without being
fully paid
The incomplete payment of the subscription does not
preclude the subscriber from alienating his shares of
stock. However, the transfer shall be valid only between
the parties.
A transferee of the partially paid shares cannot
compel the corporation to record the transfer of
shares in its books, even though he has no knowledge
that they are not fully paid
Shares of stock against which the corporation holds any
unpaid claim shall not be transferable in the books of the
corporation. Hence, a transferee of the partially paid
shares cannot compel the corporation to record the
transfer of shares in its books, even though he has no
knowledge that they are not fully paid (CC, Sec. 63).
SALE OF A PORTION OF SHARES
NOT FULLY PAID
Stockholder cannot sell a portion of the shares not
fully paid
A stockholder who has not paid the full amount of his
subscription cannot transfer a portion of his subscription
in view of the indivisible nature of the subscription
contract (Villanueva, 2009).
Liability of the transferee for the balance of the
purchase price in case the stockholder on record fails
to pay the same
In case the stockholder on record fails to pay the pay the
balance of the purchase price, he is still liable for the
balance of the purchase price. Unless the transfer of the
shares is recorded, the stockholder is still the owners of
the shares as far as the corporation is concerned.
Reason: The subscriber is as much bound to pay his
subscription as he would be to pay any other debt. (Nava
v. Peers Marketing Corporation, G.R. No. L-28120
November 25, 1976)
Q: Po subscribed to 80 shares of Peers Marketing
Corporation at one hundred pesos a share with a total
value of 8,000 pesos. Po initially paid 2,000 pesos
(25% of the amount of subscription). Without paying
the full subscription price, Po sold to Nava 20 of his 80
shares. Nava requested the officers of the corporation
to register the sale in the books of the corporation.
The request was denied because Po has not paid fully
the amount of his subscription. Can Nava compel the
corporation to register the sale?
A: No. The corporation has a claim on the said shares for
the unpaid balance of Po's subscription. A stock
subscription is a subsisting liability from the time the
251
subscription is made. The subscriber is as much bound to
pay his subscription as he would be to pay any other debt
(Ibid).
SALE OF ALL SHARES NOT FULLY PAID
The incomplete payment of the subscription does not
preclude the subscriber from alienating his shares of
stock. However, the transfer shall be valid only between
the parties. The corporation has the right to refuse from
recording the sale in its books.
SALE OF FULLY PAID SHARES
Sale of fully paid shares is allowed even without the
consent of the corporation as long as the requisites for the
valid transfer of shares are complied.
Q: Four months before his death, PX assigned 100
shares of stock registered in his name in favor of his
wife and his children. They then brought the deed of
assignment to the proper corporate officers for
registration with the request for the transfer in the
corporation's stock and transfer books of the
assigned shares, the cancellation of the stock
certificates in PX's name, and the issuance of new
stock certificates in the names of his wife and his
children as the new owners. The officers of the
Corporation denied the request on the ground that
another heir is contesting the validity of the deed of
assignment. May the Corporation be compelled by
mandamus to register the shares of stock in the
names of the assignees? (2004 Bar)
A: Yes. The corporation may be compelled by mandamus
to register the shares of stock in the name of the assignee.
The only legal limitation imposed by Section 63 of the
Corporation Code is when the Corporation holds any
unpaid claim against the shares intended to be
transferred. The alleged claim of another heir of PX is not
sufficient to deny the issuance of new certificates of stock
to his wife and children. It would be otherwise if the
transferee's title to the shares has no prima facie validity
or is uncertain.
Recording of a deed of assignment with the SEC
without the transfer of shares does not bind the
corporation and third persons
The recording of a deed of assignment does not give rise
to any legal benefit to the corporation or any person (Sec
Memo Circular No. 17, Series of 2004).
INVOLUNTARY DEALINGS WITH SHARES
Involuntary dealing
It refers to such writ, order or process issued by a court of
record affecting shares of stocks which by law should be
registered to be effective, and also to such instruments
which are not the willful acts of the registered owner and
which may have been executed even without his
knowledge or against his consent.
Examples of involuntary dealings of a share
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
1. Attachment
2. Sale on execution of judgment or sales for taxes
3. Adverse claims
4. Foreclosure of mortgage of stocks
Involuntary dealings must be registered
It is the act of registration which creates a constructive
notice to the whole world of such instrument or court writ
or process and is the operative act that conveys
ownership (Aquino, 2007).
DISSOLUTION AND LIQUIDATION
Dissolution
It is the extinguishment of the franchise of a corporation
and the termination of its corporate existence (Sundiang
Sr. & Aquino, 2009).
De jure and de facto dissolution
De jure dissolution – is a dissolution in law adjudged and
determined by judicial sentence or brought about by an
act of or with the consent of the sovereign power or which
results from the expiration of the charter period of
corporate life.
De facto dissolution – is one which takes place in
substance and in fact when the corporation by reason of
insolvency, cessation of business, or otherwise suspends
all its operations and goes into liquidation still retaining
its primary franchise to be a corporation.
Two legal steps in corporate dissolution
1. The termination of the corporate existence at least as
far as the right to go on doing ordinary business is
concerned;
2. The winding up of its affairs, the payment of its debts,
and the distribution of its assets among the
shareholders or members and other persons
interested. After winding up, the existence of the
corporation is terminated for all purposes.
Effects of the dissolution of a corporation
1. Corporation ceases as a body corporate to continue
the business for which it was established (CC, Sec.
122).
2. The assets of the corporation will then be liquidated
and legal title to the remaining corporate properties
are transferred to the stockholders who become co-
owners thereof
3. The Corporation continues as a body corporate for 3
years only for the purpose of winding up or
liquidation.
4. A dissolved corporation cannot be revived. However,
those interested may reincorporate by refilling a new
AOI and by-laws (Rebollido vs. CA, G.R. No. 81123,
February 28, 1989).
Q: Philippine College of Criminology Inc. (PCCI) is a
non-stock educational institution, while Vigilla et al.
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
252
were janitors, janitresses and supervisor in the
Maintenance Department of PCCI under the
supervision and control of Atty. Florante A. Seril (Atty.
Seril). Vigilla et al., however, were made to
understand, upon application with PCCI, that they
were under Metropolitan Building Services, Inc.
(MBMSI), a corporation engaged in providing
janitorial services to clients where Atty. Seril is also
the President and General Manager. Sometime in
2008, PCCI discovered that the Certificate of
Incorporation of MBMSI had been revoked. Hence,
PCCI terminated the school’s relationship with
MBMSI, resulting in the dismissal of the employees
under MBMSI. Thus, the dismissed employees filed
their respective complaints for illegal dismissal,
reinstatement, backwages, underpayment of salaries,
overtime pay, holiday pay, service incentive leave,
and 13th month pay against MBMSI, Atty. Seril, PCCI,
and Bautista.
PCCI submitted several documents before the labor
arbiter (LA), including releases, waivers and
quitclaims in favor of MBMSI executed by Vigilla et al.
to prove that they were employees of MBMSI and not
PCCI. The LA ruled in favor of Vigilla et al., However,
on appeal, both the NLRC and the CA excused PCCI
from liability.
May a dissolved corporation enter into an agreement
such as releases, waivers and quitclaims beyond the
3-year winding up period under Section 122 of the
Corporation Code?
A: Yes. The executed releases, waivers and quitclaims are
valid and binding notwithstanding the revocation of
MBMSI’s Certificate of Incorporation. The revocation does
not result in the termination of its liabilities. Section 122
of the Corporation Code provides for a three-year winding
up period for a corporation whose charter is annulled by
forfeiture or otherwise to continue as a body corporate
for the purpose, among others, of settling and closing its
affairs. Even if said documents were executed in 2009, six
(6) years after MBMSI’s dissolution in 2003, the same are
still valid and binding upon the parties and the dissolution
will not terminate the liabilities incurred by the dissolved
corporation pursuant to Sections 122 and 145 of the
Corporation Code (Vigilla v. Philippine College of
Criminology, G.R. No. 200094, June 10, 2013).
Q: Vitaliano Aguirre, II, one of the original subscribers
of FQB+7, filed a complaint for intra-corporate
dispute against Nathaniel Bocobo, Priscilla Bocobo
and Antonio De Villa upon learning that they have
filed, as corporate officers of FQB+7, a GIS which
showed a different set of Directors and Subscribers
from that of the AoI.
In response, Nathaniel, et al. filed a petition for
certiorari with the CA for the annulment of the
proceedings in the RTC claiming that the SEC had
already revoked FQB+7’s certificate of registration
almost a year before Aguirre filed his complaint with
the RTC.
 CORPORATION CODE
The CA ruled that the complaint, being geared
towards the continuation of FQB+7, Inc.’s business,
should be dismissed because the corporation has lost
its juridical personality. Moreover, the CA held that
the trial court does not have jurisdiction to entertain
an intra-corporate dispute when the corporation is
already dissolved.
Is the case an intra-corporate dispute and is thus
under the jurisdiction of the RTC?
A: Yes. The Court finds and so holds that the case is
essentially an intra-corporate dispute. It obviously arose
from the intra-corporate relations between the parties,
and the questions involved pertain to their rights and
obligations under the Corporation Code and matters
relating to the regulation of the corporation. The Court
further holds that the nature of the case as an intra-
corporate dispute was not affected by the subsequent
dissolution of the corporation.
It bears reiterating that Section 145 of the Corporation
Code protects, among others, the rights and remedies of
corporate actors against other corporate actors. The
statutory provision assures an aggrieved party that the
corporation’s dissolution will not impair, much less
remove, his/her rights or remedies against the
corporation, its stockholders, directors or officers. It also
states that corporate dissolution will not extinguish any
liability already incurred by the corporation, its
stockholders, directors, or officers. In short, Section 145
preserves a corporate actor’s cause of action and remedy
against another corporate actor. In so doing, Section 145
also preserves the nature of the controversy between the
parties as an intra-corporate dispute.
The dissolution of the corporation simply prohibits it
from continuing its business. However, despite such
dissolution, the parties involved in the litigation are still
corporate actors. The dissolution does not automatically
convert the parties into total strangers or change their
intra-corporate relationships. Neither does it change or
terminate existing causes of action, which arose because
of the corporate ties between the parties. Thus, a cause of
action involving an intra-corporate controversy remains
and must be filed as an intra-corporate dispute despite
the subsequent dissolution of the corporation (Aguirre v.
FQB+7 Inc., GR No. 170770, January 9 2013).
Q: Alabang Development Corporation (ADC),
developer of Alabang Hills Village, filed with the RTC
a complaint for injunction against Alabang Hills
Village Association, Inc. (AHVAI) and its president,
Rafael Tino, alleging that AHVAI started the
construction of a multi-purpose hall and a swimming
pool on one of the parcels of land still owned by ADC,
without the latter’s consent and approval.
AHVAI claimed that ADC had no legal capacity to sue
since its existence as a registered corporate entity
was revoked by the SEC on May 26, 2003. The RTC
dismissed ADC’s petition due to lack of personality
which was affirmed by the CA.
Did the CA err in declaring that ADC lacked the
capacity to file the complaint?
253
A: No. In the instant case, there is no dispute that ADC's
corporate registration was revoked on May 26, 2003.
Based on Section 122 of the Corporation Code, it had three
years, or until May 26, 2006, to prosecute or defend any
suit by or against it. The subject complaint, however, was
filed only on October 19, 2006, more than three years
after such revocation.
In the present case, ADC filed its complaint not only after
its corporate existence was terminated but also beyond
the three-year period allowed by Section 122 of the
Corporation Code. Thus, it is clear that at the time of the
filing of the subject complaint ADC lacks the capacity to
sue as a corporation. To allow ADC to initiate the subject
complaint and pursue it until final judgment, on the
ground that such complaint was filed for the sole purpose
of liquidating its assets, would be to circumvent the
provisions of Section 122 of the Corporation Code
(Alabang Development Corporation v. Alabang Hills Village
Association and Rafael Tinio, G.R. No. 187456, June 2, 2014).
Procedure for dissolution of a corporation sole
In case of a corporation sole, by submitting to the SEC for
approval, a verified declaration of dissolution which will
set forth the following:
1. The name of the corporation;
2. The reason for dissolution and winding up;
3. The authorization for the dissolution of the
corporation by the particular religious
denomination, sect or church;
4. The names and addresses of the persons who are to
supervise the winding up of the affairs of the
corporation.
Upon approval of such declaration of dissolution by the
Securities and Exchange Commission, the corporation
shall cease to carry on its operations except for the
purpose of winding up its affairs (CC, Sec. 115).
Dissolution by merger or consolidation
Upon issuance of SEC of a Certificate of Merger or
Consolidation, the corporate existence of the absorbed
corporation and the constituent corporations in case of
consolidation shall automatically cease. No liquidation
proceedings will thereafter be conducted (CC, Sec. 80).
MODES OF DISSOLUTION
Modes of dissolution
The following are the modes of dissolution of the
corporation:
1. Voluntary
a. By the vote of the BOD/ BOT and the
stockholders/ members where no creditors are
affected (CC, Sec. 118).
b. By the judgment of the SEC after hearing of
petition for voluntary dissolution, where
creditors are affected (CC, Sec. 119).
c. By amending the AOI to shorten the corporate
term (CC, Sec. 120).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
d. In case of a corporation sole, by submitting to
the SEC a verified declaration of the dissolution
for approval (CC, Sec. 115).
e. Merger or consolidation
2. Involuntary
a. By expiration of corporate term provided for in
the AOI (CC, Sec. 11).
b. By legislative enactment
c. By failure to formally organize and commence
the transaction of its business within 2 years
from the date of incorporation (CC, Sec. 22).
d. By order of the SEC on grounds under existing
laws (CC, Sec. 121).
e. Judicial decree on Quo Warranto Proceeding
(CC, Sec. 20).
NOTE: Methods effecting dissolution as prescribed by
statute are exclusive, and a corporation cannot be
dissolved except in the manner prescribed by law (De
Leon, 2010).
The requirements for dissolution mandated by the CC
should be strictly complied with (Vesaga vs. CA, G.R. No.
142924, December 5, 2001).
NOTE: Piercing the veil of corporate fiction is not one of
the causes by which a corporation may be dissolved.
Q: AAA Corporation is a bank. The operations of AAA
Corporation as a bank were not doing well. So, to
avert any bank run, AAA Corporation, with the
approval of the Monetary Board, sold all its assets and
liabilities to BBB Banking Corporation which includes
all deposit accounts. In effect then, BBB Corporation
will service all deposits of all depositors of AAA
Corporation.
a. Will the sale of all assets and liabilities of AAA
Corporation to BBB Banking Corporation
automatically dissolve or terminate the
corporate existence of AAA Corporation? Explain
your answer.
b. What are the legal requirements in order that a
corporation may be dissolved? (2012 Bar)
A:
a. No. AAA Corporation is an artificial being created by
law and has a legal personality of its own. A
corporation does not owe its existence upon the
presence of assets and properties. It can only be
dissolved in cases provided for by law. As such, AAA
Corporation will subsist regardless of the sale of all
of its assets and liabilities to another corporation.
b. A corporation may be dissolved voluntarily, by
shortening of the corporate term and through
involuntary dissolution. In voluntary dissolution, the
action for dissolution must be approved by majority
of the directors or trustees and 2/3 of the
stockholders representing the outstanding capital
stock or members, publication requirement and filed
with SEC which will issue certificate of dissolution. If
there are creditors affected, there must be a hearing
to hear the objections and claims of the creditors. In
case of shortening of corporate term, through
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
254
amendment of the AOI. In involuntary dissolution,
through filing of a verified complaint with the SEC
based on any ground provided by law or rules.
VOLUNTARY
WHERE NO CREDITORS ARE AFFECTED
Procedure of dissolution of a corporation where no
creditors are affected (Meet-NAC-PA)
1. A MEETing must be held on the call of directors or
trustees;
2. Notice of the meeting
a. Given to each stockholder or member either by
registered mail or by personal delivery at least
thirty (30) days prior to the said meeting and
b. Published for three (3) consecutive weeks in a
newspaper published in the place where the
principal office of said corporation is located
and if no newspaper is published in such place,
then in a newspaper of general circulation in the
Philippines.
3. Resolution to dissolve must be Approved by majority
vote of the board of directors or trustees and adopted
by the affirmative vote of stockholders representing
at least 2/3 of the outstanding capital stock or 2/3 of
members.
4. Copy of the resolution is then certified by the
majority of Board of directors or trustees and
countersigned by the secretary of the Corporation.
5. Petition for dissolution together with the signed and
countersigned copy of the resolution is then filed
with the SEC.
6. Approval of SEC of the petition and issuance of
certificate of dissolution (CC, Sec. 118).
WHERE CREDITORS ARE AFFECTED
Procedure of dissolution of a corporation where
creditors are affected (APSIVECSO – CPUPOOJ)
1. Approval of the stockholders representing at least
2/3 of the outstanding capital stock or by at least
two-thirds (2/3) of the members at a meeting of its
stockholders or members called for that purpose.
2. Filing of Petition for dissolution with SEC, petition
must be: (SiVeCS)
a. SIgned by a majority of its board of directors or
trustees or other officers having the
management of its affairs;
b. VErified by its president or secretary or one of
its directors or trustees;
c. Set forth all Claims and demands against it;
d. State that its dissolution was approved by the
required votes of Stockholders or members.
3. SEC shall issue an Order reciting the purpose of the
petition and fix a date when objections thereto may
be filed by any person. Said date must not be less than
thirty (30) days nor more than sixty (60) days after
the entry of the order.
4. Copy of the order shall be:
a. PUblished at least once a week for three (3)
consecutive weeks in a newspaper of
 CORPORATION CODE
general circulation published in the
municipality or city where the principal
office of the corporation is situated, or if
there be no such newspaper, then in a
newspaper of general circulation in the
Philippines, and
b. POsted for three (3) consecutive weeks in
three (3) public places in such municipality
or city.
5. After expiration of the time to file objections and
upon prior 5-day notice to hear the objections, SEC
shall proceed to hear the petition and try any issue
made by the Objections file.
6. If no objection is sufficient and the material
allegations of the petition are true, it shall render
Judgment dissolving the corporation and directing
such disposition of its assets as justice requires, and
may appoint a receiver to collect such assets and pay
the debts of the corporation.
Creditor’s consent is not necessary for dissolution
Consent of creditors are not necessary to approve
dissolution for the reason that liquidation proceedings
will be conducted to protect their interest.
BY SHORTENING THE CORPORATE TERM
Procedure for dissolving the corporation by
shortening of the corporate term (ASAF)
1. Amending the Articles of Incorporation pursuant to
Sec. 16:
a. Approved by majority vote of the board of
directors or trustees
b. Ratified at a meeting by the stockholders
representing at least 2/3 of the outstanding
capital stock or by at least two-thirds (2/3) of
the members in case of non-stock corporations).
2. Copy of the amended AOI shall be submitted with the
SEC.
3. Approval of SEC of the amended AOI.
4. As an additional requirement, the SEC requires to
submit the final audited Financial statement not
older than 60 days before the application for
shortening the corporate term (CC, Sec. 120 in
relation to Sec. 16).
Q: The Securities and Exchange Commission
approved the amendment of the articles of
incorporation of GHQ Corporation shortening its
corporate life to only 25 years in accordance with Sec.
120 of the Corporation Code. As shortened, the
corporation continued its business operations until
May 30, 1997, the last day of its corporate existence.
Prior to said date, there were a number of pending
civil actions, of varying nature but mostly money
claims filed by creditors, none of which was expected
to be completed or resolved within five years from
May 30, 1997. If the creditors had sought your
professional help at that time about whether or not
their cases could be pursued beyond May 30, 1997,
what would have been your advice? (2000 Bar)
255
A: The cases can be pursued even beyond May 30, 1997,
the last day of the corporate existence of GHQ
Corporation. The corporation is not actually dissolved
upon the expiration of its corporate term. There is still the
period for liquidation or winding up.
Q: X Corporation shortened its corporate life by
amending its articles of incorporation. It has no debts
but owns a prime property located in Quezon City.
How would the said property be liquidated among the
five stockholders of said corporation? Discuss two
methods of liquidation. (2001 Bar)
A: The prime property of X Corporation can be liquidated
among the five stockholders after the property has been
conveyed by the corporation to the five stockholders, by
dividing or partitioning it among themselves in any two of
the following ways:
1. By physical division or partition based on the
proportion of the values of their stockholdings; or
2. By selling the property to a third person and dividing
the proceeds among the five stockholders in
proportion to their stockholdings; or
3. After the determination of the value of the property,
by assigning or transferring the property to one
stockholder with the obligation on the part of said
stockholder to pay the other four stockholders the
amount/s in proportion to the value of the
stockholding of each.
INVOLUNTARY
EXPIRATION OF CORPORATE TERM
The corporation shall exist within the period stated in the
AOI not exceeding 50 years unless sooner legally
dissolved (CC, Secs. 19, 22, 117-122, 144, 145) or unless its
registration is revoked upon any of the grounds provided
by law (CC, Sec. 6, PD 902-A & Sec. 22). In the absence of
any express stipulation, it shall exist for a period not
exceeding fifty (50) years from the date of incorporation.
After the term had expired without extension, the
corporation is dissolved.
Q: XYZ Corporation entered into a contract of lease
with ABC, Inc., over a piece of real estate for a term of
20 years, renewable for another 20 years, provided
that XYZ's corporate term is extended in accordance
with law. Four years after the term of XYZ Corporation
expired, but still within the period allowed by the
lease contract for the extension of the lease period,
XYZ Corp. notified ABC, Inc., that it is exercising the
option to extend the lease. ABC, Inc., objected to the
proposed extension, arguing that since the corporate
life of XYZ Corp. had expired, it could no longer opt to
renew the lease. XYZ Corp. countered that
withstanding the lapse of its corporate term it still has
the right to renew the lease because no quo warranto
proceedings for involuntary dissolution of XYZ Corp.
has been instituted by the Office of the Solicitor
General. Is the contention of XYZ Corp. meritorious?
Explain briefly (2004 Bar).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
A: No. XYZ Corporation’s contention is not meritorious
XYZ Corp. was dissolved ipso facto upon the expiration of
its original term. It ceased to be a body corporate for the
purpose of continuing the business for which it was
organized, except only for purposes connected with its
winding up or liquidation. Extending the lease is not an
act to wind up or litigate XYZ’s affairs. It is contrary to the
idea of winding up the affairs of the corporation (PNB v.
CFI of Rizal, G.R. No. 63201, May 27, 1992).
Remedy in case the stockholders want to still
continue the business of the corporation after its term
expired
The remedy of the stockholders is reincorporation.
Amending the articles of the incorporation to extend the
corporate term is not an available remedy as the
corporation has ceased to exist.
There is nothing to prevent the stockholders from
conveying their shareholdings toward the creation of a
new corporation to continue the business of the old.
Winding up is the sole activity of a dissolved corporation
that does not intend to incorporate anew.
It is not unlawful for the old board of directors to
negotiate and transfer the assets of the dissolved
corporation to the new corporation intended to be
created as long as the stockholders have given their
consent (Chung Ka Bio v Intermediate Appellate Court, G.R.
No. 71837, July 26, 1988).
FAILURE TO ORGANIZE AND COMMENCE BUSINESS
WITHIN 2 YEARS FROM INCORPORATION
Meaning of “formally organize”
Organize as used in reference to corporations means:
1. Election of officers, providing for the subscription
and
2. Payment of the capital stock, and
3. Adoption of by-laws,
4. Such other similar steps as are necessary to endow
the legal entity with the capacity to transact the
legitimate business for which it was created (Benguet
Consolidated Mining Co. v Pineda, G.R. No. L-7231,
March 28, 1956).
Effect of failure of a corporation to formally organize
If a corporation does not formally organize and
commence the transaction of its business or the
construction of its works within two (2) years from the
date of its incorporation, its corporate powers cease and
the corporation shall be deemed dissolved (CC, Sec 22).
LEGISLATIVE DISSOLUTION
A corporation created by special law can be dissolved by
an enactment of special law or expiration of its charter.
Limitations:
1. Under the constitution, the amendment, alteration or
repeal of the corporate franchise of a public utility
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
256
shall be made only “when the common good so
requires.”
2. Section 145.
3. It cannot impair the obligations of existing contracts
between the corporation and third persons, or take
away vested rights of its creditors. However, if
effected because the common good so requires, there
is no impairment.
DISSOLUTION BY THE SEC ON
GROUNDS UNDER EXISTING LAWS
Dissolution by the SEC
A corporation may be dissolved by the Securities and
Exchange Commission upon filing of a verified complaint
and after proper notice and hearing on the grounds
provided by existing laws, rules and regulations (CC, Sec.
121).
The following are some of the grounds, which may result
to the issuance of a dissolution order by the SEC after
conduct of appropriate proceedings:
1. Violations of the Corporation committed by the
corporation. Such violations are generally penalized
by Sec. 144 as the Code did not specifically penalize
the same.
2. Deadlocks in a close corporation (CC, Sec. 104)
3. Mismanagement of a close corporation (CC, Sec. 105)
4. On any of the following grounds, wherein the SEC
retains its power to suspend or revoke, after proper
notice and hearing, the franchise or certificate of
registration of the corporations, partnerships or
associations: (FMI-DBR)
a. Fraud or misrepresentation in procuring its
Certificate of Registration;
b. Serious Misrepresentation as to what the
corporation can do or is doing to the great
prejudice of or damage to the general public;
c. continuous Inoperation for a period of at least 5
years (Sec. 22, CC);
d. Refusal to comply or Defiance with any lawful
order, rules or regulations of SEC restraining
commission of acts which would amount to a
grave violation of its franchise;
e. Failure to file By-laws within the required
period. However, SEC must give the corporation
the opportunity to explain such failure;
f. Failure within the prescribed period to submit
required Reports in appropriate forms as
determined by the SEC (e.g. General Information
Sheet, Financial Statements) (De Leon, 2010).
NOTE: All actions filed with the SEC must be prosecuted
and defended in the name of the real party-in-interest
(SEC Rules of Procedure, Rule III, Sec. 2).
METHODS OF LIQUIDATION
Liquidation
Process by which all the assets of the corporation are
converted into liquid assets (cash) in order to facilitate
the payment of obligations to creditors and the remaining
 CORPORATION CODE
balance if any is to be distributed to the stockholders
(Sundiang Sr. & Aquino, 2014).
Method of liquidation
1. By the corporation itself or its board of directors or
trustees; (CC , Sec. 122 [1])
2. By a trustee to whom the assets of the corporation
had been conveyed. (CC, Sec. 122[2]); (Board of
Liquidators v. Kalaw, G.R. No. L-18805, Aug. 14, 1967)
3. By a management committee or rehabilitation
receiver appointed by SEC (CC, Sec. 119).
Approval of the SEC is not required in order to
liquidate and distribute the assets of a dissolved
corporation
The liquidation and distribution of the assets of a
dissolved corporation is a matter of internal concern of
the corporation and falls within the power of the directors
and stockholders or duly appointed liquidation trustee
(SEC Opinion, July 23, 1996).
Q: Lucia prayed before the RTC-Iriga to annul the
extrajudicial partition and deed of mortgage executed
by her children, Roy Barrameda, et al., over the estate
of her deceased husband, having been executed
without her knowledge and consent. She also prayed
for damages.
After the case was set for pre-trial, RBCI filed a motion
to withdraw after being informed that the PDIC would
handle the case as RBCI had already been closed and
placed under the receivership of the
former. Consequently, the lawyers of PDIC took over
the case of RBCI.
The RTC-Iriga dismissed the case as it is RTC-Makati
which had jurisdiction. Lucia appealed to the CA,
which ordered the consolidation of her petition for
annulment of the partition, and the liquidation case of
RBCI.
May Lucia’s petition proceed independently of the
liquidation proceedings of RBCI?
A: No. After the Monetary Board has declared that a bank
is insolvent and has ordered it to cease operations, the
Board becomes the trustee of its assets for the equal
benefit of all the creditors, including depositors. The
assets of the insolvent banking institution are held in trust
for the equal benefit of all creditors, and after its
insolvency, one cannot obtain an advantage or a
preference over another by an attachment, execution or
otherwise.
Thus, to allow Lucia’s case to proceed independently of
the liquidation case, a possibility of favorable judgment
and execution thereof against the assets of RBCI would
not only prejudice the other creditors and depositors but
would defeat the very purpose for which a liquidation
court was constituted as well. It would be more in keeping
with law and equity if Lucia’s case is consolidated with the
liquidation case in order to expeditiously determine
whether she is entitled to recover the property subject of
mortgage from RBCI and, if so, how much she is entitled
257
to receive from the remaining assets of the bank
(Barrameda v. Rural Bank of Canaman, Inc., G.R. No.
176260, November, 24 2010, in Divina 2014).
Period of Liquidation
The period of liquidation is three (3) years.
Corporation in the process of liquidation does not
have legal authority to engage in any new business
A corporation in the process of liquidation has no legal
authority to engage in any new business, even if the same
is in accordance with the primary purpose stated in its
article of incorporation.
Suits brought against the corporation within the 3-
year period but remained pending beyond said
period
Pending actions against the corporation are not
extinguished. They may still be prosecuted against the
corporation even beyond said period.
The creditors of the corporation who were not paid within
the 3-year period may follow the property of the
corporation that may have passed to its stockholders
unless barred by prescription or laches or disposition of
said property in favor of a purchaser in good faith.
Suits not brought against the corporation within the
3-year period
Suits not brought against the corporation within the 3-
year period may still be prosecuted against the
corporation, since there is nothing in Sec. 122, par. 1
which bars action for the recovery of the debts of the
corporation against the liquidator thereof after the lapse
of the winding up period of 3 years (Republic of the
Philippines vs. Marsman Dev. Co., G.R. No. L-175109, April
27, 1972).
Right of the corporation to appeal a judgment is not
extinguished by the expiration of the 3-year period
Corporations whose certificate of registration was
revoked by the SEC may still maintain actions in court for
the protection of its rights which includes the right to
appeal (Paramount Insurance Corp. v. A.C. Ordonez Corp.,
G.R. No. 175109, August 6, 2008).
Liquidation is not necessary in case a corporation is
dissolved by merger and consolidation
In case of merger or consolidation, the surviving or the
consolidated corporation shall thereupon and thereafter
possess all the rights, privileges, immunities and
franchises of each of the constituent corporations; and all
property, real or personal, and all receivables due on
whatever account, including subscriptions to shares and
other choses in action, and all and every other interest of,
or belonging to, or due to each constituent corporation,
shall be deemed transferred to and vested in such
surviving or consolidated corporation without further act
or deed (CC, Sec 80).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Distribution of the corporation’s assets prior to
dissolution
GR: A corporation cannot distribute its assets prior to
dissolution. This will violate the trust fund doctrine. A
corporation is allowed to distribute its assets or property
only upon lawful dissolution and after payment of all its
debts and liabilities (CC, Sec. 122).
XPNs:
1. Decrease of Capital Stock (CC, Sec. 38)
2. Redemption of Redeemable Shares (CC, Sec. 8)
4. Reacquisition of shares which are considered as
treasury shares (CC, Sec. 9)
5. Acquisition of own shares (CC, Sec. 41)
6. Declaration of dividends (CC, Sec. 43)
7. Purchase of shares of any stockholder in case of
deadlocks in a close corporation (CC, Sec. 10)
8. Withdrawal of a stockholder in a close corporation
(CC, Sec 105)
9. Upon lawful dissolution and after payment of all
debts and liabilities (CC, Sec. 122)
Order of distribution of assets in case of liquidation
(CreSt-PreComE)
1. Payment of claims of CREditors who are not
stockholders (based on preference or concurrence
of credits)
2. Payment of claims of STockholders who are
creditors of the corporation, as to the amount of
their claim as creditors.
3. Residual Balance shall be distributed
proportionately:
a. Holders of PREferred stock, if any; then to
the
b. Holders of COMmon stock
4. If the creditor or stockholder cannot be found, their
claims or shares shall be Escheated in favor of the city
or municipality where the asset is located.
BY THE CORPORATION ITSELF
Liquidation by the corporation itself
Every corporation whose charter expires by its own
limitation or is annulled by forfeiture or otherwise, or
whose corporate existence for other purposes is
terminated in any other manner:
1. Shall nevertheless be continued as a body corporate
for 3 years after the time when it would have been so
dissolved,
2. For the purpose of
a. Prosecuting and defending suits by or against it;
b. Enabling it to settle and close its affairs;
c. To dispose of and convey its property; and
d. to distribute its assets
3. But NOT for the purpose of continuing the business
for which it was established (CC, Sec. 122 [1]).
Sec 122 authorizes the dissolved corporation’s board of
directors to conduct its liquidation within 3 years from its
dissolution. Jurisprudence has even recognized the
board’s authority to act as trustee for persons in interest
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
258
beyond the said 3 year period [Aguirre v. FQB+7 Inc., 688
SCRA 242 (2013)].
CONVEYANCE TO A TRUSTEE
WITHIN A 3-YEAR PERIOD
Conveyance to a trustee within a 3 year-period
At anytime during the 3-year period for liquidation, said
corporation is authorized and empowered to convey all of
its property to trustees for the benefit of its stockholders,
members, creditors and other persons in interest.
From and after any such conveyance by the corporation
of its property in trust for the benefit of its stockholders,
members, creditors and others in interest, all interest
which the corporation had in the property terminates, the
legal interest vests in the trustees, and the beneficial
interest in the stockholders, members, creditors or other
persons in interest(par. [2], Sec. 122, CC).
Meaning of trustee
The word “trustee” as used in the law must be understood
in its general concept. It has been held that a counsel who
prosecuted and defended the interest of a corporation
and who in fact appeared in behalf of the corporation
before and after its dissolution by amendment of its
articles of incorporation may be considered a trustee of
the corporation at least with respect to the matter in
litigation only. The purpose in the transfer of the assets of
the corporation to a trustee upon its dissolution is more
for the protection of its creditors and stockholders. The
appointment of said counsel can be considered a
substantial compliance [Gelano v. Court of Appeals, 103
SCRA 90 (1981)].
Period of existence of the trusteeship
Where no time limit has been fixed with respect to the
existence of the trusteeship, the trustee has authority to
close the affairs of the corporation even after the
expiration of the statutory 3-year period and claims not
barred by the statute of limitations can be presented and
allowed until the liquidation is terminated (National
Abaca & Other Fibers Corp. v. Pore, G.R. No. L-16779, August
16, 1979).
Suits brought by the corporation within the 3-year
period but remained pending beyond said period
A corporation that has a pending action and which cannot
be terminated within the 3 year period after its
dissolution is authorized under Sec. 122 of the CC to
convey all its property to a trustee to enable it to
prosecute and defend suits by or against the corporation
beyond the 3-year period. The trustee may commence a
suit which can proceed to final judgment even beyond the
3-year period. The director may be permitted to continue
as trustees to complete the liquidation (Clemente v. CA,
G.R. No. 82407, March 27, 1995).
Suits brought by the corporation beyond the 3-year
period are not barred
 CORPORATION CODE
The trustee of a dissolved corporation may commence a
suit which can proceed to final judgment even beyond the
3-year period. The expiration of 3 years after the
dissolution of a corporation does not affect its right to
enforce a favorable judgment, because under Sec. 145 of
the CC, no right or remedy in favor or against any
corporation shall be removed or impaired either by
subsequent dissolution of said corporation or by any
subsequent amendment or repeal of the CC or any part
thereof (Knecht v. United Cigarette Corp., G.R. No. 139370,
July 4, 2002)
Q: The corporation, once dissolved, thereafter
continues to be a body corporate for three years for
purposes of prosecuting and defending suits by and
against it and of enabling it to settle and close its
affairs, culminating in the final disposition and
distribution of its remaining assets. If the 3 year
extended life expires without a trustee or receiver
being designated by the corporation within that
period and by that time (expiry of the 3 year extended
term), the corporate liquidation is not yet over, how,
if at all, can a final settlement of the corporate affairs
be made? (1997 Bar)
A: The liquidation can continue with the winding up. The
members of the BOD can continue with the winding of the
corporate affairs until final liquidation. They can act as
trustees or receivers for this purpose.
Where no receiver or trustee has been designated after
dissolution:
1. The board of directors or trustees itself may be
permitted to so continue as “trustees” by legal
implication.
2. In the absence of the BoD or BoT, those having a
pecuniary interest in the corporate assets,
stockholders or creditors, may make a proper
representations with SEC for working out a final
settlement of the corporate concerns [Clemente v CA,
242 SCRA 717 (1995)].
3. The only surviving stockholder or director (SEC
Opinion No. 10-96, Jan 29 2010).
4. The counsel who prosecuted and defended the
interest of the corporation (Reburiano v CA, G.R. No.
102965, January 21, 1999).
BY MANAGEMENT COMMITTEE OR
REHABILITATION RECEIVER
Liquidation by a receiver
In the case of a dissolution order where creditors are
affected, the SEC may appoint a receiver to take charge of
the liquidation of the corporation (CC, Sec. 119).
NOTE: Thus, the appointment of receiver is addressed to
the sound discretion of the court or the SEC.
Appointment of receiver for a going corporation
The appointment of a receiver for a going corporation is a
last resort remedy, and should not be employed when
another remedy is available. Relief by receivership is an
extraordinary remedy and is never exercised if there is an
259
adequate remedy at law or if the harm can be prevented
by an injunction or a restraining order. Bad judgment by
directors, or even unauthorized use and misapplication of
the company’s funds, will not justify the appointment of a
receiver for the corporation if appropriate relief can
otherwise be had (Rev. Ao-As v. CA, G.R. No. 128464, June
20, 2006).
The corporation, through its president cannot
condone penalties and charges after it had been
placed under receivership
The appointment of a receiver operates to suspend the
authority of a corporation and of its directors and officers
over its property and effects, such authority being
reposed in the receiver (Yam v. CA, G.R. No. 104726,
February 11, 1999).
Even without dissolution, the court has authority to
appoint a receiver for a corporation to protect and
preserve its properties for the use and benefit of its
creditors and others who may have similar interests in
the property as where there is already a final and
executory judgment against the corporation, which is in a
precarious financial condition [Central Sawmills, Inc. v
Alto Surety and Ins. Co., 27 SCRA 247 (1969)].
Where corporate directors are guilty of breach of trust,
minority stockholders may ask for receivership [Chase v.
CFI, 18 SCRA 602 (1966)].
CORPORATE REHABILITATION
Rehabilitation
It refers to the restoration of the debtor to a condition of
successful operation and solvency, if it is shown that its
continuance of operation is economically feasible and its
creditors can recover by way of the present value of
payments projected in the plan, more if the debtor
continues as a going concern than if it is immediately
liquidated [Sec. 4(gg), FRIA].
Nature of Rehabilitation proceedings
Rehabilitation proceedings are summary and non-
adversarial in nature, and do not contemplate
adjudication of claims that must be threshed out in
ordinary court proceedings.
The jurisdiction of the rehabilitation court is over claims
against the debtor that is under rehabilitation, not over
claims by the debtor against its own debtors or against
third parties. The corporation under rehabilitation must
file a separate action against its debtors/insurers to
recover whatever claim it may have against them (Steel
Corporation v. Mapfre Insular Insurance Corporation, G.R.
No. 201199, October 16, 2013, in Divina, 2014).
Stay order and appointment of rehabilitation receiver
Under Section 6(c) of PD 902-A, receivers may be
appointed whenever: (1) necessary in order to preserve
the rights of the parties-litigants; and/or (2) protect the
interest of the investing public and creditors.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
The stay order and appointment of a rehabilitation
receiver is an "extraordinary, preliminary, ex parte
remed[y]." The effectivity period of a stay order is only
"from the date of its issuance until dismissal of the
petition or termination of the rehabilitation
proceedings." It is not a final disposition of the case. It is
an interlocutory order defined as one that "does not
finally dispose of the case, and does not end the Court’s
task of adjudicating the parties’ contentions and
determining their rights and liabilities as regards each
other, but obviously indicates that other things remain to
be done by the Court."
The Interim Rules does not require a hearing before the
issuance of a stay order. What it requires is an initial
hearing before it can give due course to or dismiss a
petition. Nevertheless, while the Interim Rules does not
require the holding of a hearing before the issuance of a
stay order, neither does it prohibit the holding of one.
Thus, the trial court has ample discretion to call a hearing
when it is not confident that the allegations in the petition
are sufficient in form and substance, for so long as this
hearing is held within the five (5)-day period from the
filing of the petition — the period within which a stay
order may issue as provided in the Interim Rules (Pryce
Corporation v. China Banking Corporation, G.R. No. 172302,
February 18, 2014, in Divina, 2014).
FRIA is prospective in application
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
presupposes 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 in 2002. At the time of the issuance of the Stay
Order, the rules in force were the 2000 Interim Rules of
Procedure on Corporate Rehabilitation. Under those
rules, one of the effects of a Stay Order is the stay of the
"enforcement of all claims, whether for money or
otherwise and whether such enforcement is by court
action or otherwise, against the debtor, its guarantors and
sureties not solidarily liable with the debtor. Nowhere in
the Interim Rules is the rehabilitation court authorized to
suspend foreclosure proceedings against properties of
third-party mortgagors (Situs Development Corporation,
et al. v. Asiatrust Bank, et al., G.R. No. 180036, January 16,
2013).
NOTE: FRIA took effect on July 18, 2010.
Execution of rehabilitation plan
The Interim Rules on Corporate Rehabilitation provides
for means of execution of the rehabilitation plan, which
may include, among others, the conversion of the debts or
any portion thereof to equity, restructuring of the debts,
dacion en pago, or sale of assets or of the controlling
interest. The restructuring of the debts of PALI is part and
parcel of its rehabilitation (Puerto Azul Land, Inc. v. Pacific
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
260
Wide Realty Development Corporation, G.R. No. 184000,
September 17, 2014).
Rules of Court applies in cases of appeals and reviews
Under Rule 3, Section 5 of the Rules of Procedure on
Corporate Rehabilitation, the review of any order or
decision of the rehabilitation court or on appeal
therefrom shall be in accordance with the Rules of Court,
unless otherwise provided. In the case at bar, TIDCORP’s
Petition for Review sought to nullify the pari passu
sharing scheme directed by the trial court and to grant
preferential and special treatment to TIDCORP over other
WGC creditors, such as RBC. This being the case, there is
no visible objection to RBC’s participation in said case, as
it stands to be injured or benefited by the outcome of
TIDCORP’s Petition for Review – being both a secured and
unsecured creditor of WGC (Robinson's Bank Corporation
v. Hon. Samuel H. Gaerlan, et al., G.R. No. 195289,
September 24, 2014).
Cram-down clause
Section 23. Approval of the Rehabilitation Plan. – The court
may approve a rehabilitation plan over the opposition of
creditors, holding a majority of the total liabilities of the
debtor if, in its judgment, the rehabilitation of the debtor
is feasible and the opposition of the creditors is manifestly
unreasonable (Sec. 23, Rule 4, Interim Rules of Procedure
on Corporate Rehabilitation).
This provision, which is currently incorporated in the
FRIA, is necessary to curb the majority creditors’ natural
tendency to dictate their own terms and conditions to the
rehabilitation, absent due regard to the greater long-term
benefit of all stakeholders. Otherwise stated, it forces the
creditors to accept the terms and conditions of the
rehabilitation plan, preferring long-term viability over
immediate but incomplete recovery (BPI v. Sarabia Manor
Hotel, G.R. no. 175844, July 29, 2013).
Q: APEC, a company engaged in selling of educational
plans, filed a Petition for Corporate Rehabilitation.
Marcelo, the rehabilitation receiver, submitted an
Alternative Rehabilitation Plan (ARP) which provides
for the implementation of “swap” of open-ended
education plans to a fixed-value pre-need plan as well
as tuition support depending on the prevailing
market rate of the NAPOCOR Bonds and Peso-Dollar
exchange rate. The plan was approved. In the
meantime, the value of the Philippine Peso
strengthened and appreciated. Because of this,
Marcelo filed a Modified Rehabilitation Plan (MRP)
which includes the suspension of the tuition support
and converting Philippine Peso Liabilities to U.S.
Dollar liabilities by assigning to each planholder a
share of the remaining asset. The Rehabilitation
Court approved the MRP despite opposition, in view
of the “cram down” power of the Rehabilitation Court.
Marilyn Victorio-Aquino, a planholder, questioned
this approval before the Court of Appeals for the MRP
forced the creditors to reduce their claims against
APEC and it reduces the original amount which she
was to receive under the ARP. The CA dismissed the
petition. Was the Court correct in approving the MRP?
 CORPORATION CODE
A: Yes. The “cram-down” power of the Rehabilitation
Court has long been established and even codified under
Section 23, Rule 4 of the Interim Rules. Such prerogative
was carried over in the Rehabilitation Rules, which
maintains that the court may approve a rehabilitation
plan over the objection of the creditors if, in its judgment,
the rehabilitation of the debtors is feasible and the
opposition of the creditors is manifestly unreasonable.
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.
petitioner’s outright censure of the concept of the cram-
down power of the rehabilitation court cannot be
countenanced. To adhere to the reasoning of petitioner
would be a step backward — a futile attempt to address
an outdated set of challenges. It is undeniable that there is
a need to move to a regime of modern restructuring,
cram-down and court supervision in the matter of
corporation rehabilitation in order to address the greater
interest of the public (Victorio-Aquino v. Pacific Plans Inc.,
G.R. No. 193108, December 10, 2014).
Notwithstanding the rejection of the Rehabilitation Plan
by the creditors, the court may confirm the Rehabilitation
Plan if all of the following circumstances are present:
1. The Rehabilitation Plan complies with the
requirements specified in this Act;
2. The rehabilitation receiver recommends the
confirmation of the Rehabilitation Plan;
3. The shareholders, owners or partners of the juridical
debtor lose at least their controlling interest as a
result of the Rehabilitation Plan; and
4. The Rehabilitation Plan would likely provide the
objecting class of creditors with compensation which
has a net present value greater than that which they
would have received if the debtor were under
liquidation (Sec. 64, FRIA).
A corporation’s material financial commitment is
significant for purposes of rehabilitation
A material financial commitment becomes significant in
gauging the resolve, determination, earnestness and good
faith of the distressed corporation in financing the
proposed rehabilitation plan. This commitment may
include the voluntary undertakings of the stockholders or
the would-be investors of the debtor-corporation
indicating their readiness, willingness and ability to
contribute funds or property to guarantee the continued
successful operation of the debtor corporation during the
period of rehabilitation. Due to the rehabilitation plan
being an indispensable requirement in corporate
rehabilitation proceedings, Basic Polyprinters was
expected to exert a conscious effort in formulating the
same, for such plan would spell the future not only for
itself but also for its creditors and the public in general.
The contents and execution of the rehabilitation plan
could not be taken lightly (Philippine Bank of
Communications v. Basic Polyprinters and Packaging
Corporation, G.R. No. 187581, October 20, 2014).
GR: Claims against the corporation are suspended
during rehabilitation
261
The suspension of all actions and/or claims against a
corporation under rehabilitation does not only cover
cases which are pending in court. The automatic
suspension of an action for claims embraces all phases of
the suit, that is, the entire proceedings of an action or suit
and not just the payment of the claims.
The actions that were suspended cover all claims against
a distressed corporation whether for damages founded on
a breach of contract of carriage, labor cases, collection
suits or any other claims of a pecuniary nature. A claim
arising from illegal dismissal is a claim covered by the
suspension order issued by the SEC, as it is one for
pecuniary consideration.
Furthermore, jurisprudence is settled that the suspension
of proceedings referred to in the law uniformly applies to
“all actions for claims” filed against a corporation xxx
under management or receivership, without distinction,
except only those expenses incurred in the ordinary
course of business (Molina v. Pacific Plans, Inc., G.R.
No. 165476, August 15, 2011, in Divina, 2014).
The stay order is effective on all creditors of the
corporation without distinction, whether secured or
unsecured (Veterans Philippine Scout Security Agency, Inc.
v. First Dominion Prime Holdings, Inc., G.R. No. 190907,
August 23, 2012, in Divina, 2014).
XPNs:
a. Criminal actions
The suspension of claims in corporate rehabilitation does
not extend to criminal actions against the distressed
corporations or its directors and officers. It would be
absurd for one who has engaged in criminal conduct to
escape punishment simply because the corporation of
which he is director or officer filed a petition for
rehabilitation. The prosecution of the officers of the
corporation has no bearing on the pending rehabilitation
of the corporation (Panlilio v. Regional Trial Court, Branch
51, City of Manila, GR No. 173846, February 2, 2011, in
Divina, 2014).
b. Return of the subject of writ of replevin
The return of the car subject of the writ of replevin is
correct notwithstanding the pendency of the
rehabilitation proceedings. This is the necessary
consequence of the dismissal of the replevin case for
failure to prosecute without prejudice. Upon the dismissal
of the replevin case, the writ of seizure, which is merely
ancillary in nature, became functus officio and should have
been lifted. There was no adjudication on the merits,
which means that there was no determination of the issue
who has the better right to possess the subject
car. Returning the seized vehicle is not an enforcement of
a claim against the distressed corporation which must be
suspended by virtue of the stay order issued by the
rehabilitation court. The issue in a replevin case is who
has a better right of possession. So long as the respondent
is not interposing a monetary claim, respondent’s prayer
for the return of the car subject of the replevin suit is not
in any way violative of the Rules on Corporate
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Rehabilitation (Advent Capital and Medical Corporation v.
Young, G.R. No. 183018, August 3, 2011, in Divina, 2014).
The prevailing rule now categorically provides that
awards for moral damages, exemplary damages, and
attorney’s fees in intra-corporate controversies are not
immediately executory (Heirs of Santiago Divinagracia v.
Ruiz, G.R. No. 172023, July 7, 2010, in Divina, 2014).
Qualifications under the Rules must be strictly
complied with
It is well to emphasize that the remedy of rehabilitation
should be denied to corporations that do not qualify
under the Rules. Neither should it be allowed to
corporations whose sole purpose is to delay the
enforcement of any of the rights of the creditors, which is
rendered obvious by: (a) the absence of a sound and
workable business plan; (b) baseless and unexplained
assumptions, targets, and goals; and (c) speculative
capital infusion or complete lack thereof for the execution
of the business plan. Unfortunately, these negative
indicators have all surfaced to the fore, much to SMMCI’s
chagrin. In one case, not only has SMMCI failed to show
that it has formally began its operations which would
warrant restoration, but also it has failed to show
compliance with the key requirements under the Rules,
the purpose of which are vital in determining the
propriety of rehabilitation. Thus, for all the reasons
hereinabove explained, the Court is constrained to rule in
favor of BPI Family and hereby dismiss SMMCI’s
Rehabilitation Petition (BPI Family Savings Bank, Inc. v. St.
Michael Medical Center, Inc., G.R. No. 205469, March 25,
2015).
Right of the creditor-mortgagee to foreclose
corporate property
The court has already settled and upheld the right of the
secured creditor to foreclose the mortgages in its favor
during the liquidation of a debtor corporation.
The creditor-mortgagee has the right to foreclose the
mortgage over a specific real property whether or not the
debtor-mortgagor is under insolvency or liquidation
proceedings. The right to foreclose such mortgage is
merely suspended upon the appointment of a
management committee or rehabilitation receiver or
upon the issuance of a stay order by the trial court.
However, the creditor-mortgagee may exercise his right
to foreclose the mortgage upon the termination of the
rehabilitation proceedings or upon the lifting of the stay
order (Yngson, Jr. [in his capacity as Liquidator of Arcam &
Company, Inc.] v. Philippine National Bank, G.R. No.
171132, August 15, 2012, in Divina, 2014).
The Stay Order cannot suspend foreclosure proceedings
already commenced over properties belonging to third
party mortgagors. The Stay Order can only cover those
claims directed against petitioner corporations or their
properties, against petitioners’ guarantors, or against
petitioners’ sureties who are not solidarily liable with
them.
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
262
Likewise, the enforcement of the mortgage lien cannot be
considered as a claim against a guarantor or a surety not
solidarily liable with the debtor corporations. While the
third party mortgagors also executed Continuing
Guaranty and Comprehensive Surety undertakings in
favor of the bank, the latter did not proceed against them
as individual guarantors or sureties. Rather, by initiating
extrajudicial foreclosure proceedings, the bank was
directly proceeding against the property mortgaged to
them by the spouses as security (Situs Development
Corporation, et al. v. Asiatrust Bank, et al., G.R. No. 180036,
July 25, 2012).
Considering that Metrobank acquired ownership over the
mortgaged properties upon the expiration of the
redemption period on 6 February 2002, TCEI is also out
on a limb in invoking the Stay Order issued by the
Rehabilitation Court on 8 October 2002 and the approval
of its rehabilitation plan. An essential function of
corporate rehabilitation is, admittedly, the Stay Order
which is a mechanism of suspension of all actions and
claims against the distressed corporation upon the due
appointment of a management committee or
rehabilitation receiver. The Stay Order issued by the
Rehabilitation Court cannot, however, apply to the
mortgage obligations owing to Metrobank which had
already been enforced even before TCEI’s filing of its
petition for corporate rehabilitation on 1 October 2002. In
Equitable PCI Bank, Inc v. DNG Realty and Development
Corporation, the Court upheld the validity of the writ of
possession procured by the creditor despite the
subsequent issuance of a stay order in the rehabilitation
proceedings instituted by the debtor (Town and Country
Enterprises Inc v. Honorable Quisumbing, G.R. No. 173610,
October 1, 2012, in Divina, 2014).
Q: PA Assurance (PA) was incorporated in 1980 to
engage in the sale of pre-need educational plans. It
sold open-ended educational plans which guaranteed
the payment of tuition and other fees to planholders
irrespective of the cost at the time of availment. It also
engaged in the sale of fixed value plans which
guaranteed the payment of a pre-determined amount
to planholders. In 1982, PA was among the country’s
top corporations. However, it subsequently suffered
financial difficulties.
On September 8, 2005, PA filed a Petition for
Corporate Rehabilitation before the Regional Trial
Court (RTC) of Makati City. On October 17, 2005, ten
(10) plan holders filed an Opposition and Motion to
Exclude Planholders from Stay Order on the ground
that planholders are not creditors as they
(planholders) have a trust relationship with PA. Are
the planholders correct? (2014 Bar)
A: No. Under the 2000 Interim Rules of Corporate
Rehabilitation, claim shall include all claims or demands
of whatever nature or character against a debtor or its
property, whether for money or otherwise. Creditor shall
mean any holder of a claim. Hence, the claim of the
policyholders for payment of tuition fees from [PA
Assurance] CAP is included in the definition of “claims”
under the Interim Rules.
What is to be determined at this point is whether or not
 CORPORATION CODE
claims arising from the pre-need contracts between the
policyholders and [PA Assurance] CAP can be stayed
under Section 6, Rule 4 of the Interim Rules or Section 6(c)
of P.D. No. 902-A.
It does not provide that a claim arising from a pre-need
contract is an exception to the power of the trial court to
stay enforcement of all claims upon the finding that the
petition for rehabilitation is sufficient in form and
substance.
The foregoing provision echoes the provision in Section
6(c) of the governing law, P.D. No. 602-A, as amended by
P.D. No. 1758, which mandates that upon appointment of
a management committee, rehabilitation receiver, board
or body, x x x all actions for claims against corporations,
partnerships or associations under management or
receivership pending before any court, tribunal, board or
body shall be suspended accordingly.
The Interim Rules of Procedure on Corporate
Rehabilitation of 2000 has been amended by the Rules of
Procedure on Corporate Rehabilitation of 2009, which
took effect on January 16, 2009. Under the 2009 Rules of
Procedure, the power of the RTC to issue a Stay Order
when it finds the petition for rehabilitation to be sufficient
in form and substance is contained in Section 7, Rule 3,
[17] which likewise does not exempt claims arising from
pre-need contracts from the Stay Order (Abrera, et al., v.
Hon. Barza and College Assurance Plan, G.R. No. 171681,
September 11, 2009).
Q: DNG Realty And Development Corporation (DNG)
obtained a loan from petitioner Equitable PCI Bank
(EPCIB) secured by a real estate mortgage over DNG’s
property. When DNG defaulted payment, EPCIB
foreclosed the mortgage and bought the property at
public auction. The sheriff issued a certificate of sale
in favor of EPCIB.
Months later, DNG filed a petition for rehabilitation
with the SEC, and SEC issued a stay order. Afterwards,
the Registry of Deeds issued a title in favor of EPCIB,
prompting DNG to seek the annulment of the
foreclosure proceedings. To gain possession of the
property, PCIB filed an Ex-Parte Petition for Issuance
of Writ of Possession before the RTC, which later
directed the issuance of a writ of possession.
Did the foreclosure sale and writ of possession in
favor of EPCIB affect the Stay Order? (2014 Bar)
A: No. Since the foreclosure of respondent DNG's
mortgage and the issuance of the certificate of sale in
petitioner EPCIB's favor were done prior to the
appointment of a Rehabilitation Receiver and the Stay
Order, all the actions taken with respect to the foreclosed
mortgage property which were subsequent to the
issuance of the Stay Order were not affected by the Stay
Order. After the redemption period expired without DNG
redeeming the foreclosed property, EPCIB becomes the
absolute owner of the property and it was within its right
to ask for the consolidation of title and the issuance of new
title in its name as a consequence of ownership; thus, it is
entitled to the possession and enjoyment of the property
(Equitable PCI Bank, Inc. v. DNG Realty and Development
Corporation, G.R. No. 168672, August 8, 2010).
263
LIQUIDATION AFTER 3 YEARS
If the 3-year extended life has expired without a receiver
or trustee having been expressly designated by the
corporation within that period:
1. The BOD/BOT itself may be permitted to so continue
as ‘trustees” by legal implication to complete the
liquidation.
2. Still, in the absence of BOD/BOT, those having a
pecuniary interest in the corporate assets, including
not only the stockholders but likewise the creditors
of the corporation, acting for and in its behalf, may
make proper representations with the SEC which has
primary and sufficiently broad jurisdiction in
matters of this nature, for working out a final
settlement of the corporate concerns.
3. The only surviving stockholder or director of a
corporation whose term of existence has expired
may act as trustee-in-liquidation after the 3-year
period to liquidate has expired without the
appointment of a trustee-in-liquidation.
4. The counsel who prosecuted and defended the
interest of the corporation and who, in fact, appeared
in behalf of the corporation, may be considered a
trustee of the corporation at least with respect to the
matter in litigation only (De Leon, supra, pgs. 768-769,
citing: Sec. 145, CC; Clemente vs. CA, supra; SEC
Opinion No. 10-96, January 29, 2010, Reburiano vs. CA,
G.R. No. 102965, January 21, 1999).
OTHER CORPORATIONS
CLOSE CORPORATION
A close corporation is one which AOI provides that:
1. All of the corporation’s issued stock of all classes,
exclusive of treasury shares, shall be held of record
by not more than a specified number of persons, not
exceeding 20;
2. All of the issued stock of all classes shall be subject to
one or more specified restrictions on transfer
permitted by the provisions on close corporations;
and
3. The corporation shall not list in any stock exchange
or make any public offering of any of its stock of any
class.
4. Notwithstanding the foregoing, a corporation shall
be deemed NOT a close corporation when at least 2/3
of its voting stock or voting rights is owned or
controlled by another corporation which is not a
close corporation within the meaning of this Code.
Any corporation may be incorporated as a close
corporation, EXCEPT: (MOSBI-PEP)
1. Mining or Oil companies,
2. Stock exchanges,
3. Banks,
4. Insurance companies,
5. Public utilities,
6. Educational institutions and
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
7. Corporations declared to be vested with Public
interest in accordance with the provisions of the
Corporation Code (CC, Sec. 96).
Not all corporations with 20 or less stockholders are
close corporations
The Corporation is not a close corporation even if the
shares belong to only twenty or less stockholders if not all
the requisites (under Sec. 96) are present (San Juan
Structural and Steel Fabricators, Inc. v. CA, G.R. No. 129459,
September 29, 1998).
Q: San Juan Structural and Steel Fabricators, Inc.’s
(San Juan) entered into an agreement with Motorich
Sales Corporation (Motorich) for the transfer to it of a
parcel of land which was still in the name of ACL
Development Corporation. Motorich despite
repeated demands refused to execute the Transfer of
Rights/Deed of Assignment which is necessary to
transfer the certificate of title. Later on, ACL
Development Corporation and Motorich entered into
a sale whereby the former transferred to the latter
the subject property. Because of this, San Juan filed a
case for damage against Motorich and Nenita Lee
Gruenberg. Among others, San Juan, Inc. argues that
the veil of corporate fiction of Motorich should be
pierced, because the latter is a close
corporation. Since the spouses Reynaldo L.
Gruenberg and Nenita R. Gruenberg owned all or
almost all or 99.866% to be accurate, of the
subscribed capital stock of Motorich. The spouses
needed no authorization from the board to enter into
the subject contract. It adds that, being solely owned
by the Spouses Gruenberg, the company can be
treated as a close corporation which can be bound by
the acts of its principal stockholder who needs no
specific authority. Is Motorich a close corporation?
A: No. The articles of incorporation of Motorich Sales
Corporation does not contain any provision stating that
(1) the number of stockholders shall not exceed 20, or (2)
a preemption of shares is restricted in favor of any
stockholder or of the corporation, or (3) listing its stocks
in any stock exchange or making a public offering of such
stocks is prohibited. From its articles, it is clear that
Motorich is not a close corporation. Motorich does not
become one either, just because Spouses Reynaldo and
Nenita Gruenberg owned 99.866% of its subscribed
capital stock. The mere ownership by a single stockholder
or by another corporation of all or nearly all of the capital
stock of a corporation is not of itself sufficient ground for
disregarding the separate corporate personalities. So too,
a narrow distribution of ownership does not, by itself,
make a close corporation (San Juan Structural and Steel
Fabricators, Inc., v. CA, G.R. No. 129459, September 29,
1998).
CHARACTERISTICS OF A
CLOSE CORPORATION
Nature of a close corporation
A close corporation is essentially an incorporated
partnership in which the stockholders consider each
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
264
other as partners but which the law treats as a
corporation. Thus, stockholders in a close corporation are
very much like members in a partnership. They owe to
one another the same duty of utmost good faith and
diligence that partners owe one another. This strict duty
applies particularly to controlling stockholders (De Leon,
2010).
Peculiar characteristic of a close corporation
What is outstandingly peculiar with a close corporation is
the fact that all the outstanding stock is owned by the
persons who are active in the management and conduct
of the business (De Leon, 2010).
Other characteristics of a close corporation
The following are the other characteristics of a close
corporation:
1. Where the AOI provide that the business of the
corporation shall be managed by the stockholders
themselves rather than by a BOD, then the
stockholders shall be deemed to be the directors with
all the liabilities imposed by the Code on directors
(CC, Sec. 97). The stockholders shall likewise be
personally liable for corporate torts unless the
corporation has obtained reasonably adequate
liability insurance (CC, Sec. 100).
2. Quorum may be greater than mere majority (ibid).
3. Restrictions on transfer of shares can be validly
imposed. Right of first refusal can be exercised (CC,
Sec. 98).
4. Any action by the directors of a close corporation
without a meeting shall nevertheless be deemed
valid if any of the circumstances on Sec. 101, CC is
present.
5. Pre-emptive right extends to all stock issuances,
including treasury shares (CC, Sec. 102).
6. Deadlock in the board is settled by the SEC, on the
written petition by any stockholder (CC, Sec. 104).
7. A stockholder may withdraw and avail of his right of
appraisal (CC, Sec. 105).
8. The rules primarily governing close corporations are
set forth under Title XII of the Corporation Code.
Other titles of the Code apply suppletorily.
Q: CFTI held a concessionaire's contract with AAFES
for the operation of taxi services within Clark Air
Base. Sergio Naguiat was CFTI's president, while
Antolin T. Naguiat was its vice-president. CFTI was a
family-owned corporation. Individual respondents
were previously employed by CFTI as taxicab
drivers. Due to the phase-out of the US military bases
in the Philippines, from which Clark Air Base was not
spared, the AAFES was dissolved, and the services of
individual respondents were officially terminated.
The AAFES Taxi Drivers Association (drivers' union)
and CFTI held negotiations as regards separation
benefits that should be awarded in favor of the
drivers. They arrived at an agreement. However,
individual respondents herein refused to accept
theirs. Instead, after disaffiliating themselves from
the drivers' union, individual respondents filed a
complaint for payment of separation pay due to
 CORPORATION CODE
termination/phase-out. Said complaint was later Close corporation vs. Closely-held Corporation
amended to include CFTI with Antolin T. Naguiat as
vice president and general manager, as party CLOSE CLOSELY HELD
respondent. Is Antolin Naguiat liable for payment of CORPORATION CORPORATION
separation benefits of employees terminated for A close corporation is that A closely-held
authorized causes? defined in Sec. 96. It corporation focuses more
emphasizes a on the number of
A: Yes. Section 100 of the Corporation Code states that to determination on the part shareholders in the
the extent that the stockholders are actively engaged in of the participants in the corporation at that
the management or operation of the business and affairs enterprise to keep particular time, indicating
of a close corporation, the stockholders shall be held to outsiders from acquiring that they are few in
strict fiduciary duties to each other and among any interest in the number.
themselves. Said stockholders shall be personally liable business.
for corporate torts unless the corporation has obtained
reasonably adequate liability insurance. Nothing in the VALIDITY ON RESTRICTIONS ON
records show whether CFTI obtained reasonably TRANSFER OF SHARES
adequate liability insurance, thus, what remains is to
determine whether there was corporate tort. In the Rationale for stock transfer restrictions in close
present case, Sergio Naguiat is held solidarily liable for corporations
corporate tort because he had actively engaged in the
management and operation of CFTI, a close corporation The reason for the stock transfer restriction in close
(Sergio Naguiat v. NLRC, G.R. No. 116123, March 13, 1997). corporation is that the stockholders seek to maintain
delectus personae. The close corporation is essentially an
Q: Pedro owns 70% of the subscribed capital stock of incorporated partnership, wherein one of the major
a company which owns an office building. Paolo and objectives of the shareholders is to remain close and be
Juan own the remaining stock equally between them. able to prevent changes in the control of the corporation
Paolo also owns a security agency, a janitorial which might otherwise result from the transfer of voting
company and a catering business. In behalf of the shares (De Leon, 2010).
office building company, Paolo engaged his
companies to render their services to the office Conditions for validity of restrictions on transfer of
building. Are the service contracts valid? Explain. shares
(2008 Bar)
1. Restrictions on the right to transfer shares must
A: No. This is a case of close corporation where the appear in the AOI and in the by-laws as well as in the
provision on interlocking directors in open corporations certificate of stock, otherwise they shall not be
also applies. As a general rule, the presence of interlocking binding on any purchaser thereof in good faith; and
directors does not make the contract void or 2. They shall not be more onerous than granting the
unenforceable. It is further validated when there is no existing stockholders or the corporation the option
fraud; the contract is fair and reasonable under the to purchase the shares of the transferring
circumstances; the interest of the interlocking director in stockholders with such reasonable terms, conditions,
one corporation is substantial and his interest on the or period stated therein (CC, Sec. 98).
other corporation or corporations is merely nominal and
compliance with the requirement under Sec 32 in so far NOTE: Any transfer made should not result in exceeding
as the nominal corporation is concerned. In this case, the number of stockholders as allowed by the Code.
Pedro owns a substantial interest in both business
enterprise, parties to the contract in violation of the legal Exercise of right of first refusal
requirement that in order for a contract with interlocking
directors be valid, there must only be substantial interests The corporation or the stockholders have the right of first
in one of the corporation he represents and not in both. refusal, that is, the stockholder who wants to sell his
Pedro has substantial interest in both businesses. He shares to any third person must first offer it either to the
owns a substantial portion of the company which Paolo corporation or to the other existing stockholders usually
and Juan are also stockholders while at the same time the under the same terms and conditions. The right pertains
owner of the security, janitorial and catering business. to shares already issued to stockholders. If the existing
Directors/officers are discouraged by law to personally stockholders or the corporation fails to exercise the
contract with the corporation in which they are directors, option to purchase within the period stated, the
trustees and officers because they have fiduciary transferring stockholder may sell his shares to any third
relationship with the corporation and there can be no real person (CC, Sec. 98).
bargaining where the same is acting on both sides of the
trade. Option period to exercise the right of first refusal

The option period to exercise the right of first refusal is

that period stated in the AOI, By-laws and Certificate of
Stock. The SEC likewise limits the period to 1 month
which is deemed sufficient for the stockholders or for the
corporation to signify their desire to buy the shares of

UNIVERSITY OF SANTO TOMAS

265 FACULTY OF CIVIL LAW
 MERCANTILE LAW
stock being offered for sale by any stockholder (SEC
Opinion, Oct. 13, 1964).
AOI cannot provide that the consent of the
corporation shall be obtained in case the stockholder
sells his shares
The AOI cannot provide that the consent of the
corporation shall be obtained in case the stockholder sells
his shares because such restriction is more onerous than
the right of first refusal.
ISSUANCE OR TRANSFER OF STOCK IN
BREACH OF QUALIFYING CONDITION
Transfer
The term “transfer” as used in Sec. 99, is not limited to a
transfer for value. This, therefore, includes donations (CC,
Sec. 99[6]).
Refusal to register the transfer of stock by a close
corporation
A close corporation may, at its option, refuse to register
the transfer of stock in the name of the transferee if the
person is not qualified to be a stockholder and has notice
thereof.
Any person to whom stock of a close corporation has been
issued or transferred has, or is conclusively presumed to
have notice:
a. That he is a person not eligible to be a holder of stock
of the corporation,
b. The transfer of stock to him would cause the stock of
the corporation to be held by more than the number
of persons permitted by its articles of incorporation
to hold stock of the corporation,
c. The transfer of stock is in violation of a restriction on
transfer of stock (CC, Sec. 99 [4]).
Conclusive presumption of knowledge of restrictions
There is a conclusive presumption of knowledge of
restrictions when the stock certificate issued or
transferred conspicuously shows the qualifications of
persons entitled to be holders of record; number of
persons, not exceeding 20 allowed to be stockholders; and
other restrictions as provided in the AOI of the close
corporation (CC, Sec. 99 [1],[2],[3]).
Stock transfers in violation of the restrictions can
still be registered in the books of the Corporation
Stock transfers in violation of the restrictions can still be
registered in the books of the Corporation in the
following cases:
1. If all the stockholders consent;
2. If the AOI of the close corporation was duly amended
(CC, Sec. 99 [5]).
NOTE: In both the above cases, the corporation will no
longer be a close corporation if the conditions under Sec.
96 will no longer be present, as in the case where the
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
266
transfer results in the presence of more than 20
stockholders.
Breach of any of these restrictions does not bar
rescission by the transferee of the transaction
The breach in any of the restrictions shall not in any way
impair any right of a transferee regarding any right to
rescind the transaction or to recover under any applicable
warranty, express or implied (CC, Sec. 99[7]).
WHEN BOARD MEETING IS UNNECESSARY OR
IMPROPERLY HELD
Effect of unnecessary or improperly held board
meeting
Unless the by-laws of the close corporation otherwise
provides, any action by the directors of a close
corporation without a meeting shall be valid if: (CKAO)
1. Before or after such action is taken, written Consent
is signed by all the directors
2. All the stockholders have actual or implied
Knowledge of the action and make no prompt
objection
3. The directors are Accustomed to take informal action
with the express or implied acquiescence of all the
stockholders
4. All the directors have express or implied knowledge
of the action in question and make no prompt
Objection thereto.
If a director's meeting is held without proper call or
notice, an action taken therein within the corporate
powers is deemed ratified by a director who failed to
attend, unless he promptly files his written objection with
the secretary of the corporation after having knowledge
thereof (CC, Sec. 101).
Q: By virtue of Board Resolution No. 18, Manuel Dulay,
president of Manuel R. Dulay Enterprises, sold their
apartments to Spouses Veloso with right of
redemption. The latter then mortgaged the same to
Manuel Torres. As both failed to redeem the property,
Torres moved for consolidation of ownership. Virgilio
Dulay intervened on the ground that the resolution
was resolved without the approval of all the members
of the BOD, thus, it has no binding effect. Is Virgilio
correct?
A: No. In the instant case, petitioner corporation is
classified as a close corporation and consequently a
board resolution authorizing the sale or mortgage of
the subject property is not necessary to bind the
corporation for the action of its president. At any rate, a
corporate action taken at a board meeting without
proper call or notice in a close corporation is deemed
ratified by the absent director unless the latter
promptly files his written objection with the secretary of
the corporation after having knowledge of the meeting
which, in this case, petitioner Virgilio Dulay failed to do
(Dulay Enterprises v. CA, GR No. 91889, Aug. 27, 1993).
 CORPORATION CODE
PRE-EMPTIVE RIGHT
Pre-emptive right in an ordinary corporation vs. Pre-
emptive right in a close corporation
As compared to ordinary corporations, in close
corporations, the pre-emptive right can be exercised even
as to stocks issued for corporate purposes or for payment
of a previously contracted debt.
AMENDMENT OF THE ARTICLES OF INCORPORATION
Requirements for the amendment of the AOI to delete
or remove any provision required for close
corporations or to reduce a quorum or voting
requirement stated in the AOI
Any amendment to the articles of incorporation which
seeks to delete or remove any provision required for close
corporations or to reduce a quorum or voting
requirement stated in the articles of incorporation must
be:
1. Approved by the affirmative vote of at least two-
thirds (2/3) of the outstanding capital stock:
a. Whether with or without voting rights, or
b. A greater proportion of shares as may be
specifically provided in the articles of
incorporation
2. In a meeting duly called for the purpose.
Q: Corporation Z, a close corporation, amended its
articles of incorporation and removed the provision
that all shares of stock, exclusive of treasury stock,
shall be held by a specified number of shareholders
not exceeding 20. What is the effect of such
amendment to Corporation Z?
A: It is a special feature of a close corporation that its
shares of stock exclusive of treasury shares shall be held
by not more than 20 stock holders. The deletion of such
special feature would render Corporation Z no longer a
close corporation.
DEADLOCKS
Deadlock in a close corporation
It is when the directors or stockholders are so divided
respecting the management of the business and affairs of
the corporation that the votes required for any corporate
action cannot be obtained and as a result, business and
Widely held vs. Close corporation
WIDELY HELD
CORPORATION
Number of No limit
Stockholders
Public Offering/ Allowed
Listing of Shares in
the Stock Exchange
Corporate powers are exercised, all business
Who may exercise
conducted and all property of such
corporate Powers
267
affairs can no longer be conducted to the advantage of the
stockholders generally (CC, Sec. 104).
NOTE: Dissolution of the corporation is one of the
possible consequences of deadlock (CC, Sec. 104).
Remedy in case of deadlocks in a close corporation
The SEC may be asked, upon written petition by any
stockholder, to intervene. And SEC shall have the
authority to do the following:
1. To arbitrate the dispute
2. Cancel or alter any provision contained in the articles
of incorporation, by-laws, or any stockholder's
agreement;
3. Cancel, alter or enjoin any resolution or act of the
corporation or its board of directors, stockholders, or
officers;
4. Direct or prohibit any act of the corporation or its
board of directors, stockholders, officers, or other
persons party to the action;
5. Require the purchase at their fair value of shares of
any stockholder, either by the corporation regardless
of the availability of unrestricted retained earnings in
its books, or by the other stockholders;
6. Appoint a provisional director;
7. Dissolve the corporation; or
8. Grant such other relief as the circumstances may
warrant. (ibid.)
SEC can interfere with the management of a close
corporation in case of disagreement of the
stockholders or directors
In case of deadlock in the management of the corporation,
the SEC may intervene and can do certain acts which
would have not been allowed to do in open corporations.
Provisional director
A provisional director is an impartial person who is
neither a stockholder nor a creditor of the corporation or
of any subsidiary or affiliate of the corporation. A
provisional director has all the rights and powers of a
director of the corporation, including the right to notice of
and to vote at meetings of directors, until such time as he
shall be removed by order of the Commission or by all the
stockholders.
NOTE: A provisional director is not considered as a
receiver of the corporation. He does not have the title and
powers of a custodian or receiver.
CLOSE CORPORATION
Not exceeding 20 (CC, Sec. 96)
Not Allowed (CC, Sec. 96)
The articles of incorporation of a close
corporation may provide that the business of
the corporation shall be managed by the
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
corporations controlled and held by the board stockholders of the corporation rather than by
of directors or trustees (CC, Sec. 23) a board of directors (CC, Sec. 97).
Qualification of Qualifications of stockholders are not normally Specific qualifications are usually provided for
Stockholders prescribed (CC, Sec. 97).
Restriction on A restriction need not be provided for There must be a restriction on the transfer of
transfers of shares shares (CC, Sec. 96)
All stockholders of a stock corporation shall The pre-emptive right of stockholders in close
enjoy pre-emptive right to subscribe to all corporations shall extend to all stock to be
issues or disposition of shares of any class, in issued, including reissuance of treasury shares,
proportion to their respective shareholdings, whether for money or for property or personal
unless such right is denied by the AOI or services, or in payment of corporate debts,
amendment thereto: Provided, that such pre- unless the AOI provide otherwise (CC, Sec.
emptive right shall not extend to shares to be 102).
Pre-emptive Right issued in compliance with laws requiring stock
offerings or minimum stock ownership by the
public; or to shares to be issued in good faith
with the approval of the stockholders
representing 2/3 of the outstanding capital
stock, in exchange for property needed for
corporate purposes or in payment of a
previously contracted debt (CC, Sec. 39).
Only to those cases provided by law under Sec. Can be exercised with or without reason and
42 and 81. regardless of whether the corporation has
unrestricted retained earnings (CC, Sec. 105).
Appraisal Right
Required that the Corporation has unrestricted
retained earnings at the time of demand (CC,
Sec. 82).
Interference of SEC as Not allowed. Based on the Business Judgment Allowed in case of deadlocks (CC, Sec. 104).
to the management of Rule
the Corporation’s
business.
For voluntary dissolutions, approval of Dissolution may be effected by any stockholder
majority of the Board of Directors or Trustees upon petition to the SEC whenever any of acts
and of stockholders representing 2/ 3 of the of the directors, officers or those in control of
outstanding capital stock or 2/3 of the the corporation is illegal, or fraudulent, or
Dissolution
members in case of non-stock corporations is dishonest, or oppressive or unfairly prejudicial
necessary (CC, Sec. 118 and 119). to the corporation or any stockholder, or
whenever corporate assets are being
misapplied or wasted (CC, Sec. 105).
Requires vote or written assent of stockholders Amendment as to the matters stated in Sec. 103
Amendment of AOI representing at least 2/3 of the outstanding requires affirmative vote of at least 2/3 of the
capital stock (CC, Sec. 16). outstanding capital stock (CC, Sec. 103).
Oral objection is sufficient to preserve the right Written objection is required (CC, Sec. 101).
Objection in a meeting of the director to question the validity of an
without proper notice action taken in a meeting held without proper
notice (CC, Sec. 53).

NON-STOCK CORPORATION welfare or similar activities primarily through extending

grants or endowments. A foundation, as distinguished
DEFINITION from an ordinary non-stock corporation requires a
minimum capital of 1 million Pesos (SEC Memo. Circular
Non-stock corporation No. 1 Series of 2004).

It is one where no part of its income is distributable as Characteristics of a non-stock corporation

dividends to its members, trustees or officers. Any profit
which it may obtain as an incident to its operations shall
whenever necessary or proper, be used in furtherance of
the purpose or purposes for which it was organized (CC,
Sec. 87).
Foundation
A foundation is a non-stock, non-profit corporations with
funds established to maintain or aid charitable, religious,
educational, athletic, cultural, literary, scientific, social
1. It does not have capital stock divided into shares;
2. No part of its income during its existence is
distributable as dividends to its members, trustees,
or officers;
3. As a general rule, it is not empowered to engage in
business with the object of making income or profits
directly or indirectly. However, it is not prohibited to
make income or profits as an incident to its
operation. (CC, Sec. 87)

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 CORPORATION CODE
4. There is non-transferability of membership (CC, Sec.
90)
5. The right to vote of members may be limited,
broadened, or even denied in the AOI or the by-laws
(CC, Sec. 89).
6. Non-stock corporations may, through their articles of
incorporation or their by-laws designate their
governing boards by any name other than as BOT
(CC, Sec. 138).
7. By-laws may provide that the members may hold
their meetings at any place even outside the place
where the principal office of the corporation is
located, provided that such place is within the
Philippines (CC, Sec. 93). A non-stock corporation is
not allowed to distribute any of its assets or any
incidental income or profit made by the corporation
during its existence.
8. Non-availability of conversion into stock corporation
(SEC Opinion, February 24, 1989).
REMOVAL IN HOLD-OVER CAPACITY
Q: Adventist University of the Philippines (AUP) is a
non-stock, non-profit educational institution.
Petonillo Barayuga was appointed by the AUP’s Board
of Trustees as its President in 2001. AUP
subsequently amended its By-Laws to state that
members of the Board of Trustees were to serve a
term of office of only two years; and the officers, who
included the President, were to be elected from
among the members of the Board of Trustees during
their organizational meeting, which was held during
the election of the Board of Trustees every two years.
In 2003, the Board voted to remove Barayuga as
president. This prompted Barayuga to file a petition
for injunction with damages against AUP, contending
among others, that the Board relieved him of the
presidency without valid grounds despite his five-
Stock Corporation vs. Non-stock Corporation
STOCK- CORPORATION
Existence of Has capital stock divided into shares (CC, Sec.
Capital Stock 3)
Purpose Organized for profit.
Distribution of Profits are distributed to the stockholders
Profit through dividends(CC, Sec. 3)
Number of Not less than 5 but not more than 15.
Directors or
Trustees Except corporation sole and banks (in case of
merger or consolidation) which can have a
maximum of 21 directors
Term of Office of Term of one year until their successors are
Directors elected and qualified, subject to the provisions
of AOI and By-laws
Election of Officers are elected by the BOD and not by the
Officers stockholders
269
year term. The RTC ruled in favor of Barayuga. The CA,
on the other hand, ruled in favor of AUP.
Can an officer-elect of a non-stock educational
corporation occupying a hold-over capacity be
removed without cause upon the appointment of his
or her successor?
A: Yes. Although setting the term of the members of the
Board of Trustees at five years, Sec. 108, par 2 contains a
proviso expressly subjecting the duration to what is
otherwise provided in the articles of incorporation or by-
laws of the educational corporation. That contrary
provision controls on the term of office.
In light of the amended By-Laws of AUP the members of
the Board of Trustees were to serve a term of office of only
two years; and the officers, who included the President,
were to be elected from among the members of the Board
of Trustees during their organizational meeting, which
was held during the election of the Board of Trustees
every two years. Naturally, the officers, including the
President, were to exercise the powers vested by Section
2 of the amended By-Laws for a term of only two years,
not five years.
Ineluctably, Barayuga, having assumed as President of
AUP on January 23, 2001, could serve for only two years,
or until January 22, 2003. By the time of his removal for
cause as President on January 27, 2003, he was already
occupying the office in a hold-over capacity, and could be
removed at any time, without cause, upon the election or
appointment of his successor. His insistence on holding on
to the office was untenable, therefore, and with more
reason when one considers that his removal was due to
the loss of confidence on the part of the Board of Trustees
(Barayuga v. Adventist University of the Philippines, G.R.
No. 168008, August 17, 2011).
NON-STOCK CORPORATION
No capital stock.
Non-stock corporations has capital is in the form of
contributions or donations.
Not organized for profit.
Profits are not distributed to members. Any profit
earned by the non-stock corporation is used for the
furtherance of the purpose or purposes for which it is
organized (CC, Sec. 87).
Not less than 5 and may be more than 15 except Non-
stock educational institutions (maximum of 15
trustees).
Subject to the provision in AOI and By-laws, 3 years
on a staggered basis.
Members may directly elect officers. (CC, Sec. 92)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Place of meeting Stockholders meeting shall be held in city or
municipality where the principal office of the
corporation is located or at the principal office
of the corporation (CC, Sec. 51).
Right to vote Stockholders can resort to cumulative voting.
Only preferred and redeemable shares can be
denied the right to vote except those matters
in Sec. 6.
Voting of directors may be made only through
general voting. Regional or district voting of
directors is not allowed.
Transferability Shares may be transferred by the stockholder
of Shares/ with or without the consent of the corporation.
Membership
Right to expel Stockholders may be expelled only for grounds
members provided by law.
Distribution of Assets of stock corporation shall be distributed
Assets in case of in the following order:
dissolution
1.Payment of claims of creditors who are not
stockholders (based on preference of credit)
2.Payment of claims of stockholders as
creditors
3.Residual balance is distributed
proportionately to preferred shares, if any,
then to common stock.
Conversion
1. A non-stock corporation cannot be converted into a
stock corporation through mere amendment of its
AOI. This would violate Section 87 which prohibits
distribution of income as dividends to members.
Giving the members shares is tantamount to
distribution of its assets or income (Sundiang Sr. &
Aquino, 2014 citing SEC Opinion, March 1995).
2. A non-stock corporation can be converted into a
stock corporation only if the members dissolve it first
and then organize a stock corporation. However,
there is a resulting new corporation (Sundiang Sr. &
Aquino, 2014 citing SEC Opinion, May 13, 1992).
3. A stock corporation may be converted into a non-
stock corporation by mere amendment provided all
the requirements are complied with. Its rights and
liabilities will remain (Sundiang Sr. & Aquino, 2014).
Termination of Membership
The power to admit members pertains to the Board in the
absence of any contrary provisions on the AOI and by-
laws. Consistently, it is also the Board who has the power
to terminate membership.
1. Standards - A non-stock corporation is authorized to
terminate the membership in accordance with the
standards fixed in the AIO or the by-laws (CC, Sec. 91).
2. When property rights are involved - Membership may
involve property rights. Example: Membership in a
golf club where the purchase of the share is a sine qua
non (Valley Golf & Country Club Inc. v. Caram, G.R. No.
158805, April 16, 2009).
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
270
May be held at any place outside the principal place of
business of the corporation provided it shall be within
the Philippines (CC, Sec. 93).
No cumulative voting unless allowed by AOI.
Right to vote may be limited, broadened or denied by
the AOI and by-laws (CC, Sec. 89).
Regional or district voting of trustees is allowed.
Membership is personal in character and is not
transferable unless allowed by the AOI or by-laws (CC,
Sec. 90).
Membership shall be terminated in the manner and
for the causes provided in the articles of
incorporation or the by-laws (CC, Sec. 91).
Assets of non-stock corporation shall be distributed
as follows:
1. Payment of claims of creditors
2. Assets held on condition of return or subject to
limitation of use shall be returned, transferred
or conveyed.
3. Distribution to member based on distributive
rights stated in AOI or by-law.
4. In case of default, distribution pursuant to Plan
of Distribution of Assets.
3. Lien – Non-payment of dues may be a ground for
termination or suspension of membership. The AOI
or the by-laws of a non-stock corporation may
provide that unpaid dues shall constitute a lien on the
member’s share. However, Section 68 of the
Corporation Code does not apply if the membership
shares are sold under the provisions that provide for
the constitution of lien (Calatagan Golf & Country
Club Inc. V. Caram, G.R. No. 165443, April 16, 2009);
4. Notice - For the termination of membership to be
valid, there should be reasonable notice to the
member concerned and he must be given a fair
opportunity to be heard in his defense;
5. Effect of death of a member - Membership in and all
rights arising from a non-stock corporation are
personal and non-transferable, unless the AOI or the
by-laws of the corporation provide otherwise.
Deceased members who are dropped from the
membership roster in the manner and for the cause
provided for in the by-laws are not to be counted in
determining the requisite vote in corporate matters
or the requisite quorum for the annual member’s
meeting (Tan v. Sycip, G.R. No. 153468, August 17,
2006).
PURPOSES
Purposes for which a non-stock corporation may be
organized
Non-stock corporations may be formed or organized for:
(CREP-CFLSS-CS)
1. Charitable,
2. Religious,
3. Educational,
 CORPORATION CODE
4. Professional,
5. Cultural,
6. Fraternal,
7. Literary,
8. Scientific,
9. Social,
10. Civic service, or
11. Similar purposes, like trade, industry, agriculture
and like chambers, or any combination thereof (CC,
Sec. 88).
NOTE: A non-stock corporation organized to promote
educational objectives may not be an educational
corporation as contemplated in Secs. 106 to 108, CC.
The formation of a non-stock corporation for political
purpose is not allowed
Political purpose is not included on the purposes for
which a non-stock corporation may be established. SEC
may reject the AOI if the purpose of the corporation is to
engage in election campaign or partisan political activity
(SEC Opinion, April 10, 1985).
TREATMENT OF PROFITS
Non-stock corporation may earn profit
Mere intangible or pecuniary benefit to the members does
not change the nature of the corporation. The fact that a
non‐stock corporation earns a profit does not make it a
profit‐making corporation where such profit or income is
used for purposes set forth in its articles of incorporation
and is not distributed to its incorporators, members or
officers.
DISTRIBUTION OF ASSETS UPON DISSOLUTION
Order of distribution of assets on dissolution of non-
stock corporations
1. All liabilities of the corporation shall be paid or
adequate provision thereof shall be made;
2. Assets held upon a condition requiring return,
transfer or conveyance upon, and which condition
occurs by reason of the dissolution, shall be returned,
transferred or conveyed;
3. Assets received and held by the corporation subject
to limitations permitting their use only for charitable,
religious, benevolent, educational or similar
purposes shall be transferred or conveyed to one or
more corporations, societies or organizations
engaged in activities in the Philippines substantially
similar to those of the dissolving corporation.
4. All other assets shall be distributed to the members
as provided by the articles of incorporation or the by-
laws.
5. In the absence of provision in the AOI or by-laws,
distribution may be made in accordance to a plan of
distribution adopted by the board of trustees by
majority vote and by at least 2/3 of the members (CC,
Sec. 94).
271
A non-stock corporation cannot offset unused
contributions of members against the balance of
receivables from the same members
The unused contributions of members cannot be offset
against the balance of receivables because this would
amount to distribution of the capital of the corporation.
Members of non-stock corporation are not entitled to
distribution of capital. They are only entitled to
distribution of capital upon dissolution when it is
provided for in the articles of incorporation or by-laws
(SEC Opinion, November 27, 1985).
FOREIGN CORPORATIONS
A foreign corporation is done, formed, organized or
existing under any laws other than those of the
Philippines and whose laws allow Filipino citizens and
corporations to do business in its own country or State
(CC, Sec. 123).
Features that make a foreign corporation within the
coverage of the law
1. Place of incorporation - The corporation must be
formed, organized, or existing under foreign law.
Due to the enactment of RA 7042, the control test is
now used in the determination of nationality of the
corporation in case of nationalized or partly
nationalized activities. However, this does not
preclude the use of other tests in determining the
nationality of the corporation. In fact, as per SEC
Opinion on Nov. 28, 2009, the SEC opined that the
grandfather rule can be useful when a corporation’s
economic activity is strictly limited by law to Filipino
citizens, such as certain types of retail trading and
mass media. Further, according to the commission,
the control test, which is more liberal, is applied for
corporations intending to engage in commerce
where 60%-40% equity ratio is allowed by law.
2. Principle of reciprocity - It allows Filipino citizens to
do business in the foreign state or country. This is
merely prescribed as a requirement to secure a
license and not an essential element of being a
foreign corporation (De Leon, 2010).
Jurisdiction over a foreign corporation
IF THE FOREIGN IF THE FOREIGN
CORPORATION IS THE CORPORATION IS THE
PLAINTIFF DEFENDANT
1. Voluntary appearance 1.GR: Voluntary
before the local courts by appearance of the
the filing of an action by a corporation by
licensed corporation interposing a defense
2. If the foreign XPN: A special
corporation is a co- appearance to file a
plaintiff with a domestic motion to dismiss based
corporation and latter filed on lack of jurisdiction
a suit here in the
Philippines. 2. Service of summons to a
foreign corporation which
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
has transacted business in
the Philippines whether
licensed or registered
3. Service of summons to
its resident agent in an
isolated transaction.
BASES OF AUTHORITY OVER FOREIGN
CORPORATION
Bases of authority or jurisdiction
The following are the two bases of authority (jurisdiction)
over foreign corporations:
1. A corporation may give actual consent to judicial
jurisdiction manifested normally by compliance with
the State’s foreign corporation qualification
requirements (licensing requirements and other
requisites to lawfully transact business in the
Philippines); and
2. A corporation, even though not qualified (not
licensed), by engaging in sufficient activity (doing
business) within the State, established judicial
jurisdiction over the foreign corporation. (Foreign
Corporations: The Interrelation of Jurisdiction and
Qualification, Indiana Law Journal, Article 4, Vol. 33,
Issue 3, retrieved on April 29, 2013).
CONSENT
Through compliance with the Philippines’ legal
requirements to lawfully engage in business within the
country’s territory, the foreign corporation gives its
actual consent to be subjected to the jurisdiction of the
Philippines (ibid).
By securing a license, which is a legal requirement to
lawfully engage in business in the Philippines, the foreign
entity would be giving assurance that it will abide by the
decisions of our courts, even if adverse to it (Eriks PTE,
Ltd. v. CA, GR 118843, February 6, 1997).
Foreign corporations shall not be permitted to transact or
do business in the Philippines until they have secured a
license for that purpose from the SEC and certificate of
authority from the appropriate government agency (CC,
Sec. 123).
DOCTRINE OF DOING BUSINESS
Doing business in the Philippines
To be doing or “transacting business in the Philippines”
for purposes of Section 133 of the Corporation Code, the
foreign corporation must actually transact business in the
Philippines, that is, perform specific business transactions
within the Philippine territory on a continuing basis in its
own name and for its own account. A foreign company
that merely imports goods from a Philippine exporter,
without opening an office or appointing an agent in the
Philippines, is not doing business in the Philippines
(Cargill Inc. v. Intra Strata Assurance Corporation, G.R. No.
168266, March 15, 2010).
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2016 GOLDEN NOTES
272
Q: When is a foreign corporation deemed to be “doing
business in the Philippines?” (1998 Bar)
A: A foreign corporation is “deemed doing business in the
Philippines” if it is continuing the body or substance of the
business or enterprise for which it was organized. It is the
intention of an entity to continue the body of its business
in the country. The grant and extension of 90-day credit
terms of a foreign corporation to a domestic corporation
for every purchase shows an intention to continue
transacting with the latter.
Jurisdictional tests of “doing or transacting business”
in the Philippines for foreign corporations
1. Twin Characterization Test
a. Continuity Test – Doing business implies a
continuity of commercial dealings and
arrangements, and contemplates to some extent
the performance of acts or works or the exercise
of some functions normally incident to and in
progressive prosecution of, the purpose and
object of its organization.
b. Subsequent Test – a foreign corporation is doing
business in the country if it is continuing the
body or substance of the enterprise of business
for which it was organized (Sundiang Sr. &
Aquino, 2009).
2. Contract Test - Whether the contracts entered into by
the foreign corporation, or by an agent acting under
the control and direction of the foreign corporation,
are consummated in the Philippines.
NOTE: Actual transaction of business within the
Philippine territory is an essential requisite for the
Philippines to acquire jurisdiction over a foreign
corporation and thus require the foreign corporation to
secure a Philippine business license (B. Van Zuiden Bros.,
Ltd. v. GTVL Manufacturing Industries, Inc., G.R. No.
147905, May 28, 2007).
Q: What is the legal test for determining if an
unlicensed foreign corporation is doing business in
the Philippines? (2002 Bar)
A: The test is whether or not the unlicensed foreign
corporation has performed an act or acts that imply a
continuity of commercial dealings or arrangements, and
contemplate to that extent the performance of acts or
works, or the exercise of some of the functions normally
incident to, and in progressive prosecution of, commercial
gain or of the purpose and object of the business
corporation.
Acts which are considered as doing or transacting
business in the Philippines for foreign corporations
(2002 Bar)
1. Soliciting orders, entering into service contracts, and
opening offices, whether called “liason” offices or
branches.
2. Appointing representatives, distributors domiciled
in the Philippines or who stay for a period or periods
totaling 180 days or more.
 CORPORATION CODE
3. Participating in the management, supervision or
control of any domestic business, firm, entity, or
corporation in the Philippines.
4. Any act or acts that imply a continuity of commercial
dealings or arrangements, and contemplate to some
extent the performance of acts or works or the
exercise of some functions normally incident to and
in progressive prosecution of, the purpose and object
of its organization (RA 7042, Sec. 3[d]).
Acts which are not considered doing business under
the Foreign Investment Act (R.A. 4072)
1. Mere investment as a shareholder by a foreign entity
in a foreign corporation duly registered to do
business;
2. The exercise of rights as a stock investor and
3. Having a nominee director or officer to represent its
interest in such corporation;
4. Appointing a representative or distributor domiciled
in the Philippines which transacts business in its own
name and for its own account;
5. Publication of general advertisement through any
print or broadcast media;
6. Maintaining a stock of goods in the Philippines solely
for the purpose of having the same processed by
another entity in the Philippines
7. Consignment by a foreign entity of equipment with a
local company to be used in the processing of
products for export; and
8. Performing services auxiliary to an existing isolated
contract of sale which are not on a continuing basis,
such as installing in the Philippines machinery it has
manufactured or exported to the Philippines,
servicing the same, training domestic workers to
operate it and similar incidental services (ibid).
Q: Steelcase is a foreign corporation existing under
the laws of Michigan, USA, and engaged in the
manufacture of office furniture with dealers
worldwide. DISI is a corporation existing under
Philippine Laws and engaged in the furniture
business, including the distribution of furniture.
Steelcase and DISI orally entered into a dealership
agreement whereby Steelcase granted DISI the right
to market, sell, distribute, install, and service its
products to end-user customers within
the Philippines. The business relationship continued
smoothly until it was terminated after the agreement
was breached with neither party admitting any fault.
Steelcase filed a complaint for sum of money against
DISI alleging, among others, that DISI had an unpaid
account of US$600,000.00.
DISI alleged that the complaint failed to state a cause
of action and to contain the required allegations on
Steelcase’s capacity to sue in the Philippines despite
the fact that Steelcase was doing business in
the Philippines without the required license to do
so. Consequently, it posited that the complaint
should be dismissed because of Steelcase’s lack of
legal capacity to sue in Philippine courts. Is Steelcase
doing business in the Philippines without the
required license?
273
A: No. The appointment of a distributor in
the Philippines is not sufficient to constitute “doing
business” unless it is under the full control of the foreign
corporation. If the distributor is an independent entity
which buys and distributes products, other than those of
the foreign corporation, for its own name and its own
account, the latter cannot be considered to be doing
business in the Philippines. It should be kept in mind that
the determination of whether a foreign corporation is
doing business in the Philippines must be judged in light
of the attendant circumstances.
It is undisputed that DISI was founded in 1979 and is
independently owned and managed by the spouses
Leandro and Josephine Bantug. In addition to Steelcase
products, DISI also distributed products of other
companies including carpet tiles, relocatable walls and
theater settings. The dealership agreement between
Steelcase and DISI had been described by the owner
himself a buy and sell arrangement. This clearly belies
DISI’s assertion that it was a mere conduit through which
Steelcase conducted its business in the country. From the
preceding facts, the only reasonable conclusion that can
be reached is that DISI was an independent contractor,
distributing various products of Steelcase and of other
companies, acting in its own name and for its own account
(Steelcase, Inc., v. Design InternationalSelections, Inc., G.R.
No. 171995, April 18, 2012).
Q: Leonardo is the Chairman and President, while
Raphael is a director of NT Corporation. On one
occasion, NT Corp., represented by Leonardo and A
Enterprises, a single proprietorship owned by
Raphael, entered into a dealership agreement
whereby NT Corp. appointed A Enterprises as
exclusive distributor of its products in Northern
Luzon. Is the dealership agreement valid? Explain
(1996 Bar)
A: The dealership agreement is valid PROVIDED the
following conditions under Section 32 of BP 68 are
complied with. The law provides that a contract of the
corporation with one or more of its directors or trustees
or officers is voidable, at the option of such corporation,
unless all the following conditions are present: 1) that the
presence of such director or trustee in the board meeting
in which the contract was approved was not necessary to
constitute a quorum for such meeting; 2) that the vote of
such director or trustee was not necessary for the
approval of the contract; 3) that the contract is fair and
reasonable under the circumstances; and 4) that in case
of an officer, the contract has been previously authorized
by the board of directors.
Q: Chito Santos is a director of both Platinum
Corporation and Kwik Silver Corporation. He owns
1% of the outstanding capital stock of Platinum and
40% of Kwik. Platinum plans to enter into a contract
with Kwik that will make both companies earn very
substantial profits. The contract is presented at the
respective board meetings of Platinum and Kwik.
a. In order that the contract will not be voidable,
what conditions will have to be complied with?
Explain.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
b. If these conditions are not met, how may this
contract be ratified? Explain (1995 Bar)
A:
a. Under Section 32 of BP 68, the law provides that: 1)
the presence of such director or trustee in the board
meeting in which the contract ws approved was not
necessary to constitute a quorum for such meeting;
2) the vote of such director or trustee was not
necessary for the approval of the contract; 3) the
contract is fair and reasonable under the
circumstances; and 4) in case of an officer, the
contract has been previously authorized by the board
of directors. In the case at bar, Chito must make sure
that the following conditions be met for in order that
the contract will not be voidable.
b. Under Section 32 of BP 68, the law provides that
where any of the first two conditions set forth in the
preceding paragraph is absent, in the case of a
contract with a director or trustee, such contract may
be ratified by the vote of the stockholders
representing at least 2/3 of the outstanding capital
stock or of at least 2/3 of the members in a meeting
called for the purpose. Provided, that full disclosure
of the adverse interest of the directors or trustees
involved is made at such meeting. Provided,
however, that the contract is fair and reasonable
under the circumstances.
NOTE: See Section 33 as well on interlocking directors.
NECESSITY OF A LICENSE TO DO BUSINESS
The purpose of the law in requiring that a foreign
corporation doing business in the Philippines be licensed
to do so is to subject such corporation to the jurisdiction
of the courts. The object is not to prevent foreign
corporation from performing single acts but to prevent it
from acquiring a domicile for the purpose of business
without taking steps necessary to render it amenable to
suits in local courts (Marshall-Wells Co. vs. Elser & Co, G. R.
No. 22015, September 1, 1924)
Further, the following are considered objectives of the
statutory provisions prescribing regulation of foreign
corporations:
1. To place the foreign corporations under the
jurisdiction of the court;
2. To place them in the same footing as domestic
corporation;
3. To protect the public in dealing with the said
corporation.
A corporation engaged in exporting goods to the
Philippines is not required to obtain a license
If a foreign corporation does not transact such kind of
business in the Philippines, even if it exports its products
to the Philippines, the Philippines has no jurisdiction to
require such foreign corporation to secure a Philippine
business license. Actual transaction of business within the
Philippine territory is an essential requisite for the
Philippines to acquire jurisdiction over a foreign
corporation and thus require the foreign corporation to
secure a Philippine business license (B. Van Zuiden Bros.,
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
274
Ltd. v. GTVL Manufacturing Industries, Inc., G.R. No.
147905, May 28, 2007).
Q: Cargill is a corporation organized and existing
under the laws of the State of Delaware, United States
of America. Cargill and Northern Mindanao
Corporation (NMC) executed a contract whereby NMC
agreed to sell to Cargill molasses provided that Cargill
would open a Letter of Credit with the BPI. The
amended contract required NMC to put up a
performance bond which represents the value of
10,500 metric tons of molasses. The performance
bond was intended to guarantee NMC’s performance
to deliver the molasses during the prescribed
shipment periods according to the terms of the
amended contract. In compliance with the terms of
the third amendment of the contract, respondent
Intra Strata Assurance Corporation (Intra Strata)
issued a performance bond to
guarantee NMC’s delivery of the 10,500 tons of
molasses, and a surety bond. NMC was only able to
deliver 219.551 metric tons of molasses out of the
agreed 10,500 metric tons. Thus, Cargill sent demand
letters to NMC claiming payment under the
performance and surety bonds. When NMC refused to
pay, Cargill filed a complaint for sum of money against
NMC and Intra Strata. Does Cargill, an unlicensed
foreign corporation, has legal capacity to sue before
Philippine courts?
A: Yes, it has the capacity to sue. In this case, Cargill and
NMC amended their contract three times to give a chance
to NMC to deliver to Cargill the molasses, considering that
NMC already received the minimum price of the contract.
There is no showing that the transactions between Cargill
and NMC signify the intent of Cargill to establish a
continuous business or extend its operations in the
Philippines. An exporter in one country may export its
products to many foreign importing countries without
performing in the importing countries specific
commercial acts that would constitute doing business in
the importing countries. The mere act of exporting from
one’s own country, without doing any specific commercial
act within the territory of the importing country, cannot
be deemed as doing business in the importing country.
The importing country does not require jurisdiction over
the foreign exporter who has not yet performed any
specific commercial act within the territory of the
importing country. Without jurisdiction over the foreign
exporter, the importing country cannot compel the
foreign exporter to secure a license to do business in the
importing country (Cargill, Inc., v. Intra Strata Assurance
Corporation, G.R. No. 168266, March 15, 2010).
REQUISITES FOR ISSUANCE OF LICENSE
Requisites for the issuance of license to a foreign
corporation
The foreign corporation must submit to SEC the
following:
1. Copy of its articles of incorporation and by-laws,
certified in accordance with law and their translation
to an official language of the Philippines, if necessary.
2. The application, which shall be under oath.
 CORPORATION CODE
3. Attached to the application for license shall be a duly
executed certificate under oath by the authorized
official or officials of the jurisdiction of its
incorporation, attesting to the fact that:
a. The laws of the country or state of the applicant
allow Filipino citizens and corporations to do
business therein
This oath of reciprocity is one of the
requirements to secure a license under Sec. 123,
CC, which defines a foreign corporation.
b. The applicant is an existing corporation in good
standing.
c. If such certificate is in a foreign language, a
translation thereof in English under oath of the
translator shall be attached thereto.
4. Statement under oath by the President or other
person authorized by the Corporation showing to the
satisfaction of the SEC and other governmental
agency in the proper cases that the:
a. applicant is solvent and in sound financial
condition
b. the assets and liabilities of the corporation as of
the date not exceeding one (1) year immediately
prior to the filing of the application.
5. An agreement or stipulation stating the designated
resident agent who will receive summons and other
legal processes for the corporation together with a
Special Power of Attorney.
6. An agreement that if it ceases to transact business or
if there is no more resident agent, summons shall
then be served through SEC; and
7. Deposit securities for the benefit of present and
future creditors, within 60 days after the issuance of
license.
NOTE: Foreign banking, financial and insurance
corporations shall, in addition to the above requirements,
comply with the provisions of existing laws applicable to
them.
The AOI and by-laws of a licensed and registered
foreign corporation is valid despite the fact that said
AOI and by-laws are not approved by SEC
Since the SEC will grant a license only when the foreign
corporation has complied with all the requirements of
law, it follows that when it decides to issue such license, it
is satisfied that the applicant's by-laws, among the other
documents, meet the legal requirements. This, in effect, is
an approval of the foreign corporation’s by-laws (Citibank
v. Chua, G.R. no. 102300, March 17, 1993).
RESIDENT AGENT
1. An individual, who must be of good moral character
and of sound financial standing, residing in the
Philippines; or
2. A domestic corporation lawfully transacting business
in the Philippines (CC, Sec. 127).
Purpose of appointing a resident agent
275
The appointment of a resident agent is required for the
purpose of accepting and receiving, on behalf of the
foreign corporation:
1. Notice affecting the corporation pending the
establishment of its local office and
2. Summons and other legal processes in all
proceedings for or against the corporation.
Effect of service of summons and notices to the
resident agent
Service upon any agent of a foreign corporation, whether
or not engaged in business in the Philippines, constitutes
personal service upon the corporation (CC, Sec. 128;
Facilities Management Corp. v. Dela Rosa, G.R. No. L-38649,
March 26, 1979).
Resident agent cannot sign the certificate of non-
forum shopping
While a resident agent may be aware of the actions filed
against the principal, he may not be aware of the actions
initiated by the principal, therefore he cannot sign the
certificate of non-forum shopping that is a requirement
for filing of an initiatory pleading in court (Expert Travel
& Tours Inc. v. CA, G.R. No. 152392, May 26, 2005).
Replacement of a resident agent
SEC requires the submission of:
1. A duly authenticated copy of board resolution or a
certification from the authorized officer of the
company formally revoking his appointment as a
resident agent of the corporation,
2. Accompanied by a duly authenticated written power
of attorney designating the substitute or the new
resident agent (SEC Opinion, Sept. 4, 1990).
NOTE: The appointment of a resident agent of a foreign
corporation is revocable at any time at the instance of the
corporation (ibid).
Duty of the resident agent in case it changes its
address
It shall be his or its duty to immediately notify in writing
the SEC of the new address (CC, Sec. 128).
Instances when service of summons or other legal
processes made upon the SEC instead of a resident
agent
1. If a foreign corporation, previously granted a license,
ceases to transact business in the Philippines, or
2. Shall be without any resident agent in the Philippines
on whom any summons or other legal processes may
be served, then in any action or proceeding arising
out of any business or transaction which occurred in
the Philippines, service of any summons or other
legal process may be made upon the SEC (ibid.)
Effect of service made upon the SEC
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Such service made upon the SEC shall have the same force
and effect as if made upon the duly authorized officers of
the corporation at its home office (ibid).
Whenever such service shall be made upon the SEC, it
must, within 10 days thereafter, transmit by mail a copy
of such summons or other legal process to the corporation
at its home or principal office. The sending of such copy
by the Commission shall be a necessary part of and shall
complete such service.
PERSONALITY TO SUE
Personality to sue by foreign corporations
GR: Only foreign corporations that have been issued a
license to operate a business in the Philippines have the
personality to sue (CC, Sec.133).
XPN: Under the rule on estoppel, a party is estopped to
challenge the personality of a foreign corporation to sue,
even if it has no license, after having acknowledged the
same by entering to a contract with it.
One who has dealt with a corporation of foreign origin as
a corporate entity is estopped to deny its corporate
existence.
A foreign corporation which is not licensed to do
business in the Philippines is not absolutely
incapacitated from filing a suit in local courts
Only when that foreign corporation is “transacting” or
“doing business” in the country will a license be necessary
before it can institute suits. It may, however, bring suits
on isolated business transactions, which is not prohibited
under Philippine law. Thus, a foreign insurance company
may sue in Philippine courts upon the marine insurance
policies issued by it abroad to cover international-bound
cargoes shipped by a Philippine carrier, even if it has no
license to do business in this country. It is the act of
engaging in business without the prescribed license
which bars a foreign corporation from access to our
courts (Aboitiz Shipping Corp. vs. Insurance Co. of North
America, G.R. No. 168402, August 6, 2008, in Divina, 2010).
The obtainment of a license prescribed by the
Corporation Code is not a condition precedent to the
maintenance of any kind of action in Philippine courts by
a foreign corporation. However, no foreign corporation
shall be permitted to transact business in the Philippines,
as this phrase is understood under the Corporation Code,
unless it shall have the license required by law, and until
it complies with the law in transacting business here, it
shall not be permitted to maintain any suit in local courts.
As thus interpreted, any foreign corporation not doing
business in the Philippines may maintain an action in our
courts upon any cause of action, provided that the subject
matter and the defendant are within the jurisdiction of the
court. It is not the absence of the prescribed license but
"doing business" in the Philippines without such license
which debars the foreign corporation from access to our
courts. In other words, although a foreign corporation is
without license to transact business in the Philippines, it
does not follow that it has no capacity to bring an action.
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
276
Such license is not necessary if it is not engaged in
business in the Philippines (Columbia Pictures v. CA, G.R.
No. 110318, August 28, 1996).
Petitioner Tuna Processing Inc., although not licensed to
do business in the Philippines, may seek recognition and
enforcement of the foreign arbitral award in accordance
with the provisions of the Alternative Dispute Resolution
Act of 2004. A foreign corporation‘s capacity to sue in the
Philippines is not material insofar as the recognition and
enforcement of a foreign arbitral award is concerned
(Tuna Processing Inc., v. Philippine Kingford Inc., G.R. No.
185582, February 29, 2012).
SUABILITY OF FOREIGN CORPORATIONS
A foreign corporation, which was granted a license to
transact business in the Philippines, is suable before
local courts or administrative agencies
It is suable since any foreign corporation lawfully doing
business in the Philippines shall be bound by all laws,
rules and regulations applicable to domestic corporations
of the same class, save and except:
1. Such only as provided for the creation, formation,
organization or dissolution of the corporations or
2. Those which fix the relations, liabilities,
responsibilities, or duties of stockholders, members
or officers of corporations to each other or to the
corporation (CC, Sec. 129).
NOTE: Matters relating to the organization or internal
affairs of the corporation are governed by the laws of the
home or incorporating State unless they offend any public
policy of the Philippines.
A foreign corporation doing business in the
Philippines without license may be sued in the
country
While an unlicensed foreign corporation doing business
in the country cannot maintain any action, said
corporation can be sued in the country, under the
doctrine of quasi-estoppel by acceptance of benefits. It
shall not be allowed to invoke its lack of license to impugn
the jurisdiction of the courts (Marubeni Nedeland BV v.
Tensuan, G.R. No. 61950, September 28, 1990; SEC Opinion,
Jan. 10, 1995).
INSTANCES WHERE AN UNLICENSED FOREIGN
CORPORATION BE ALLOWED TO SUE
1. Isolated transactions;
2. A license subsequently granted enables the foreign
corporation to sue on contracts executed before the
grant of the license;
3. In an action for infringement of patent or other
intellectual property rights, provided that the
country of the foreign corporation is a party to the
Paris Convention.
4. If the foreign corporation is co-plaintiff with a
domestic corporation and the domestic corporation
is the one who instituted the suit in the Philippines;
and
5. By reason of the doctrine of estoppel.
 CORPORATION CODE
Isolated transaction
The Court has not construed the term “isolated
transaction” to literally mean “one” or a mere single act.
The phrase “isolated transaction” has a definite and fixed
meaning, i.e., a transaction or series of transaction set
apart from the common business of a foreign enterprise
in the sense that there is no intention to engage in
progressive pursuit of the purpose and object of the
business organization (Lorenzo Shipping Corp., v. Chubb
and Sons, G.R. No. 147724, June 8, 2004)
Q: May a foreign corporation not engaged in business
in the Philippines and a national of a country which is
a party to any convention, treaty, or agreement
relating to intellectual property rights or the
repression of unfair competition, to which the
Philippines is also a party or extend reciprocal rights
sue in trademark or service mark enforcement
action?
A: Yes. The foreign corporation mentioned above may sue
in trademark or service mark enforcement action. This is
in accordance with Section 160, in relation to Section 3 of
R.A. No. 8393, The Intellectual Property Code (Sehwani
Inc. v. In-n-Out Burger, G.R. No. 171053, Oct. 15, 2007).
Q: Surecomp, a foreign corporation duly organized
and existing under the laws of the Netherlands,
entered into a software license agreement with ABC,
a domestic corporation, for the use of its IMEX
Software System (System) in the bank’s computer
system for a period of twenty (20) years. ABC merged
with Global Business Holdings, Inc. (Global), with
Global as the surviving corporation.
When Global took over the operations of ABC, it found
the System unworkable for its operations, and
informed Surecomp of its decision to discontinue
with the agreement and to stop further payments
thereon. Consequently, for failure of Global to pay its
obligations under the agreement despite demands,
Surecomp filed a complaint for breach of contract
with damages before the RTC.
In its complaint, Surecomp alleged that it is a foreign
corporation not doing business in the Philippines and
is suing on an isolated transaction. Pursuant to the
agreement, it installed the System in ABC’s computers
for a consideration of US$298,000.00 as license fee.
Global filed a motion to dismiss on the ground that
Surecomp had no capacity to sue because it was doing
business in the Philippines without a license. Is
Global estopped from questioning Surecomp’s
capacity to sue?
A: Yes, Global is estopped. As a rule, unlicensed foreign
non-resident corporations doing business in
the Philippines cannot file suits in the Philippines. This is
mandated under Section 133 of the Corporation Code. A
corporation has a legal status only within the state or
territory in which it was organized. For this reason, a
corporation organized in another country has no
personality to file suits in the Philippines. In order to
277
subject a foreign corporation doing business in the
country to the jurisdiction of our courts, it must acquire a
license from the Securities and Exchange Commission and
appoint an agent for service of process. Without such
license, it cannot institute a suit in the Philippines.
The exception to this rule is the doctrine of estoppel.
Global is estopped from challenging Surecomp’s capacity
to sue. A foreign corporation doing business in
the Philippines without license may sue in Philippine
courts a Filipino citizen or a Philippine entity that had
contracted with and benefited from it. A party is estopped
from challenging the personality of a corporation after
having acknowledged the same by entering into a contract
with it. The principle is applied to prevent a person
contracting with a foreign corporation from later taking
advantage of its non-compliance with the statutes, chiefly
in cases where such person has received the benefits of
the contract (Global Business Holdings, Inc., v. Surecomp
Software, B.V., G.R. No. 173463, October 13, 2010).
GROUNDS FOR REVOCATION OF LICENSE
Grounds for revocation of license of a foreign
corporation
Without prejudice to other grounds provided by special
laws, the license of a foreign corporation to transact
business in the Philippines may be revoked or suspended
by the SEC upon any of the following grounds:
1. Failure to file its annual report or pay any fees as
required by the Code;
2. Failure to appoint and maintain a resident agent in
the Philippines;
3. Failure, after change of its resident agent or of his
address, to submit to the Securities and Exchange
Commission a statement of such change;
4. Failure to submit to the SEC an authenticated copy of
any amendment to its articles of incorporation or by-
laws or of any articles of merger or consolidation
within the time prescribed by the Corporation Code;
5. A misrepresentation of any material matter in any
application, report, affidavit or other document
submitted by such corporation pursuant to this Title;
6. Failure to pay any and all taxes, imposts, assessments
or penalties, if any, lawfully due to the Philippine
Government or any of its agencies or political
subdivisions;
7. Transacting business in the Philippines outside of the
purpose or purposes for which such corporation is
authorized under its license;
8. Transacting business in the Philippines as agent of or
acting for and in behalf of any foreign corporation or
entity not duly licensed to do business in the
Philippines; or
9. Any other ground as would render it unfit to transact
business in the Philippines (CC, Sec 134).
Revocation of the license to transact business in the
Philippines
A certificate of revocation shall be issued by the SEC. A
copy thereof shall be furnished to the appropriate
government agency in the proper cases.The SEC shall also
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
mail to the corporation at tits registered office in the control. The acquiring corporation is called the
Philippines a notice of such revocation accompanied by a parent/ holding company. The corporation whose
copy of the certificate of revocation. (CC, Sec. 135) stocks were acquired is the subsidiary.
4. Merger – One where a corporation absorbs another
Effects of revocation of license of a foreign corporation and remains in existence while others
corporation are dissolved.
5. Consolidation - One where a new corporation is
The following are the effects of such revocation: created and consolidating corporations are
1. The revocation cannot affect the validity of contracts extinguished (ibid).
entered into by it before the revocation nor its right
to maintain an action to enforce them (Billmeyer Merger
Lumber Co. vs. Merchants’ Coal Co., 69 SE 1073).
2. The revocation shall not affect the validity of Two or more corporations unite, one corporation which
contracts entered into by a foreign corporation after retains its corporate existence absorbing or merging in
revocation. The only effect of the revocation is that itself the other which disappears as a separate
the foreign corporation cannot seek redress from the corporation. It is the absorption of one corporation by
courts to enforce such contracts. It simply removes another which survives (De Leon, 2010).
its legal standing to sue (SEC Opinion No. 10-07, Feb.
5, 2010). Merger vs. De Facto Merger
3. Innocent parties can enforce such contracts whether
the same are considered valid or not. However, the Merger De Facto Merger
foreign corporation can no longer transact business Merger is a re- Can be pursued by one
in the Philippines, and it cannot maintain any suit or organization of two or corporation acquiring all or
action in any court or administrative agency (CC, Sec. more corporations that substantially all of the
133). results in their properties of another
consolidating into a single corporation in exchange of
Withdrawal by foreign corporation licensed to corporation, which is one shares of stock of the
transact business in the Philippines from said license of the constituent acquiring corporation. The
corporations, one acquiring corporation would
A foreign corporation licensed to transact business in the disappearing or end up with the business
Philippines may be allowed to withdraw from the dissolving and the other enterprise of the target
Philippines by filing a petition for withdrawal of license. surviving. To put it corporation; whereas, the
However, no certificate of withdrawal shall be issued by another way, merger is target corporation would end
the SEC unless all the following requirements are met: the absorption of one or up with basically its only
more corporations by remaining assets being the
1. All claims which have accrued in the Philippines have another existing shares of stock of the
been paid, compromised or settled; corporation, which acquiring corporation.
2. All taxes, imposts, assessments, and penalties, if any, retains its identity and
lawfully due to the Philippine Government or any of takes over the rights,
its agencies or political subdivisions have been paid; privileges, franchises,
and properties, claims,
3. The petition for withdrawal of license has been liabilities and obligations
published once a week for three (3) consecutive of the absorbed
weeks in a newspaper of general circulation in the corporation(s). The
Philippines (CC, Sec. 136). absorbing corporation
continues its existence
MERGERS AND CONSOLIDATIONS while the life or lives of
the other corporation(s)
DEFINITION AND CONCEPT is or are terminated.

Common forms of corporate combinations (Bank of Commerce v. Radio Philippines Network, Inc., et
al., G.R. No. 195615, April 21, 2014).
1. Sale of assets – One corporation sells all or
substantially all of its assets to another. Such sale, Asset sale vs. Stock sale
usually, though not necessarily made in the course of
the dissolution of the vendor corporation. ASSET SALE STOCK SALE
2. Lease of assets – A corporation, without being The corporate entity sells The individual or corporate
dissolved, leases its property to another corporation all or substantially all of its shareholders sell a
for which the lessor merely receives rental paid by assets to another entity. controlling block of stock
the lessee. This is similar to the sale of assets, except to new or existing
that under a lease, nothing passes, except the right to shareholders.
use the property leased.
3. Sale of stock – The purpose of a holding corporation The seller in good faith is Notwithstanding the stock
is to acquire a sufficient amount of the stock of authorized to dismiss the sale, the corporation
another corporation for the purpose of acquiring affected employees, but is continues to be the

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 CORPORATION CODE
liable for the payment of employer of its people and
separation pay under the continues to be liable for
law. The buyer in good the payment of their just
faith, on the other hand, is claims. Furthermore, the
not obliged to absorb the corporation or its new
employees affected by the majority shareholders are
sale, nor is it liable for the not entitled to lawfully
payment of their claims. dismiss corporate
The most that it may do, for employees absent a just or
reasons of public policy authorized cause. (SME
and social justice, is to give Bank, Inc., et al., v. Gaspar,
preference to the qualified et al., G.R. Nos. 184517 &
separated personnel of the 186641, October 8, 2013).
selling firm.
Q: One of the stipulations in the sale of petitioner SME
Bank to petitioner Abelardo Samson was that Agustin
and De Guzman, the majority stockholders and
corporate directors of SME, shall terminate/retire its
employees. At the behest of Samson’s wife, SME’s
general manager urged its employees, respondents
Gaspar, et al., to tender their resignations on the
promise that they will be rehired. The majority shares
of SME were then sold to the Sps. Samson, and SME did
not rehire De Guzman, et al.
Gaspar, et al. filed a complaint for illegal dismissal
against SME, Samson, Agustin and De Guzman. The LA
ruled that the labor buyer of an enterprise is not
bound to absorb its employees, unless there is an
express stipulation to the contrary. The NLRC found
that there was only a mere transfer of shares – and
therefore, a mere change of management – from
Agustin and De Guzman to the Samson Group. As the
change of management was not a valid ground to
terminate respondent bank employees, the NLRC
ruled that they had indeed been illegally dismissed. It
further ruled that Agustin, De Guzman and the
Samson Group should be held jointly and severally
liable.
a. Was there a transfer of business such that
Samson,, being an innocent transferee, has no
obligation to retain the employment of Gaspar, et
al. ?
b. May the Spouses Samson be held liable?
A:
a. No. The argument is misleading and unmeritorious.
Contrary to petitioner bank’s argument, there was no
transfer of the business establishment to speak of, but
merely a change in the new majority shareholders of the
corporation.
There are two types of corporate acquisitions: asset sales
and stock sales. In contrast with asset sales, in which the
assets of the selling corporation are transferred to
another entity, the transaction in stock sales takes place
at the shareholder level. Because the corporation
possesses a personality separate and distinct from that of
its shareholders, a shift in the composition of its
shareholders will not affect its existence and continuity.
Thus, notwithstanding the stock sale, the corporation
continues to be the employer of its people and continues
279
to be liable for the payment of their just claims.
Furthermore, the corporation or its new majority
shareholders are not entitled to lawfully dismiss
corporate employees absent a just or authorized cause.
In the case at bar, the Letter Agreements show that their
main object is the acquisition by the Samson Group of
86.365% of the shares of stock of SME Bank. Hence, this
case involves a stock sale, whereby the transferee
acquires the controlling shares of stock of the
corporation. Thus, following the rule in stock sales,
respondent employees may not be dismissed except for
just or authorized causes under the Labor Code.
The transfer only involved a change in the equity
composition of the corporation. To reiterate, the
employees are not transferred to a new employer, but
remain with the original corporate employer,
notwithstanding an equity shift in its majority
shareholders. This being so, the employment status of the
employees should not have been affected by the stock
sale. A change in the equity composition of the corporate
shareholders should not result in the automatic
termination of the employment of the corporation’s
employees. Neither should it give the new majority
shareholders the right to legally dismiss the corporation’s
employees, absent a just or authorized cause.
It is thus erroneous on the part of the corporation to
consider the employees as terminated from their
employment when the sole reason for so doing is a change
of management by reason of the stock sale. The
conformity of the employees to the corporation’s act of
considering them as terminated and their subsequent
acceptance of separation pay does not remove the taint of
illegal dismissal. Acceptance of separation pay does not
bar the employees from subsequently contesting the
legality of their dismissal, nor does it estop them from
challenging the legality of their separation from the
service.
b. No. Respondent employees argue that the Samson
Group had already taken over and conducted an inventory
before the execution of the share purchase agreement.
Agustin and De Guzman likewise argued that it was at
Olga Samson’s behest that the employees were required
to resign from their posts. Even if this statement were
true, it cannot amount to a finding that spouses Samson
should be treated as corporate directors or officers of SME
Bank. The records show that it was Espiritu who asked the
employees to tender their resignation and or retirement
letters, and that these letters were actually tendered to
him. He then transmitted these letters to the
representative of the Samson Group. That the spouses
Samson had to ask Espiritu to require the employees to
resign shows that they were not in control of the
corporation, and that the former shareholders – through
Espiritu – were still in charge thereof. As the spouses
Samson were neither corporate officers nor directors at
the time the illegal dismissal took place, we find that there
is no legal basis in the present case to hold them in their
personal capacities solidarily liable with SME Bank for
illegally dismissing respondent employees, without
prejudice to any liabilities that may have attached under
other provisions of law.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Furthermore, even if spouses Samson were already in
control of the corporation at the time that Simeon, Jr. was
constructively dismissed, we refuse to pierce the
corporate veil and find them liable in their individual
steads. There is no showing that his constructive
dismissal amounted to more than a corporate act by SME
Bank, or that spouses Samson acted maliciously or in bad
faith in bringing about his constructive dismissal (SME
Bank, Inc., et al., v. Gaspar, et al., G.R. Nos. 184517 & 186641,
October 8, 2013).
Q: Petitioner Bank of Commerce (BOC) and Traders
Royal Bank (TRB) executed a Purchase and
Assumption agreement, where the former acquired
the latter’s specified assets and liabilities, excluding
liabilities arising from judicial actions which were
covered by a BSP-mandated escrow fund of P50
million. Shortly after, the Supreme Court, in TRB v.
RPN, ordered TRB to pay respondents Radio
Philippines Network, Intercontinental Broadcasting
Corporation, and Banahaw Broadcasting Corporation
(RPN, et al.) actual damages with legal interest. RPN,
et al. filed a motion for execution against TRB before
the RTC. But rather than pursue a levy in execution of
the corresponding amounts on escrow, RPN, et al.
filed a Supplemental Motion for Execution where they
described TRB as “now BOC” based on the assumption
that TRB had been merged into BOC.
BOC opposed RPN, et al.’s motion and denied that
there was a merger between itself and TRB. The RTC
granted the writ of execution to cover all assets of
TRB, including those subject of the P & A agreement.
The RTC held that the P & A agreement was a mere
tool to effectuate merger.
BOC appealed to the CA, which affirmed with
modification the RTC decision, by declaring that no
merger existed between BOC and TRB and deleting
the phrase that the P & A agreement was a farce or a
mere tool to effectuate a merger or consolidation
between TRB and BOC. The CA limited the execution
to TRB’s properties found in BOC’s possession.
The RTC issued an alias writ of execution against BOC,
and BOC sought reconsideration of the same
considering that the CA declared that no merger
existed between BOC and TRB. The RTC denied BOC’s
motion.
a. Was there a merger between BOC and TRB?
b. Should BOC be considered as RPN, et al.’s
judgment debtor?
A:
a. No. What happened is that TRB sold and BOC
purchased identified recorded assets of TRB in
consideration of BOC’s assumption of identified
recorded liabilities of TRB including booked
contingent accounts. There is no law that prohibits
this kind of transaction especially when it is done
openly and with appropriate government approval.
In a strict sense, no merger or consolidation took
UNIVERSITY OF SANTO TOMAS
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280
place as the records do not show any plan or articles
of merger or consolidation.
In his book, Philippine Corporate Law, Dean Cesar
Villanueva explained that under the Corporation Code, “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 corporation. The acquiring corporation
would end up with the business enterprise of the target
corporation; whereas, the target corporation would end
up with basically its only remaining assets being the
shares of stock of the acquiring corporation.” (Emphasis
supplied)
No de facto merger took place in the present case simply
because the TRB owners did not get in exchange for the
bank’s assets and liabilities an equivalent value in BOC
shares of stock. BOC and TRB agreed with BSP approval to
exclude from the sale the TRB’s contingent judicial
liabilities, including those owing to RPN, et al.
The Bureau of Internal Revenue (BIR) treated the
transaction between the two banks purely as a sale of
specified assets and liabilities when it rendered its
opinion on the tax consequences of the transaction given
that there is a difference in tax treatment between a sale
and a merger or consolidation.
b. No. First, BOC agreed to assume those liabilities of
TRB that are specified in their P & A Agreement. That
agreement specifically excluded TRB’s contingent
liabilities that the latter might have arising from
pending litigations in court, including the claims of
RPN, et al.
Second, as already pointed out above, the sale did not
amount to merger or de facto merger of
Bancommerce and TRB since the elements required
of both were not present.
Third, the evidence in this case fails to show that BOC
was a mere continuation of TRB. TRB retained its
separate and distinct identity after the purchase.
Although it subsequently changed its name to
Traders Royal Holding’s, Inc. such change did not
result in its dissolution.
Fourth, to protect contingent claims, the BSP directed
BOC and TRB to put up P50 million in escrow with
another bank. It was the BSP, not BOC that fixed the
amount of the escrow. Consequently, it cannot be
said that the latter bank acted in bad faith with
respect to the excluded liabilities. They did not enter
into the P & A Agreement to enable TRB to escape
from its liability to creditors with pending court
cases.
Since there had been no merger, BOC cannot be
considered as TRB’s successor-in-interest and
against which the Court’s Decision in TRB v. RPN may
be enforced. BOC did not hold the former TRBs assets
in trust for it as to subject them to garnishment for
the satisfaction of the latter’s liabilities to RPN, et al.
 CORPORATION CODE
BOC bought and acquired those assets and thus, Q: Where one corporation sells or otherwise transfers
became their absolute owner. all of its assets to another corporation, is the latter
liable for the debts and liabilities of the transferor?
The enforcement, therefore, of the decision in the
main case should not include the assets and A: GR: No.
properties that BOC acquired from TRB. These have
ceased to be assets and properties of TRB under the XPNs:
terms of the BSP-approved P & A Agreement 1. Where the purchaser expressly or impliedly agrees
between them. They are not TRB assets and to assume such debts;
properties in the possession of BOC (Bank of 2. Where the transaction amounts to a consolidation or
Commerce v. Radio Philippines Network, Inc., et al., merger of the corporations;
G.R. No. 195615, April 21, 2014). 3. Where the purchasing corporation is merely a
continuation of the selling corporation; and
Consolidation 4. Where the transaction is entered into fraudulently to
escape liability for such debts (Edward J. Nell Co. vs.
Two or more corporations unite, giving rise to a new Pacific Farms, Inc., G.R. No. L-20850, November 29,
corporate body and dissolving the constituent 1965).
corporations which cease to exist as separate
corporations (De Leon, 2010). The Nell Doctrine states the general rule that the transfer
of all the assets of a corporation to another shall not
Merger vs. Consolidation render the latter liable to the liabilities of the transferor.
If any of the above-cited exceptions are present, then the
BASIS MERGER CONSOLIDATION transferee corporation shall assume the liabilities of the
One where a transferor.
corporation One where a new
absorbs another corporation is The legal basis of the last in the four (4) exceptions to the
corporation and created and Nell Doctrine, where the purchasing corporation is
Definition remains in consolidating merely a continuation of the selling corporation, is
existence while corporations are challenging to determine. In his book, Philippine
others are extinguished. (CC, Corporate Law, Dean Cesar Villanueva explained that this
dissolved (CC, Sec. Sec. 76) exception contemplates the “business-enterprise
76). transfer.” In such transfer, the transferee corporation’s
All of the interest goes beyond the assets of the transferor’s assets
Consequent and its desires to acquire the latter’s business enterprise,
constituent All consolidated
dissolution of including its goodwill.
corporations corporations are
a corporation
involved are dissolved without
or Section 40 suitably reflects the business-enterprise
dissolved except exception
corporations transfer under the exception of the Nell Doctrine because
one
Consequent the purchasing or transferee corporation necessarily
No new A new continued the business of the selling or transferor
creation of a
corporation is corporation corporation. Given that the transferee corporation
new
created emerges acquired not only the assets but also the business of the
corporation
The surviving All assets, transferor corporation, then the liabilities of the latter are
corporation liabilities, and inevitably assigned to the former. Section 40 refers to the
Acquisition of sale, lease, exchange or disposition of all or substantially
acquires all the capital stock of all
Assets, all of the corporation's assets, including its goodwill. The
assets, liabilities, consolidated
Liabilities, sale under this provision does not contemplate an
and capital stock corporations are
Capital Stock ordinary sale of all corporate assets; the transfer must be
of all constituent transferred to the
corporations new corporation of such degree that the transferor corporation is rendered
incapable of continuing its business or its corporate
A partnership cannot merge or to consolidate with a purpose.
corporation
The purpose of the business-enterprise transfer is to
Only corporations can merge or consolidate into a single protect the creditors of the business by allowing them a
corporation. Hence, a partnership may NOT be allowed to remedy against the new owner of the assets and business
merge with a corporation but the partnership may enterprise. Otherwise, creditors would be left “holding
transfer all its assets and liabilities to the corporation the bag,” because they may not be able to recover from the
which will issue its shares of stock to be distributed to the transferor who has “disappeared with the loot,” or against
partners in proportion to their respective interest in the the transferee who can claim that he is a purchaser in
partnership, provided the partnership shall be dissolved good faith and for value. Based on the foregoing, as the
in accordance with the Civil Code (De Leon,2010, citing exception of the Nell doctrine relates to the protection of
SEC Opinion, Jan 3, 1984). the creditors of the transferor corporation, and does not
depend on any deceit committed by the transferee
corporation, then fraud is certainly not an element of the
business enterprise doctrine. Indeed, the transferee

UNIVERSITY OF SANTO TOMAS

281 FACULTY OF CIVIL LAW
 MERCANTILE LAW
corporation may inherit the liabilities of the transferor
despite the lack of fraud due to the continuity of the
latter’s business (Y-I Leisure Philippines, Inc. v. Yu, G.R. No.
207161, September 18, 2015).
Q: E Co. sold its assets to M Inc. after complying with
the requirements of the Bulk Sales Law.
Subsequently, one of the creditors of E Co. tried to
collect the amount due it, but found out that E Co. has
no more assets left. TH creditors sued M Inc. on the
theory that M Inc. is a mere alter ego of E Co. Will the
suit prosper? (1996 Bar)
A: The suit will not prosper. The sale by E Co. of ts assets
to M Inc. does not result in the transfer of liabilities of the
latter to, nor in the assumption therefore by, the former.
The facts given do not indicate that such transfer or
assumption took place or was stipulated upon by the
parties in their agreement. Furthermore, the sale by E Co.
of its assets is a sale of its property. It does not involve the
sale of the shares of stock of the corporation belonging to
its stockholders. There is therefore no merger or
consolidation that took place. E Co. continues to exist and
remains liable to the creditor
CONSTITUENT VS. CONSOLIDATED CORPORATION
Constituent Corporation
The parties to a merger or consolidation are constituent
corporations (McLeod v. NLRC, G.R. No. 146667, January
23, 2007).
Consolidated corporation
Sec. 76 of the CC authorizes two or more corporations to
merge under one of the participating constituent
corporations, or to consolidate into a new single
corporation called consolidated corporation (BPI vs. BPI-
Employees Union-Davao Chapter Federation of Unions in
BPI Unibank, GR 164301, August 10, 2010, J. Brion,
dissenting).
PLAN OF MERGER OR CONSOLIDATION
Plan of merger or consolidation
The plan of merger or consolidation is a plan created by
the representatives of the constituent corporations,
providing for the details of such merger.
Contents of a plan of merger or consolidation
The BOD/ BOT of each corporation party to the merger or
consolidation must set forth the following in their plan of
merger or consolidation:
1. The names of the corporations proposing to merge or
consolidate, hereinafter referred to as the
constituent corporations;
2. The terms of the merger or consolidation and the
mode of carrying the same into effect;
3. A statement of the changes, if any, in the AOI of the
surviving corporation in case of a merger; and, with
respect to the consolidated corporation in case of
consolidation, all the statements required to be set
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282
forth in the AOI for corporations organized under the
CC; and
4. Such other provisions with respect to the proposed
merger or consolidation as are deemed necessary or
desirable (CC, Sec. 76).
Approvals required for an effective plan of merger or
consolidation
The plan of merger or consolidation must be approved by
majority vote of each of the BOD/ BOT of the constituent
corporation. Thereafter, it shall be submitted for approval
by the stockholders or members of each of such
corporations at separate corporate meetings duly called
for the purpose. The affirmative vote of the stockholders
representing at least 2/3 of the outstanding capital stock
of each corporation in the case of stock corporations or at
least 2/3 of the members in the case of non-stock
corporations, shall be necessary for the approval of such
plan (CC, Sec. 77).
Amendment of a plan of merger or consolidation
Any amendment may be made, provided such amendment
is approved by majority vote of the respective BOD / BOT
of all the constituent corporations and ratified by the
affirmative vote of stockholders representing at least 2/3
of the outstanding capital stock or 2/3 of the members of
each of the constituent corporations (ibid).
NOTE: Such plan, together with any amendment, shall be
considered as the agreement of merger or consolidation.
Appraisal right is available to a dissenting
stockholder to a plan of merger or consolidation
Any dissenting stockholder in stock corporations may
exercise his appraisal right in accordance with this Code:
Provided, that if after the approval by the stockholders of
such plan, the BOD should decide to abandon the plan, the
appraisal right shall be extinguished (ibid.)
ARTICLES OF MERGER OR CONSOLIDATION
After approval of the plan of merger or consolidation, an
article of merger or consolidation is executed by each of
the constituent corporations to be signed by the president
or vice-president of the each corporation and signed by
their secretary or assistant secretary setting forth:
1. The plan of the merger or the plan of consolidation;
2. As to stock corporations, the number of shares
outstanding, or in the case of non-stock corporations,
the number of members;
3. As to each corporation, the number of shares or
members voting for and against such plan,
respectively (CC, Sec. 78).
PROCEDURE
1. Board of each corporation shall draw up a plan of
merger or consolidation.
2. Plan of merger or consolidation shall be approved by
majority vote of each board of the concerned
corporations at separate meetings.
3. The plan of merger or consolidation shall be
submitted for approval by the stockholders or
 CORPORATION CODE
members of each such corporation at separate
corporate meetings duly called for the purpose.
Notice should be given to all stockholders or
members at least two (2) weeks prior to date of
meeting, either personally or by registered mail.
4. Affirmative vote of 2/3 of the outstanding capital
stock in case of stock corporations, or 2/3 of the
members of a non-stock corporation shall be
required.
5. Dissenting stockholders may exercise the right of
appraisal. But if Board abandons the plan to merge or
consolidate, such right is extinguished.
6. The plan may still be amended before the same is
filed with the SEC; however, any amendment to the
plan must be approved by the same votes of the
board members of trustees and stockholders or
members required for the original plan.
7. After such approval, Articles of Merger or Articles of
Consolidation shall be executed by each of the
constituent corporations, signed by president or VP
and certified by secretary or assistant secretary,
setting forth:
a. Plan of merger or consolidation;
b. In stock corporation, the number of shares
outstanding; in non-stock, the number of
members; and
c. As to each corporation, number of shares or
members voting for and against such plan,
respectively.
8. Four copies of the Articles of Merger or Consolidation
shall be submitted to the SEC for approval. Special
corporations like banks, insurance companies,
building and loan associations, etc., need the prior
approval of the respective government agency
concerned.
9. If SEC is satisfied that the merger or consolidation is
not inconsistent with the provisions of the
Corporation Code and existing laws, it shall issue the
Certificate of Merger or the Certificate of
Incorporation, as the case may be.
10. If, upon investigation, the SEC has reason to believe
that the proposed merger or consolidation is
contrary to or inconsistent with the Corporation
Code or other existing laws, it shall set a hearing to
give the corporations the opportunity to be heard
and written notice of said hearing shall be given to
each constituent corporation at least two weeks
prior to the said hearing (CC, Secs. 76-79).
EFFECTIVITY
Effectivity of merger or consolidation
The merger or consolidation shall become effective upon
issuance by the SEC of the certificate of merger and
consolidation (CC, Sec. 79).
In the case of merger or consolidation of banks or banking
institutions, building and loan associations, trust
companies, insurance companies, public utilities,
educational institutions and other special corporations
governed by special laws, the favorable recommendation
of the appropriate government agency shall first be
obtained (ibid).
283
Q: FISLAI and DSLAI entered into a merger, with
DSLAI as the surviving corporation. The articles of
merger were not registered with the SEC due to
incomplete documentation. DSLAI changed its
corporate name to MSLAI. The business of MSLAI,
however, failed.
Prior to the closure of MSLAI, Remedios Uy filed an
action for collection of sum of money against FISLAI.
The RTC ruled in favor of Uy and hence, six (6) parcels
of land owned by FISLAI were sold to Willkom, the
highest bidder.
MSLAI filed a complaint for annulment of
sheriff’s sale. Willkom, et al., averred that MSLAI had
no cause of action against them or the right to recover
the subject properties because MSLAI is a separate
and distinct entity from FISLAI. They further
contended that the “unofficial merger” between
FISLAI and DSLAI (now MSLAI) did not take effect
considering that the merging companies did not
comply with the formalities and procedure for
merger or consolidation as prescribed by the
Corporation Code of the Philippines. Was the merger
between FISLAI and DSLAI (now MSLAI) valid and
effective?
A: No. The merger was not valid. Merger does not become
effective upon the mere agreement of the constituent
corporations. Since a merger or consolidation involves
fundamental changes in the corporation, as well as in the
rights of stockholders and creditors, there must be an
express provision of law authorizing them.
The merger shall only be effective upon the issuance of a
certificate of merger by the SEC, subject to its prior
determination that the merger is not inconsistent with the
Corporation Code or existing laws.
In this case, it is undisputed that the articles of merger
between FISLAI and DSLAI were not registered with the
SEC due to incomplete documentation. Consequently, the
SEC did not issue the required certificate of merger. Even
if it is true that the Monetary Board of the Central Bank of
the Philippines recognized such merger, the fact remains
that no certificate was issued by the SEC. Such merger is
still incomplete without the certification.
The issuance of the certificate of merger is crucial because
not only does it bear out SEC’s approval but it also marks
the moment when the consequences of a merger take
place. By operation of law, upon the effectivity of the
merger, the absorbed corporation ceases to exist but its
rights and properties, as well as liabilities, shall be taken
and deemed transferred to and vested in the surviving
corporation (Mindanao Savings and Loan Association, Inc.,
et al., v. Edward Willkom, et al., G.R. No. 178618, October 11,
2010).
Q: TRB proposed to sell to petitioner BOC for P10.4B
its banking business consisting of specified assets and
liabilities. BOC agreed subject to prior BSP’s approval
of their Purchase and Assumption (P & A) Agreement.
The latter approved that Agreement subject to the
condition that BOC and TRB would set up an escrow
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
fund of P50M with another bank, which was complied
by TRB through MBTC. Based on a prior decision
rendered by the SC, RPN, IBC, and BBC (RPN, et. al.)
filed a motion for execution against TRB before the
RTC. But rather than pursue a levy in execution of the
corresponding amounts on escrow with MBTC, RPN,
et al. filed a Supplemental Motion for Execution where
they described TRB as “now Bank of Commerce”
based on the assumption that TRB had been merged
into BOC.
The RTC issued an Order granting and issuing the writ
of execution to cover any and all assets of TRB. On
appeal, the CA denied BOC’s petition. The RTC granted
the motion to cause the issuance of an alias writ of
execution against BOC, filed by RPN, et al. based on the
CA Decision. BOC sought reconsideration of the RTC
Order considering that the CA Decision actually
declared that no merger existed between TRB and
BOC.
The RTC issued the assailed Order denying BOC’s
pleas. On appeal the CA dismissed BOC’s petition
outright for its supposed failure to file a motion for
reconsideration of the assailed order. Was there a
valid merger to make BOC liable for TRB’s judgment
debts?
A: What happened is that TRB sold and BOC purchased
identified recorded assets of TRB in consideration of
BOC’s assumption of identified recorded liabilities of TRB
including booked contingent accounts. There is no law
that prohibits this kind of transaction especially when it
is done openly and with appropriate government
approval. x x x In strict sense, no merger or consolidation
took place as the records do not show any plan or articles
of merger or consolidation. More importantly, the SEC did
not issue any certificate of merger or consolidation (Bank
of Commerce v. Radio Philippines Network, Inc., et al., G.R.
No. 195615, April 21, 2014).
LIMITATIONS
Limitations with regard to merger or consolidation of
corporations
Subject to the limitations provided by the Constitution,
the merger or consolidation should not create illegal
combinations nor create monopolies and it should not
eliminate free and healthy competition.
Monopoly
A "monopoly" embraces any combination the tendency of
which is to prevent competition in the broad and general
sense, or to control prices to the detriment of the public
(Gokongwei v. SEC, G.R. No. L-45911, April 11, 1979).
EFFECTS
Effects of a merger or consolidation
The effects of merger or consolidation are:
1. The constituent corporations shall become a single
corporation which:
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284
a. In case of merger, shall be the surviving
corporation designated in the plan of merger.
b. In case of consolidation, shall be the
consolidated corporation designated in the plan
of consolidation.
2. The separate existence of the constituent
corporations shall cease, except that of the surviving
or the consolidated corporation;
3. The surviving or the consolidated corporation shall
possess all the rights, privileges, immunities and
powers and shall be subject to all the duties and
liabilities of a corporation organized under this Code;
4. The surviving or the consolidated corporation shall
thereupon and thereafter possess:
a. All the rights, privileges, immunities and
franchises of each of the constituent
corporations;
b. All property, real or personal, and all receivables
due on whatever account, including
subscriptions to shares and other choses in
action, and all and every other interest of, or
belonging to, or due to each constituent
corporation.
5. These shall be deemed transferred to and vested in
such surviving or consolidated corporation without
further act or deed;
6. The surviving or consolidated corporation shall:
a. Be responsible and liable for all the liabilities
and obligations of each of the constituent
corporations in the same manner as if such
surviving or consolidated corporation had itself
incurred such liabilities or obligations;
b. Any pending claim, action or proceeding
brought by or against any of such constituent
corporations may be prosecuted by or against
the surviving or consolidated corporation
c. The rights of creditors or liens upon the
property of any of such constituent corporations
shall not be impaired by such merger or
consolidation (CC, Sec. 80; BPI v. Lee, G.R. No.
190144, August 1, 2012).
Garnishment upon the surviving corporation for the
liabilities of the absorbed corporation
Citytrust was dissolved, no winding up of its affairs or
liquidation of assets, privileges, powers and liabilities
took place. As the surviving corporation, BPI simply
continued the combined businesses of the two banks and
absorbed all the rights, privileges, assets, liabilities and
obligations of City Trust, including the latter’s obligation
over the garnished deposits of the defendants.
Through the service of the writ of garnishment, the
garnishee becomes a “virtual party” to, or a “forced
intervenor” in the case and the trial court thereby
acquires jurisdiction to bind him to compliance with all
orders and processes of the trial court with a view to the
complete satisfaction of the judgment of the court.
Citytrust, therefore, upon service of the notice of
garnishment and its acknowledgment that it was in
possession of defendants’ deposit accounts became a
“virtual party” to or “forced intervenor” in the civil case.
As such, it became bound by the orders and processes
 CORPORATION CODE
issued by the trial court despite not having been properly
impleaded therein. Consequently, by virtue of its merger
with BPI, the latter, as the surviving corporation,
effectively became the garnishee, thus the “virtual party”
to the civil case. (BPI v. Lee, G.R. No. 190144, August 1,
2012).
Transfer of employees of the absorbed corporation to
the surviving corporation.
merger between the two banks could not have vested
Associated Bank with any interest arising from the
promissory note executed in favor of CBTC after such
merger.
May Associated Bank, the surviving corporation,
enforce the promissory note made by Sarmiento in
favor of CBTC, the absorbed company, after the
merger agreement had been signed?

It is contrary to public policy to declare the former
employees of the absorbed corporation as forming part of
its assets or liabilities that were transferred to and
absorbed by the surviving corporation in the Articles of
Merger. Assets and liabilities, in this instance, should be
deemed to refer only to property rights and obligations
and do not include the employment contracts of its
personnel. A corporation cannot unilaterally transfer its
employees to another employer like chattel. Certainly, if
the surviving corporation as an employer had the right to
choose who to retain among the employees of the
absorbed corporation, the latter employees had the
concomitant right to choose not to be absorbed by the
corporation. Even though the employees of the absorbed
corporation had no choice or control over the merger of
their employer, they had a choice whether or not they
would allow themselves to be absorbed by the surviving
corporation. Certainly nothing prevented the employees
of the absorbed corporation from resigning or retiring
and seeking employment elsewhere instead of going
along with the proposed absorption. (Bank of the
Philippine Islands v. BPI Employees Union – Davao Chapter,
G.R. No. 164301, October 19, 2011).
A: Yes. Associated Bank may enforce the promissory note.
Ordinarily, in the merger of two or more existing
corporations, one of the combining corporations survives
and continues the combined business, while the rest are
dissolved and all their rights, properties and liabilities are
acquired by the surviving corporation. Although there is
dissolution of the absorbed corporations, there is no
winding up of their affairs or liquidation of their assets,
because the surviving corporation automatically acquires
all their rights, privileges and powers, as well as their
liabilities. All contracts of the absorbed corporations,
regardless of the date of execution shall pertain to the
surviving corporation (Associated Bank v. CA, G.R. No.
123793, June 29, 1998).

On motion for reconsideration, however, the Supreme

Court ruled that it is more in keeping with social justice
that the employees of the absorbed corporation be
considered employees of the surviving corporation
without break in the continuity of their employment even
without express stipulation in the Articles of Merger
(Bank of the Philippine Islands v. BPI Employees Union –
Davao Chapter, supra).

Q: Associated Banking Corporation and Citizens Bank

and Trust Company (CBTC) merged to form just one
banking corporation known as Associated Citizens
Bank, the surviving bank. The Associated Citizens
Bank changed its corporate name to Associated Bank
by virtue of the Amended Articles of Incorporation.

Lorenzo Sarmiento executed in favor of CBTC a

promissory note. Upon maturity and despite
repeated demands Sarmiento failed to pay the
amount due. Associated Bank filed a collection suit
against Sarmiento. Sarmiento contends that
Associated Bank is not the proper party in interest
because the promissory note was executed in favor of
Associated Citizens Bank.

The trial court ordered Sarmiento to pay. The CA

however, held that the Associated Bank had no cause
of action against Lorenzo Sarmiento Jr., since said
bank was not privy to the promissory note executed
by Sarmiento in favor of Citizens Bank and Trust
Company (CBTC). The court ruled that the earlier

UNIVERSITY OF SANTO TOMAS

285 FACULTY OF CIVIL LAW
 MERCANTILE LAW
SECURITIES REGULATION CODE
STATE POLICY, PURPOSE
Nature of the Securities Regulation Code (SRC)
The SRC is the law that regulates securities (its issuance,
distribution and sale) and the person who deals with such
securities. It is enacted to protect the public from
unscrupulous promoters, who stake business or venture
claims which have really no basis, and sell shares or
interests therein to investors. The SRC also serves to
protect investors, promote investor confidence, and
stabilize the financial markets.
The law does not guarantee that a person who invests in
securities will make money. The law only ensures that
there will be a fair and full disclosure of information
regarding securities so that the investor could make an
informed judgment (Divina, 2014).
State policy with regard to the SRC
1. Establish a socially-conscious free market that
regulates itself
2. Encourage widest participation of ownership in
enterprises
3. Enhance democratization of wealth
4. Promote development of the capital market
5. Protect investors
6. Ensure full and fair disclosure about securities
7. Minimize, if not totally eliminate, insider trading and
other fraudulent or manipulative devices and
practices which creates distortion in the free market.
SECURITIES REQUIRED TO BE REGISTERED
Securities (1996 Bar)
Securities are shares, participation or interests in a
corporation or in a commercial enterprise or profit-
making venture and evidenced by a certificate, contract,
instrument, whether written or electronic in character. It
includes: (DO DIET)
1. Debt instruments – bonds, debentures, notes,
evidence of indebtedness, asset-backed securities
Asset-backed securities (ABS) - These are financial
securities the value of which depends on the assets
underlying it. For investors, ABS are alternative to
investing in corporate debt. An ABS is essentially the
same thing as a mortgage-backed security, except
that the securities backing it are assets such as loans,
leases, credit card debt, a company’s receivables,
royalty and so on, and not mortgage-based securities,
hence, the risk involved in ABS is greater.
2. Other instruments as may in the future be
determined by the SEC.
3. Derivatives– options and warrants
Options – are contracts that give the buyer the right,
but not the obligation, to buy or sell an underlying
security at a predetermined price called the exercise
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
286
or strike price, on or before a predetermined date,
called the expiry date, which can only be extended in
accordance with Exchange rules (Sundiang Sr. &
Aquino, 2014).
Kinds of Options
a. Call option – option to buy
b. Put option – option to sell
c. Straddle – combination of both call and put
option
Warrants - are rights to subscribe or purchase new
shares or existing shares in a company, on or before
a predetermined date called the expiry date, which
can only be extended in accordance with Exchange
rules. Warrants generally have a longer exercise
period than options.
4. Investments instruments – Investment contracts,
fractional undivided interests in oil, gas, or other
mineral rights
Investment contract – is a contract, transaction or
scheme whereby a person invests his money in a
common enterprise and is led to expect profits
primarily from the efforts of others.
Howey Test
For an investment contract to exist, the following
elements must concur:
a. A contract, transaction or scheme;
b. An investment of money;
c. Investment is made in a common enterprise;
d. Expectation of profits
e. Profits arising primarily from the effort of
others
Network marketing, a scheme adopted by companies
for getting people to buy their products outside the
usual retail system where products are brought from
the store’s shelf and where the buyer can become a
down-line seller, earning commissions from
purchases made by new buyers whom he refers to
the person who sold the product to him, is not an
investment contract. The commissions are incentives
to down-line sellers to bring in other customers.
These can hardly be regarded as profits from
investment of money under the Howey Test (SEC v.
Prosperity.Com, Inc., G.R. No. 164197, January 25,
2012).
5. Equity instruments – Shares of stock, certificates of
interest or participation in a profit sharing
agreement, certificates of deposit for a future
subscription, proprietary or non-proprietary
membership certificates in corporations.
6. Trust instruments – Certificates of assignments,
certificates of participation, trust certificates, voting
trust certificates or similar instruments (SRC, Sec. 3).
Q: Betty Go Gabionza and other investors lent,
invested or deposited money with ASBHI. For this,
ASBHI issued two (2) postdated checks to its lenders,
one representing the principal amount and the other
covering the interest thereon. On the maturity of the
 SECURITIES REGULATION CODE
checks, the individual lenders renewed the loans,
either collecting only the interest earnings or rolling
over the same with the principal amounts.
After sometime, DBS Bank refused to pay for the
checks by virtue of “stop payment” orders from
ASBHI. The series of events led to the filing of the
complaints by Gabionza, et al., for Estafa under Article
315(2)(a) and (2)(d) of the Revised Penal Code, Estafa
under Presidential Decree No. 1689, violation of the
Revised Securities Act and violation of the General
Banking Act.
The DOJ concluded that ASHBHI, et al., are liable for
violating such prohibition against the sale of
unregistered securities. However, the CA reversed the
DOJ holding that the postdated checks issued by
ASBHI did not constitute a security under the Revised
Securities Act. Are the checks issued by ASHBHI
“securities”?
A: Yes. The checks issued constitutes securities, hence,
the non-registration thereof is a violation of the Revised
Securities Act. It is one thing for a corporation to issue
checks to satisfy isolated individual obligations, and
another for a corporation to execute an elaborate scheme
where it would comport itself to the public as a pseudo-
investment house and issue postdated checks instead of
stocks or traditional securities to evidence the
investments of its patrons. The Revised Securities Act was
geared towards maintaining the stability of the national
investment market against activities such as those
apparently engaged in by ASBHI. ASBHI adopted this
scheme in an attempt to circumvent the Revised
Securities Act, which requires a prior license to sell or deal
in securities.
It bears pointing out that the definition of “securities” set
forth in Section 2 of the Revised Securities Act includes
“commercial papers evidencing indebtedness of any
person, financial or non-financial entity, irrespective of
maturity, issued, endorsed, sold, transferred or in any
manner conveyed to another. A check is a commercial
paper evidencing indebtedness of any person, financial or
non-financial entity. Since the checks in this case were
generally rolled over to augment the creditor’s existing
investment with ASBHI, they most definitely take on the
attributes of traditional stocks. A different rule would
open the floodgates for a similar scheme, by companies
without prior license or authority from the SEC. This
cannot be countenanced (Gabionza v. CA, G.R. No. 161057,
September 12, 2008).
A corporation is absolutely proscribed in selling and
distributing unregistered timeshare certificates unless it
complies with the registration requirements under the
SRC. Corporate registration is just one of the several
requirements before it may deal with timeshares
(Timeshare Realty Corporation v. Cesar Lao, G.R. No.
158941, February 11, 2008).
Test on determining whether or not it is a security
TEST: Does it represent a share, participation, or interest
in a commercial enterprise or any profit making venture?
287
If yes, then, it is a security. If it is a security, then, it cannot
be sold, or offered for sale or distribution within the
Philippines without a registration statement duly filed
with and approved by the SEC (Divina, 2014).
Requirement before securities are sold or offered for
sale or distribution within the Philippines
They are required to be registered with and approved by
the SEC. Registration also includes the disclosure to SEC
of all material and relevant information about the issuer
of the security. Prior to the sale, the information on the
securities, in such form and with such substance as the
SEC may prescribe, shall be made available to each
prospective purchaser (SRC, Sec. 8).
GR: Securities must be registered with and approved by
SEC.
REASON: To protect the public from fraud.
XPN: The following need not be registered:
1. Exempt securities
2. Securities sold in exempt transactions.
XPN TO XPN: SRC provides that the resale of securities
previously sold in an exempt transaction must be
registered.
Effect of non-registration
The issuer would be penalized. Issuers of securities not
registered shall be subjected to criminal, civil and
administrative charges.
Q: Timeshare Corp. sold to Spouses Cortez one
timeshare of Laguna de Boracay. After sometime, the
SEC issued a resolution to the effect that Timeshare
Corp. was without authority to sell securities, like
timeshares. It held therefore that the purchaser may
exercise the option to unilaterally rescind the
purchase agreement and receive the refund of money
paid applies to all purchase agreements entered into
by Timeshare Corp. prior to the effectivity of the
Registration Statement. Hence, Spouses Cortez
demanded their right to cancel their contract, as it
appears that Laguna de Boracay is selling said shares
without license or authority from the SEC.
Despite repeated demands, Timeshare Corp. failed
and refused to refund the same. Timeshare Corp.
contends that its mere registration as a corporation
already authorizes it to deal with unregistered
timeshares. Does the registration of Timeshare Corp.
as a corporation authorize it to deal with
unregistered timeshares?
A: No. Mere registration as a corporation does not
authorize it to deal with unregistered timeshares.
Corporate registration is just one of several requirements
before it may deal with timeshares. Prior to fulfillment of
all the other requirements of Section 8, Timeshare Corp.
is absolutely proscribed from dealing with unregistered
timeshares No securities, except of a class exempt under
the SRC or unless sold in any transaction exempt under
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
the same, shall be sold or offered for sale or distribution
to the public within the Philippines unless such securities
shall have been registered and permitted to be sold as
provided by the SRC (Timeshare Realty Corporation v.
Cesar Lao, G.R. No. 158941, February 11, 2008).
Validity of the sale of shares acquired 12 months after
the approval of the Registration Statement
If the person who acquired the security sued any of the
enumerated persons under sec. 56 for recovery of
damages after the issuer has made generally available to
its security holders an income statement covering a
period of at least twelve months beginning from the
effective date of the registration statement, then the right
of recovery shall be conditioned on proof that such person
who acquired the security relying upon such untrue
statement in the registration statement or relying upon
the registration statement and not knowing of such
income statement, but such reliance may be established
without proof of the reading of the registration statement
by such person (SRC, Sec. 56.2).
Securities market professionals (persons who deal
with securities)
1. Broker – A person engaged in the business of buying
and selling securities for the account of others (SRC,
Sec.3.3).
2. Dealer – Any person who buys and sells securities
for his/her own account in the ordinary course of
business (SRC, Sec. 3.4).
3. Associated person of a broker or dealer – He is an
employee of a broker or dealer who directly
exercises control of supervisory authority but does
not include a salesman, or an agent, or a person,
whose functions are solely clerical or ministerial
(SRC, Sec. 3.5).
4. Salesman – He is a natural person, employed as such,
or as an agent, by a dealer, issuer or broker to buy
and sell securities; but for the purpose of
registration, shall not include any employee of an
issuer whose compensation is not determined
directly or indirectly on sales of securities of the
issuer.
Obligation of the broker to his client
The primary obligation of the broker is to ensure his
account’s compliance with the law (Abacus Securities
Corp. v. Ampil, G.R. No. 160922, February 27, 2006).
NOTE: Since a brokerage relationship is essentially a
contract for the employments of an agent, the law on
contracts govern the broker-principal relationship.
Registration of security market professionals
Security market professionals are required to be
registered. No broker shall sell any securities unless he is
registered with the SEC (Revised Securities Act, Sec. 1,)
(Nicolas v. CA, et al., G.R. No. 12285, Mar. 27, 1998).
UNIVERSITY OF SANTO TOMAS
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288
Q: Can a stock broker without license from the SEC,
recover management fees allegedly earned from
handling the securities transactions of a client?
A: No. An unlicensed person may not recover
compensation for services as a broker where a statute or
ordinance is applicable and such is of a regulatory nature.
EXEMPT SECURITIES
(PC-RIBO)
1. Any security issued or guaranteed by the
Government of the Philippines, or by any political
subdivision or agency thereof, or by any person
controlled or supervised by, and acting as an
instrumentality of said government.
2. Any security issued or guaranteed by the
government of any Country with which the
Philippines maintains diplomatic relations, or by any
state, province or political subdivision thereof on the
basis of reciprocity. Provided, that the SEC may
require compliance with the form and content of
disclosures the Commission may prescribe.
3. Certificates issued by a Receiver or by a trustee in
bankruptcy duly approved by the proper
adjudicatory body.
4. Any security or its derivatives the sale or transfer of
which, by law, is under the supervision and
regulation of the Office of Insurance Commission,
Housing and Land Use Regulatory Board, or the
Bureau of Internal Revenue.
5. Any security issued by a Bank except its own shares
of stock (which serves to promote the sale of
securities issued by heavily regulated banks).
6. Other securities as determined by the SEC by rule or
regulation, after public hearing (SRC, Sec. 9).
Being an issuer of an exempt security does NOT exempt
such issuer from the requirement of submission of
reports under the regime of full and fair disclosure.
RATIONALE: The reason for the exemption of the
enumerated securities from registration is that they are
either guaranteed by the government or they are already
regulated by another government agency or body other
than the SEC.
EXEMPT TRANSACTIONS
(JuDe ISCaRIOT’S Ex-20-QB’s)
1. Any JUdicial sale, or sale by an executor,
administrator, guardian, receiver or trustee in
insolvency or bankruptcy;
2. Those sold by a pledge holder, mortgagee, or any
other similar lien holder, to liquidate a bona fide debt
a security pledged in good faith as security for such
Debt;
3. Those sold or offered for sale in an Isolated
transaction for the owner’s account and the owner
not being an underwriter;
4. Distribution by the corporation of Securities to its
stock holders or other security holders as stock
dividends or distribution out of surplus;
5. Sale of CApital stock of a corporation to its own
stockholders exclusively wherein no commission or
 SECURITIES REGULATION CODE
remuneration is paid or given directly or indirectly in
connection with the sale of such capital stock;
NOTE: Also, this sale must not involve an
underwriter or financial advisor
6. Bonds or notes secured by a mortgage upon Real
estate or tangible personal property, where the
entire mortgage together with all the bonds or notes
secured thereby are sold to a single purchaser at a
single sale;
7. Issue and delivery of any security in exchange for any
other security of the same Issuer pursuant to the
right of conversion entitling the holder of the
security surrendered in exchange to make such
conversion.
8. Broker’s transactions executed upon customer’s
Orders, on any registered Exchange or other Trading
market
9. Share Subscriptions in capital stock prior to
incorporation or in pursuance of an increase in its
authorized capital stock under the Corporation Code
when no expense is incurred, or no commission,
compensation or remuneration is paid or given in
connection with the sale or disposition of such
securities, and only when the purpose for soliciting,
giving or taking of such subscriptions is to comply
with the requirements of such law as to the
percentage of the capital stock of a corporation
which should be subscribed before it can be
registered and duly incorporated, or its authorized
capital increased;
10. EXchange of securities by the issuer with its existing
security holders exclusively, when no commission or
other remuneration is paid or given directly or
indirectly for soliciting such exchange;
11. Sale by issuer to fewer than 20 persons in the
Philippines during any 12 month period, otherwise
known as private placement transactions;
12. Sale of securities to any number of the following
Qualified Buyers:
a. banks,
b. registered investment houses,
c. insurance companies,
d. pension funds or retirement plans maintained
by the Government of the Philippines or any
political subdivision thereof or managed by a
bank or other persons authorized by the Bangko
Sentral to engage in trust functions,
investment companies, and
e. other persons or entities ruled qualified by the
SEC on the basis of such factors such as financial
sophistication, net worth, knowledge, and
experience in financial and business matters, or
amount of assets under management
(SRC, Sec. 10.1).
RATIONALE: Although the securities themselves must
still be registered, the sale or issue need not be registered
because the investors involved herein are considered as
highly sophisticated investors or specialized investors
and as such, have a greater risk tolerance or do not need
strict protection from the Commission.
289
List of exempt transactions under SRC is NOT
exclusive
The list of exempt transaction under the SRC is not
exclusive because under Section 10.2 of Republic Act
8799, the Commission may exempt other transactions, if
it finds that the requirements of registration under the
Code is not necessary in the public interest or for the
protection of the investors such as by reason of the small
amount involved or the limited character of the public
offering.
PROCEDURE FOR REGISTRATION
OF SECURITIES
Purpose for registration of securities
Registration of securities allows the subsequent release of
these securities to the investing public and serves to
protect investors.
Procedure for registration of securities
(A- POSE- CsFP- RulE)
1. Application – All securities required to be registered
shall be registered through the filing by issuer with
SEC, of a sworn registration statement with respect
to such securities in such form and containing such
information or documents as the Commission shall
prescribe;
2. Prospectus – The registration statement shall include
any prospectus required or permitted to be
delivered;
3. Other information– The information required for the
registration of any kind and all securities shall
include, among others, the effect of the securities’
issue on ownership, on the mix of ownership,
especially foreign and local ownership;
4. Signatories to registration statement– The
registration statement shall be signed by the issuer’s:
a. Executive officer
b. Principal operating officer
c. Principal financial officer
d. Comptroller
e. Principal accounting officer
f. Corporate secretary or persons performing
similar functions
It shall be accompanied by a duly verified resolution
of the Board of Directors of the issuer corporation.
5. Written consent of Expert – The written consent of the
expert named as having certified any part of the
registration statement or any document used in
connection therewith shall also be filed;
6. Certification by Selling stockholders– Where the
registration statement includes shares to be sold by
the selling shareholders, a written certification by
such selling shareholders as to the accuracy of any
part of the registration statement contributed by
such selling shareholders shall also be filed;
7. Fees – Upon filing of the registration statement, the
issuer shall pay to the SEC a fee of not more than one
tenth of one percent (1/10 of 1%) of the maximum
aggregate price at which such securities are
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
proposed to be offered; the SEC shall prescribe by
rule, diminishing the fees in inverse proportion, the
value of the aggregate price of the offering.
This fee paid to the SEC is called a diminishing fee.
8. Notice and Publication – Notice of the filing of the
registration statement shall be immediately
published by the issuer, at its own expense, in two
newspapers of general circulation in the Philippines;
once a week for two consecutive weeks, or in such
other manner as the Commission by rule shall
prescribe, reciting that:
a. A registration statement for the sale of such
security has been filed, and
b. The aforesaid registration statement as well as
the papers attached thereto is open to
inspection at the Commission during business
hours.
c. Copies thereof, photo static or otherwise, shall
be furnished to interested parties at such
reasonable charges as the Commission may
prescribe.
9. RULing – Within 45 days after the date of the filing of
the registration statement, or by such later date to
which the issuer has consented, the SEC shall declare
the registration statement effective or rejected,
unless the applicant is allowed to amend the
registration statement. The Commission shall enter
an order declaring the registration statement to be
effective if it finds that the registration statement
together with all the other papers and documents
attached thereto is on its face complete and that the
requirements have been complied with. The
Commission may also impose such terms and
conditions as may be necessary or appropriate for
the protection of the investors;
10. Effectivity – Upon effectivity of the registration
statement, the issuer shall state under oath in every
prospectus that all registration requirements have
been met and that all information are true and
correct as represented by the issuer or the one
making the statement.
NOTE: Any untrue statement or fact of omission to state a
material fact required to be stated therein or necessary to
make the statement therein not misleading shall
constitute fraud.
Grounds for rejection of a registration statement and
revocation of the effectivity of a registration
statement and the registration of a security [I-ICE]
After due notice and hearing by issuing an order to such
effect, the Commission may reject the registration
statement or revoke the registration of a security based
on the following grounds:
1. The Issuer: [REFaCo]
a. Has been judicially declared Insolvent
b. Has violated any of the provisions of the Code,
the Rules promulgated pursuant thereto, or any
order of the SEC of which the issuer has notice
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
290
in connection with the offering for which a
registration statement has been filed
c. Has been or is Engaged or is about to engage in
fraudulent transactions
d. Has made any False or misleading
representation of material facts in any
prospectus concerning the issuer or its
securities; or
e. Has failed to comply with any requirement that
the Commission may impose as a condition for
registration of the security for which
registration statement has been filed.
2. The registration statement is on its face Incomplete
or inaccurate in any material respect or includes any
untrue statement of a material fact or omits to state
a material fact required to be stated therein or
necessary to make the statements therein not
misleading.
3. The issuer, any officer, director or Controlling person
of the issuer, or any person performing similar
functions, or any underwriter has been convicted by
a competent judicial or administrative body, upon
plea of guilty, or otherwise, of an offense involving
moral turpitude and/or fraud or is enjoined or
restrained by the SEC or other competent judicial or
administrative body for violations of securities,
commodities and other related laws.
4. Any issuer who refuses to permit the Examination to
be made by the Commission.
NOTE: The Commission may compel the production of all
the books and papers of the issuer, and may administer
oaths to, and examine the officers of such issuer or any
other person connected therewith as to its business and
affairs.
Grounds for suspension of registration (I-FIRe)
1. If any time, the Information contained in the
registration statement filed is or has become
misleading, incorrect, inadequate or incomplete in
any material respect; or
2. The sale or offering for sale of the security registered
thereunder may work or tend to work a Fraud;
3. Pending Investigation of the security registered, if
the Commission deems it necessary, to ascertain
whether the registration of such security should be
revoked on any ground specified the SRC;
4. Refusal to furnish information required by the
Commission (SRC, Sec. 15).
Grounds for suspension or cancellation of certificate
of registration (ROSe Co BRO)
1. Fraud in procuring Registration
2. Serious misrepresentation as to Objectives of
corporation
3. Refusal to comply with lawful order of SEC
4. COntinuous non-operation for at least 5 years
5. Failure to file By-laws within required period
6. Failure to file Reports
7. Other similar grounds (SRC, Sec. 6 [L]).
Order of suspension by the SEC requires a subsequent
hearing
 SECURITIES REGULATION CODE
An order of suspension must be followed by a hearing to
be conducted by the Commission. If the Commission
determines that the sale of any security should be
revoked, it shall issue an order prohibiting the sale of such
security. Until the issuance of a final order, the suspension
of the right to sell, though binding upon the persons
notified thereof, shall be deemed confidential, and shall
not be published, unless it shall appear that the order of
suspension has been violated after notice.
However, if the Commission finds that the sale of the
security will neither be fraudulent nor result in fraud, it
shall forthwith issue an order revoking the order of
suspension, and such security shall be restored to its
status as a registered security as of the date of such order
of suspension.
PROHIBITIONS ON FRAUD, MANIPULATIONS
AND INSIDER TRADING
MANIPULATION OF SECURITY PRICES
Acts which are considered manipulation of security
prices (2001 Bar)
The price of securities should be dictated by market
forces. It cannot be pegged or stabilized. The following
acts are considered as manipulation of security prices and
are therefore prohibited:
1. Transactions intended to create a false or misleading
appearance of active trading in any listed security
traded in an Exchange or any other trading market:
a. Wash Sale – is a transaction in which there is no
genuine change in the beneficial (or actual)
ownership of a security;
b. Matched Sale – is a change of ownership in the
securities by entering an order for the purchase
or sale of a security with the knowledge that a
simultaneous order of substantially the same
size, time, and price, for the sale or purchase of
any such security, has or will be entered by or
for the same or different parties;
c. Similar transactions where there is no change of
beneficial ownership.
2. Effecting a series of transactions that will raise or
depress the price of securities to induce the purchase
or sale of securities respectively, or creating active
trading to induce transactions through manipulative
devices:
a. Marking the close – buying and selling of
securities at the close of the market in an effort
to alter the closing price of these securities.
b. Painting the tape – engaging in a series of
transactions effected by brokers in securities
that are reported publicly to give the
impression or illusion of activity or price
movement in a security, which may trick
investors into trading in these securities
because of the alleged trading volume or
indications of interest.
c. Squeezing the float – refers to taking advantage
of a shortage of securities in the market by
291
controlling the demand side and exploiting
market congestion during such shortages in a
way to create artificial prices. This prevents
the actual market from determining the price of
these securities.
d. Hype and dump – engaging in buying activity at
increasingly higher prices and then selling
securities in the market at the higher prices.
e. Boiler room operations – refers to activities that
involve the use of high pressure sale tactics such
as direct mail offers or telephone follow-ups to
investors to promote purchase and sale of
securities wherein there is misrepresentation in
these securities. This is a fraudulent transaction
that tricks investors into trading in a fake
market.
f. Daisy chain – refers to a series of purchase and
sales of the same issue at successively higher
prices by the same group of people with the
purpose of manipulating prices are drawing
unsuspecting investors into the market leaving
them defrauded of their money and securities.
g. Front-Running – is the prohibited practice of a
broker-dealer executing its proprietary order
before the customer’s order for the same
security. This violates the fiduciary
responsibility by the broker-dealer to its
customer accounts as well as placing the
customer’s order first.
h. Churning – involves the excessive trading of
securities by a broker-dealer in a customer’s
discretionary account in order to generate
commissions, without regard to the customer’s
investment objective.
3. Circulating or disseminating information that the
price of any security listed in an Exchange will or is
likely to rise or fall because of manipulative market
operations of any one or more persons conducted for
the purpose of raising or depressing the price of that
security for the purpose of inducing the purchase or
sale of such security.
4. To make false or misleading statement with respect
to any material fact, which he knew or had
reasonable ground to believe was so false or
misleading, for the purpose of inducing the purchase
or sale of any security listed or traded in an
Exchange.
5. To effect, either alone or with others, any series of
transactions for the purchase and/or sale of any
security traded in an exchange for the purpose of
pegging, fixing or stabilizing the price of such
security, unless otherwise allowed by the Code or by
rules of the Commission.
SHORT SALES
It is the selling of shares which the seller does not actually
own or possess and therefore he cannot, himself, supply
the delivery. Short selling leads to speculation of price of
securities.
Short swing transaction
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
It is a transaction by the director, issuer or any person
controlling the issuer (stockholder owning 10% of the
stocks), whereby such person buys and sells securities
within six (6) months.
FRAUDULENT TRANSACTIONS
The following are considered as fraudulent transactions:
1. Employment of any device, scheme or artifice to
defraud investors;
2. Obtaining money or property by means of any untrue
statement of a material fact or any omission to
state a material fact necessary in order to make
the statement made not misleading;
3. Engaging in any act, transaction, practice or course of
business, which operates as a fraud or deceit upon
any person.
NOTE: Section 5, Rule 8 of the Revised Rules of Court
provides that in all averments of fraud or mistake, the
circumstances constituting fraud or mistake must be
stated with particularity. These rules find specific
application to Section 5(a) of P.D. No. 902-A which speaks
of corporate devices or schemes that amount to fraud or
misrepresentation detrimental to the public and/or to the
stockholders.
INSIDER TRADING
A purchase or sale made by an insider, or such insider’s
spouse or his relative by affinity or consanguinity within
the second degree, legitimate or common-law, shall be
presumed to be effected while in possession of material
non-public information if transacted after such
information came into existence but prior to the public
dissemination of such information, and lapse of
reasonable time for the market to absorb such
information. (2015 Bar)
Insider
A person who is in possession of corporate material
information not generally available to the public.
Who may be an insider
1. The issuer;
2. A director or officer (or person performing similar
functions) of, or a person controlling the issuer;
3. A person whose relationship or former relationship
to the issuer gives or gave him access to material
information about the issuer or the security that is
not generally available to the public;
4. A government employee, or director , or officer of an
exchange, clearing agency and/or self-regulatory
organization who has access to material information
about an issuer or a security that is not generally
available to the public; or
5. Constructive Insider – A person who learns such
information by a communication from any of the
foregoing insiders (SRC, Sec. 3.8).
Other prohibited acts in an insider trading
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
292
1. For an insider to communicate material non-public
information about the issuer or the security to any
person who by virtue of the communication thereby
becomes an insider, where the original insider
communicating the information knows or has reason
to believe that such person will likely buy or sell a
security of the issuer while in possession of such
information;
2. When a tender offer has commenced or is about to
commence, it is unlawful for any person, other than
the tender offeror, who is in possession of material
non-public information relating to such tender offer
to buy or sell the securities of the issuer that are
sought or to be sought by such tender offer, if such
person knows or has reason to believe that the
information is non-public and has been acquired
directly or indirectly from the tender offer, or those
acting on its behalf, the issuer of the securities sought
or to be sought by such tender offer, or any insider of
such issuer;
3. When a tender offer has commenced or is about to
commence, it is also unlawful for any tender offeror,
or those acting on its behalf, the issuer of securities
covered by such tender offer, and any insider, to
communicate material non-public information to any
person relating to the tender offer which would likely
result in violation of prohibition of the insider from
trading.
Material non-public information (1995 Bar)
1. Information about the issuer or the security has not
been generally disclosed to the public and would
likely affect the market price of the security after
being disseminated to the public and the lapse of a
reasonable time for the market to absorb the
information; or
2. Would be considered by a reasonable person
important under the circumstances in determining
his course of action whether to buy, sell or hold a
security (SRC, Sec. 27.2).
Q: Grand Gas Corporation, a publicly listed company,
discovered after extensive drilling a rich deposit of
natural gas along the coast of Antique. For five (5)
months, the company did not disclose the discovery
so that it could quietly and cheaply acquire
neighboring land and secure mining rights to the
land. Between the discovery and its disclosure of the
information to the Securities and Exchange
Commission, all the directors and key officers of the
company bought shares in the company at very low
prices. After disclosure, the price of the shares went
up. The directors and officers sold their shares at
huge profits.
a. What provision of the Securities Regulation Code
(SRC) did they violate, if any? Explain.
b. Assuming that the employees of the
establishment handling the printing work of
Grand Gas Corporation saw the exploration
reports which were mistakenly sent to their
establishment together with other materials to
be printed. They too bought shares in the
company at low prices and later sold them at
 SECURITIES REGULATION CODE
huge profits. Will they be liable for violation of
the SRC? Why? (2008 Bar)
A:
a. The directors and officers of the corporation violated
Sec. 27 of the Securities and Regulation Code on the
prohibition on insider’s trading. Sec. 27.1 of the
Securities and Regulation Code provides that it shall
be unlawful for an insider to sell or buy a security of
the issuer, while in possession of material
information with respect to the issuer or the security
that is not generally available to the public. In this
case, the directors and officers falls squarely into the
definition of an insider under Sec. 3.8 of the
Securities and Regulation Code. Thus, the directors
and officers are liable for violating the prohibition on
Insider trading.
b. The said employees will be also liable for engaging in
insider trading. Sec. 3.8 of the Securities and
Regulation Code, an insider is also a person whose
relationship or former relationship to the issuer
gives or gave him access to material information
about the issuer or security that is not generally
available to the public. The said employees because
of their relationship with the issuer, Grand Gas
Corporation as their printer, where able to obtain
material information. They too became liable for
insider trading when they bought the shares in the
company and at the same time possessing
undisclosed material information
Q: In insider trading, what is a fact of special
significance? (1991 Bar)
A: It is, in addition to being material, such fact as would
likely, on being made generally available, to affect the
market price of a security to a significant extent, or which
a reasonable person would consider as especially
important under the circumstances in determining his
course of action in the light of such factors as the degree
of its specificity, the extent of its difference from
information generally available previously, and its nature
and reliability (RSA, Sec. 30 [c]).
Q: You are a member of the legal staff of a law firm
doing corporate and securities work for Coco
Products Inc., a company with unique products
derived from coconuts and whose shares are traded
in the Philippine Stock Exchange. A partner in the law
firm, Atty. Buenexito, to whom you report, is the
Corporate Secretary of Coco Products. You have long
been investing in Coco Products stocks even before
you became a lawyer.
While working with Atty. Buenexito on another file,
he accidentally gave you the Coco Products file
containing the company's planned corporate
financial rehabilitation. While you knew you had the
wrong file, your curiosity prevailed and you browsed
through the file before returning it. Thus, you learned
that a petition for financial rehabilitation is
imminent, as the company could no longer meet its
obligations as they fell due.
293
Soon after, your mother is rushed to the hospital for
an emergency operation, and you have to raise money
for her hospital bills. An immediate option for you is
to sell your Coco Products shares. The sale would be
very timely because the price of the company's stocks
are still high. Would you sell the shares to raise the
needed funds for your mother's hospitalization? Take
into account legal and ethical considerations (2013
Bar)
A: The sale of the shares does not constitute insider
trading. Although Atty. Buenexito, as corporate secretary
of Coco Products, Inc., was an insider, it did not obtain the
information regarding the planned corporate
rehabilitation by communication from him. He just
accidentally gave the wrong file (Section 3.8 of Security
Regulations Code).
It would be unethical to sell the shares. Rule 1.01 of the
Code of Professional Responsibility provides, “A lawyer
shall not engage in unlawful, dishonest, immoral or
deceitful conduct.”
A lawyer should not only refrain from performing
unlawful acts. He should also desist from engaging in
unfair deceitful conduct to conceal form the buyer of the
shares of the planned corporate rehabilitation.
Possible defenses against insider trading
1. That the information was acquired not on account of
his relationship with the issuer; or
2. That he disclosed the information to the other party
who knew or had the reason to believe he knew the
material information;
3. That the purchaser or seller was not aware of the
material, non-public information at the time of the
purchase or the sale.
PROTECTION OF INVESTORS
Provisions in the SRC intended to protect the
investors
1. Tender Offer Rule
2. Rules on Proxy Solicitation
3. Disclosure Rule
TENDER OFFER RULE
Tender offer (2002, 2010 Bar)
Tender offer means a publicly announced intention by a
person acting alone or in concert with other persons to
acquire equity securities of a public company. It is also an
offer by the acquiring person to stockholders of a public
company for them to tender their shares therein on the
terms specified in the offer. Tender offer is in place to
protect their minority shareholders against any scheme
that dilutes the share value of any investments. It gives the
minority shareholders the chance to exit the company
under reasonable terms, giving them opportunity to sell
their shares at the same price as those of the majority
shareholders (CEMCO HOLDINGS, INC. v. National Life
Insurance Company, Inc. G.R. No. 171815, August 7, 2007).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
It is an invitation by the acquirer of shares of a company
for other stockholders to tender their shares to the
acquirer so that they may sell their shares in the same
price and conditions as the previously acquired shares.
It is given to all stockholders by:
1. Filing with the SEC a declaration to that effect, and
paying the filing fee.
2. Furnishing the issuer a statement containing the
information required of the issuers as SEC may
prescribe, including subsequent or additional
materials.
3. Publishing all requests or invitations for tender, or
materials making a tender offer or requesting or
inviting letters of such security.
Purpose of tender offer
Tender offer is in place to protect the interest of minority
stockholders of a target company against any scheme that
dilutes the share value of their investments. It affords
such minority shareholders the opportunity to withdraw
or exit from the company under reasonable terms or a
chance to sell their shares at the same price as those of the
majority stockholders.
Public company
The following are considered as public company:
1. Those listed on an exchange; or
2. Those with assets of at least PHP 50M and having 200
shareholders owning at least 100 shares each.
3. Those companies that have an effective registration
statement under Section 12 of the SRC.
Mandatory tender offer (2002 Bar)
Tender offer is required to be made in the following
instances:
1. Any person or group of persons acting in concert who
intends to acquire 35% or more of any class of equity
shares in a public company shall disclose such
intention and contemporaneously make a tender
offer for the percent sought to all shareholders of
such class.
In the event that the tender offer is oversubscribed,
the aggregate amount of securities to be acquired at
the close of such tender offer shall be proportionately
distributed across both selling shareholder with
whom the acquirer may have been in private
negotiations and the minority shareholders.
2. Any person or group of persons acting in concert who
intends to acquire 35% or more of any class of equity
shares of a public company (corporation with assets
of at least P 50,000,000.00 and having 200 or more
stockholders with at least 100 shares for each stock
holder) pursuant to an agreement made between or
among the person or group of persons and one or
more sellers.
3. Any person or group of persons acting in concert
intends to acquire 35% or more of equity shares of a
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2016 GOLDEN NOTES
294
public company in one or more transactions within a
period of 12 months shall be required to make a
tender offer to all holders of such class for the
number of shares so acquired within the same
period.
4. If any acquisition of even less than 35% would result
in ownership of over 51% of the total outstanding
equity securities of a public company, the acquirer
shall be required to make a tender offer under this
Rule for all the outstanding equity securities to all
remaining stockholders of the said company at a
price supported by a fairness opinion provided by an
independent financial advisor or equivalent third
party. The acquirer in such tender offer shall be
required to accept any and all securities thus
tendered.
5. In any transaction covered by this Rule, the sale of
shares pursuant to the private transaction shall not
be completed prior to the closing and completion of
the tender offer. Transactions with any of the seller/s
of significant block of shares with whom the
acquirers may have been in private negotiation shall
close at the same time and upon the same terms as
the tender offer made to the public under this Rule.
For paragraph (2)(B), the last sale meeting the
threshold shall not be consummated until the closing
and completion of the tender offer.
Coverage of the application of tender offer
The mandatory tender offer rule covers not only direct
acquisition but also indirect acquisition or “any type of
acquisition.” The legislative intent of Section 19 of the
Code is to regulate activities relating to acquisition of
control of the listed company and for the purpose of
protecting the minority stockholders of a listed
corporation. Whatever may be the method by which
control of a public company is obtained, either through
the direct purchase of its stocks or through an indirect
means, mandatory tender offer applies. What is decisive
is the determination of the power of control. The
legislative intent behind the tender offer rule makes clear
that the type of activity intended to be regulated is the
acquisition of control of the listed company through the
purchase of shares. Control may be effected through a
direct and indirect acquisition of stock, and when this
takes place, irrespective of the means, a tender offer must
occur (Cemco Holdings v. National Life Insurance Company,
G.R. No. 171815, August 7, 2007).
Illustration of the application of tender offer in direct
acquisition:
The shares of stock of X company are owned by A (19%),
B (16%), C (20%), D (14%), E (31%). If Aljon buys the
shares of A (19%), the transaction is not subject to
mandatory tender offer. However, if Aljon buys the shares
of A (19%) and the shares of B (16%), then tender offer
must be made because the total shares bought by Aljon is
35%.
Illustration of the application of tender offer in indirect
acquisition:
 SECURITIES REGULATION CODE
The shares of stock of X company are owned by A (16%),
B (19%), C (15%), D (18%), and Corporation E (32%)
respectively. The shares of Corporation E are owned by
Kenneth (50%), King (25%) and Jacq (25%). If Aljon
acquires the shares of B (19%), the transaction is not
subject to mandatory tender offer because it did not reach
the 35% threshold limit required by law. However, if
Aljon acquires the shares of B (19%) and the shares of
Kenneth in Corporation E (50% of 32 is 16%), then,
tender offer must be made because the total shares
bought by Aljon directly and indirectly is 35%.
Obligations of person making a tender offer
1. Make an announcement of his intention in a
newspaper of general circulation, prior to the
commencement of the offer;
2. At least (2) business days prior to the date of the
commencement of the tender offer:
a. File with the SEC a required form for tender
offer including all exhibits thereto (and any
amendments thereto), with the prescribed filing
fees; and
b. Hand deliver a copy of such form including all
exhibits (and amendments thereto) to the target
company and its principal executive office and
to each Exchange where such class of target
company’s securities are listed for trading.
3. Report the results of the tender offer by filing with
the SEC, not later than ten (10) calendar days after
the termination of the tender offer, copies of the final
amendments to the form (Sundiang Sr. & Aquino,
2014).
Unlawful and prohibited acts relating to tender offers
It shall be unlawful for any person to:
1. Make any untrue statement of a material fact or omit
to state any material fact necessary in order to make
statements made, in the light of the circumstances
under which they are made, not misleading, or
2. Engage in any fraudulent, deceptive, or manipulative
acts or practices, in connection with any tender offer
or request or invitation for tenders, or any
solicitation of security holders in opposition to or in
favor of any such offer, request, or invitation.
Margin trading (2009 Bar)
A kind of trading that allows a broker to advance for the
customer/investor part of the purchase price of the
security and to keep the same security as collateral for
such advance.
Margin allowance standard
GR: The credit extended must be for an amount not
greater than, whichever is higher of:
1. 65% of the current market price of the security; or
2. 100% of the lowest market price during the
preceding 36 calendar months, but not more than
75% of the current market price.
295
XPN: The Monetary Board may increase or decrease the
above percentages, in order to achieve the objectives of
the Government with due regard for promotion of the
economy and prevention of the use of excessive credit.
Purposes of the margin requirements
They are primarily intended to achieve a macroeconomic
purpose – the protection of the overall economy from
excessive speculation in securities. Their recognized
secondary purpose is to protect small investors.
Burden of compliance with margin requirements
The brokers and dealers have the burden of compliance
with margin requirements.
NOTE: In securities trading, the brokers are essentially
the counterparties to the stock transactions at the
Exchange. Since the principals of the broker are generally
undisclosed, the broker is personally liable for the
contracts thus made. Brokers have a right to be
reimbursed for sums advanced by them with the express
or implied authorization of the principal (Abacus
Securities Corporation v. Ampil, G.R. No. 160016, February
27, 2006).
RULES ON PROXY SOLICITATION
Requisites for valid proxy solicitation
1. It must be in writing
2. It must be signed by the stockholder or his duly
authorized representative
3. It must be filed before the scheduled meeting with
the corporate secretary (SRC, Sec. 20).
NOTE: For public companies, the period to submit proxy
solicitation should not be later than five (5) days before
the meeting unless the by-laws provides for a longer
period.
Unless otherwise provided in the proxy, the proxy shall be
valid only for the meeting for which it is intended. No
proxy shall be valid and effective for a period longer than
5 years at one time.
Rules on proxy solicitation with regard to broker or
dealer
1. No broker or dealer shall give any proxy, consent or
authorization, in respect of any security carried for
the account of a customer, to a person other than the
customer, without the express written authorization
of such customer.
2. A broker or dealer who holds or acquires the proxy
for at least 10% or such percentage as the
Commission may prescribe of the outstanding share
of the issuer, shall submit a report identifying the
beneficial owner within 10 days after such
acquisition, for its own account or customer, to the
issuer of the security, to the Exchange where the
security is traded and to the Commission. (SRC, Sec.
20)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Jurisdiction over violations of the SEC rules on proxy
solicitation
The power of the SEC to investigate violations of its rules
on proxy solicitation is unquestioned when proxies are
obtained to vote on matters unrelated to the cases
enumerated under Section 5 of PD 902-A. However, when
proxies are solicited in relation to the election of
corporate directors, the resulting controversy, even if it
ostensibly raised the violation of the SEC rules on proxy
solicitation, should be properly seen as an election
controversy within the jurisdiction of the RTC special
commercial court (GSIS vs. CA, G.R. Nos. 183905 and
184275, April 16, 2009).
DISCLOSURE RULE
Beginning of disclosure requirement
It begins at registration and continues periodically
through the regular filing of periodic report.
Suspension of disclosure
It may be suspended for any fiscal year after the year such
registration became effective if such issuer as of the first
day of any such fiscal year, has less than 100 shareholders
of such class of securities and it notifies the Commission
of such (SRC IRR, Rule 17.1).
End of disclosure requirement
GR: Disclosure does not end because once an issuer
becomes a reporting company, it remains as such even
when the registration of securities has been revoked (SRC
IRR, Rule 13).
XPN: If the primary license is revoked.
XPN to the XPN: In the case of hospitals and educational
institutions if the primary license is revoked, the
disclosure requirement still continues because of public
interest.
Reportorial requirements
1. Issuers:
a. Shall file with the Commission within 135 days,
after the end of the issuer’s fiscal year, or such
other time as the Commission may prescribe, an
annual report which shall include among others,
a balance sheet, profit and loss
statement and statement of cash flows, for such
last fiscal year, certified by an independent
certified public accountant, and a management
discussion and analysis of results of
operations; and
b. Such other periodical reports for interim fiscal
periods and current reports on significant
developments of the issuer as the Commission
may prescribe as necessary to keep current
information on the operation of the business
and financial condition of the issuer (SRC, Sec.
17).
2. Types of issuers required to file reports:
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296
a. An issuer which has sold a class of its securities
pursuant to a registration statement under
Section 12 of the SRC;
b. An issuer with a class of securities listed for
trading in an Exchange;
c. An issuer with assets of at least PHP 50M and
having 200 or more holders each holding at least
100 shares
3. Persons acquiring securities - If the issuer is one that
has to make a report, any person who acquires
directly or indirectly the beneficial ownership of
more than 5% of such class, or in excess of such
lesser per centum as the Commission by rule may
prescribe, shall, within 10 days after such acquisition
or such reasonable time as fixed by the Commission,
submit to the issuer of the security, to the Exchange
where the security is traded, and to the Commission
a sworn statement containing:
a. His personal circumstances
b. The nature of such beneficial ownership
c. If the purpose was to acquire control of the
business, any plans the recipient may have
affecting a major change in the business
d. The number of shares beneficially owned, and
the number of shares for which there is a right
to acquire
e. granted to such person or his associates
f. Information as to any agreement with a third
person regarding the securities (SRC, Sec. 18).
4. Persons that has beneficial ownership of 10% or more
- Every person who is directly or indirectly the
beneficial owner of more than 10% of any class of
any equity security, or who is director or an officer
of the issuer of such security, shall file:
a. Statement with the SEC and, if such security is
listed for trading on an Exchange, also with the
Exchange, of the amount of all equity securities
of such issuer of which he is the beneficial
owner;
b. Within 10 days after the close of each calendar
month, if there is a change in ownership during
such month, a statement indicating his
ownership at the close of the calendar month
and such changes in his ownership as have
occurred during such calendar month (SRC, Sec.
23).
Q: Union Bank, through its General Counsel and
Corporate Secretary, sought the opinion of the SEC as
to the applicability and coverage of the Full Material
Disclosure Rule on banks, contending that said rules,
in effect, amend Section 5 (a) (3) of the Revised
Securities Act which exempts securities issued or
guaranteed by banking institutions from the
registration requirement. The SEC, in reply, informed
Union Bank that while the requirements of
registration do not apply to securities of banks which
are exempt under Section 5(a) (3) of the Revised
Securities Act, however, banks with a class of
securities listed for trading on the Philippine Stock
Exchange, Inc. are covered by certain Revised
Securities Act Rules governing the filing of various
reports with SEC. The CA affirmed the SEC. Is Union
Bank required to comply with SEC’s full disclosure
rules?
 SECURITIES REGULATION CODE
A: Yes. Union Bank is required to comply with SEC’s full
disclosure rule. The exemption from the registration
requirement enjoyed by Union Bank does not necessarily
connote that it is exempted from the other reportorial
requirements. Having confined the exemption enjoyed by
Union Bank merely to the initial requirement of
registration of securities for public offering, and not to the
subsequent filing of various periodic reports, the SEC, as
the regulatory agency, is able to exercise its power of
supervision and control over corporations and over the
securities market as a whole. Otherwise, the objectives of
the `Full Material Disclosure’ policy would be defeated
since Union Bank and its dealings would be totally beyond
the reach of respondent Commission and the investing
public (Union Bank of the Philippines v. SEC, G.R. No.
138949, June 6, 2001).
CIVIL LIABILITY
Grounds for civil liability to arise
1. False Registration Statement (SRC, Sec. 56)
2. Fraud in connection with prospectus,
communications and reports (SRC, Sec. 57)
3. Fraud in connection with security transactions (SRC,
Sec. 58)
4. Manipulation of security prices (SRC , Sec. 60)
5. Insider trading (SRC, Sec. 61)
Persons that may be liable in case of false registration
statement
1. The issuer and every person who signed the
registration statement;
2. Every person who was a director of, or any other
person performing similar functions, or a partner in,
the issuer at the time of the filing of the registration
statement or any part, supplement or amendment
thereof with respect to which his liability is asserted;
3. Every person who is named in the registration
statement as being or about to become a director of,
or a person performing similar functions, or a
partner in, the issuer and whose written consent
thereto is filed with the registration statement;
4. Every auditor or auditing firm named as having
certified any financial statements used in connection
with the registration statement or prospectus;
5. Every person who, with his written consent, which
shall be filed with the registration statement, has
been named as having prepared or certified any part
of the registration statement, or as having prepared
or certified any report or valuation which is used in
connection with the registration statement, with
respect to the statement, report, or valuation, which
purports to have been prepared or certified by him;
6. Every selling shareholder who contributed to and
certified as to the accuracy of a portion of the
registration statement, with respect to that portion
of the registration statement which purports to have
been contributed by him;
7. Every underwriter with respect to such security.
Persons liable for fraud in connection with
prospectus, communications and reports
297
Any person who offers to sells or sells
1. In violation any provisions on registration of
securities; and
2. By the use of any means or instruments of
transportation or communication, by means of a
prospectus or other written or oral communication.
Persons liable for fraud in connection with security
transactions
Any person who engages in any act or transaction in
violation of Sections 19.2, 20 or 26 of SRC.
Persons liable for the manipulation of security prices
Any person who willfully participates in any act or
transaction in violation of Section 24 shall be liable to any
person who shall purchase or sell any security at a price
which was affected by such act or transaction.
Persons liable with regard to insider trading
Any person in case of legal tender who:
1. Purchases or sells a security while in possession of
material information not generally available to the
public;
2. Communicates material non-public information.
NOTE: The liability of the persons enumerated shall be
jointly and severally.
Prescriptive period for filing of action
Two years after the discovery of the facts constituting the
cause of action and within five years after such cause of
action accrued
Jurisdiction over civil liabilities
The court which has jurisdiction over cases involving civil
liabilities is the Regional Trial Court.
Q: In civil liabilities, is it required that the action be
filed first with the SEC before filing the same with the
RTC?
A: No. As ruled by the Court that “all complaints for any
violation of the [SRC] x x x should be filed with the SEC,” it
should be construed as to apply only to criminal and not
to civil suits such as petitioners’ complaint. It is apparent
that the SRC provisions governing criminal suits are
separate and distinct from those which pertain to civil
suits (Pua v. Citibank, N. A., G.R. No. 180064, September 16,
2013).
Limitation for awarding damages
1. The court can award not exceeding triple the amount
of the transaction plus actual damage
2. The court is also authorized to award attorney’s fees
not exceeding 30% of the award
Award exemplary damages
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
The court may award exemplary damages in cases of:
1. Bad Faith
2. Fraud
3. Malevolence or
4. Wantonness in the violation of SRC or the Rules and
Regulations promulgated by the Commission
SECURITIES AND EXCHANGE COMMISSION
ADMINISTRATIVE AND REGULATORY JURISDICTION
Q: Does the SEC have the power to recall and cancel a
stock and transfer book which was erroneously
registered.
A: Yes. Considering that the SEC, after due notice and
hearing, has the regulatory power to revoke the corporate
franchise – from which a corporation owes its legal
existence – the SEC must likewise have the lesser power
of merely recalling and canceling a STB that was
erroneously registered (Provident International Resources
Corporation v. Venus, G.R. No. 167041, June 17, 2008).
Q: Does the SEC’s jurisdiction extend to the
liquidation of a corporation?
A: SEC’s jurisdiction does not extend to the liquidation of
a corporation. While the SEC has jurisdiction to order the
dissolution of a corporation, jurisdiction over the
liquidation of the corporation now pertains to the
appropriate regional trial courts. This is the correct
procedure because the liquidation of a corporation
requires the settlement of claims for and against the
corporation, which clearly falls under the jurisdiction of
the regular courts. The trial court is in the best position to
convene all the creditors of the corporation, ascertain
their claims, and determine their preferences (Bank of the
Philippine Islands, as successor-in-interest of Far East Bank
and Trust Company v. Eduardo Hong, doing business under
the name and style Super Line Printing Press and the Court
of Appeals, G.R. No. 161771, February 15, 2012).
Violation of the SRC
Q: What are the elements of the violation of Sec. 28 of
the SRC?
A: The violation of Sec. 28 of the SRC has the following
elements:
a. engaging in the business of buying and selling of
securities as a broker or dealer;
b. acting as salesman; or
c. acting as associated person of any broker or dealer
unless registered as such with the SEC.
Thus, a person is liable for violating Sec. 28 of the SRC
where acting as a broker, dealer or salesman, is in the
employ of a corporation which sold or offered for sale
unregistered securities in the Philippines (Securities and
Exchange Commission vs. Santos, G.R. No. 195542, March
19, 2014).
When it is mentioned in paragraph 4(c) of A.M. No. 04-9-
07-SC that in case a petition appealing or assailing the
decision and/or final order is filed directly with the Court
UNIVERSITY OF SANTO TOMAS
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298
of Appeals within the reglementary period, petition shall
be considered a petition for review under Rule 3. It is
presumed that the mode of appeal resorted to was an
ordinary appeal and not a special civil action. (China
Banking Corporation vs. Cebu Printing and Packaging
Corporation, G.R. No. 172880, August 11, 2010)
Under Sec. 62 of the SRC, no action shall be maintained to
enforce any liability created under Sec. 56 of the SRC and
Sec. 57 unless brought within 2 years after discovery of
the untrue statement or omission of after the violation
upon which it is based but not more than 5 years after the
security was bona fide offered to the public or more than
5 years after the security was bona fide offered to the
public or more than 5 years after the sale, respectively.
Under Sec. 73 of the SRC, violation of its provisions is
punishable by imprisonment of not less than seven years
nor more than 21 years. Applying ACT no. 3326, criminal
prosecution for violations of SRC prescribes in 12 years
(Citibank N.A. vs. Tanco-Gabaldon, et.al., G.R. No. 198444,
September 4, 2013).
Issuance by the SEC of the cease and desist order
(CDO)
There are three distinct bases for the issuance by the SEC
of the CDO:
1. The first, allocated by Section 5(i), is predicated on a
necessity to prevent fraud or injury to the investing
public. No other requisite or detail is tied to this CDO
authorized under Section 5(i).
2. The second basis, found in Section 53.3, involves a
determination by the SEC that any person has
engaged or is about to engage in any act or practice
constituting a violation of any provision of this Code,
any rule, regulation or order thereunder, or any rule
of an Exchange, registered securities association,
clearing agency or other self-regulatory
organization. The provision additionally requires a
finding that there is a reasonable likelihood of
continuing [or engaging in] further or future
violations by such person. The maximum duration of
the CDO issued under Section 53.3 is ten (10) days.
3. The third basis for the issuance of a CDO is Section
64. This CDO is founded on a determination of an act
or practice, which unless restrained, will operate as a
fraud on investors or is otherwise likely to cause
grave or irreparable injury or prejudice to the
investing public. Section 64.1 plainly provides three
segregate instances upon which the SEC may issue
the CDO under this provision: (1) after proper
investigation or verification, (2) motu proprio, or (3)
upon verified complaint by any aggrieved party.
While no lifetime is expressly specified for the CDO
under Section 64, the respondent to the CDO may file
a formal request for the lifting thereof, which the SEC
must hear within fifteen (15) days from filing and
decide within ten (10) days from the hearing.
A singular CDO could not be founded on Section 5.1,
Section 53.3 and Section 64 collectively. At the very least,
the CDO under Section 53.3 and under Section 64 have
 SECURITIES REGULATION CODE
their respective requisites and terms (GSIS v. CA, G.R. Nos.
183905 and 184275, April 16, 2009).
INTRA-CORPORATE CONTROVERSIES
An intra-corporate controversy is one which arises
between a stockholder and the corporation and pertains
to the enforcement of the parties’ correlative rights and
obligations under the Corporation Code and the internal
and intra-corporate regulatory rules of the corporation
(Real v. Sangu Philippines Inc., G.R. No. 168757, January 19,
2011).
Q: Is the Securities and Exchange Commission the
venue for actions involving intra-corporate
controversies? (2006, 2009 Bar)
A: No. The venue for actions involving intra-corporate
controversies is now under the jurisdiction of the RTC
acting as a special commercial court. (Sec. 5, A.M. NO. 01-
2-04-SC)
TESTS TO DETERMINE INTRA-CORPORATE
CONTROVERSY
1. Relationship Test – No doubt exists that the parties
were members of the same association, but this
conclusion must still be supplemented by the
controversy test before it may be considered as an
intra-corporate dispute.
2. Controversy Test – The dispute must be rooted in the
existence of an intra-corporate relationship, and
must refer to the enforcement of the parties’
correlative rights and obligations under the
Corporation Code, as well as the internal and intra-
corporate regulatory rules of the corporation, in
order to be an intra-corporate dispute (Gulfo v.
Ancheta, G.R. No. 175301, August 15, 2012).
Doctrine of Primary Jurisdiction
Under the doctrine of primary jurisdiction, courts will not
determine a controversy involving a question within the
jurisdiction of the administrative tribunal, where the
question demands the exercise of sound administrative
discretion within the jurisdiction of the administrative
tribunal. The Securities Regulation Code is a special law.
Its enforcement is particularly vested in the SEC. Hence,
all complaints for any violation of the Code and its
implementing rules and regulations should be filed with
SEC. Where the complaint is criminal in nature, SEC shall
indorse the complaint to the DOJ for preliminary
investigation and prosecution (Baviera v. Standard
Chartered Bank, G.R. No. 170602, February 8, 2007).
Q: DC is a unit owner of Medici Condominium located
in Pasig City. On September 7, 2011, Medici
Condominium Corp. (Medici) demanded from DC
payment for alleged unpaid association dues and
assessments amounting to P195,000.00. DC disputed
the claim, saying that he paid all dues as shown by the
fact that he was previously elected as Director and
President of Medici. Medici, on the other hand,
claimed that DC’s obligation was a carry-over of his
obligations to the condominium developer, Medici
Construction Corporation. Consequently, DC was
299
prevented from exercising his right to vote and be
voted for during the 2011 election of Medici’s Board
of Directors. This prompted DC to file a complaint for
damages before the Special Commercial Court of
Pasig City. Medici filed a motion to dismiss on the
ground that the court has no jurisdiction over the
intra-corporate dispute which the Housing and Land
Use Regulatory Board (HLURB) has exclusive
jurisdiction over. Is Medici correct? (2014 Bar)
A: Medici is incorrect. Where a member of the
condominium corporation was denied the right to vote for
alleged non-payment of condominium dues and
assessment, the action although denominated as one for
damages is an intra-corporate controversy and therefore,
falling within the jurisdiction of the regional trial court
designated as a special commercial court.
In determining whether a dispute constitutes an intra-
corporate controversy, the Court uses two tests, namely,
the relationship test and the nature of the controversy
test. Applying these two tests, the present case is indeed
an intra-corporate controversy.
Anent the first test, it is admitted that Medici is a
condominium corporation. On the other hand, DC is a
member of the condominium corporation.
As regards the second test, the cases principally dwells on
the propriety of the assessment made by Medici against
DC as well as the validity of the act of preventing the latter
from participating in the election of the former’s Boar d of
Directors. To be sure, this action partakes of the nature of
intra-corporate controversy.
Also, while R.A. No. 9904 empowers the HLURB to hear
and decide inter-association and/or intra-associations,
the same cannot be applied in the present case as it
involves a controversy between a condominium unit
owner and a condominium corporation. While the term
association as defined in the law covers homeowners’
associations of other residential real property which is
broad enough to cover a condominium corporation, it
does not seem to be the legislative intent (Medical Plaza
Makati Condominium Corporation v. Robert Cullen, G.R. No.
18141, November 11, 2013).
Q: Juan was a stockholder of X Co. He owned a total of
500 shares evidenced by Cert of Stock No 1001. He
sold the shares to Pedro. After getting paid, Juan
indorsed and delivered said Certificate of Stock No
1001 to Pedro. The following day, Juan went to the
offices of the corporation and claimed that his
Certificate of Stock No 1001 was lost and that, despite
diligent efforts, the certificate could not be located.
The formalities prescribed by law for the
replacement of the lost certificate were complied
with. Eventually X Co issued in substitution of the lost
certificate, Cert of Stock No 2002. Juan forthwith
transferred for valuable consideration the new
certificate to Jose who knew nothing of the previous
sale to Pedro. In time, the corporation was confronted
with the conflicting claims of Jose and Pedro. The BOD
of X Co invited you to enlighten them on these
questions; viz:
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
a. If a suit were to be initiated in order to resolve
the controversy between Pedro and Jose, should
the matter be submitted to the SEC or to the
regular courts?
b. Between Jose and Pedro, whom should the
corporation so recognize as the rightful
stockholder? How would you respond to the
above queries? (1997 Bar)
A:
a. The jurisdiction of the matter belongs to the regular
courts. Under section 5.2 of the SRC as amended, the
jurisdiction for intra-corporate controversies was
transferred from the SEC to the regular courts.
b. The corporation should recognize both Pedro and
Jose as rightful stockholders if there is no over-
issuance of shares resulting from the two
transactions without prejudice to the right of the
corporation to claim against Juan for the value of the
shares sold to Jose.
Q: Because of disagreement with the BOD and a threat
by the BOD to expel her for misconduct and
inefficiency, Carissa offered in writing to resign as
President and member of the BOD, and to sell to the
company all her shares therein for P300,000.00 Her
offer to resign was ―effective as soon as my shares are
fully paid. At its meeting, the BOD accepted Carissa‘s
resignation, approved her offer to sell back her
shares of stock to the company, and promised to buy
the stocks on a staggered basis. Carissa was informed
of the BOD Resolution in a letter-agreement to which
she affixed her consent. The Company‘s new
President singed the promissory note. After payment
P100,000 the company defaulted in paying the
balance of P200,000. Carissa wants to sue the
Company to collect the balance. If you were retained
by Carissa as her lawyer, where will you file the suit?
A) Labor Arbiter; b) RTC; or c) SEC?
A: RTC has jurisdiction. Under section 5.2 of the SRC, the
commission’s jurisdiction over all cases enumerated
under section 5 of Presidential Decree No. 902-A is hereby
transferred to the Courts of general jurisdiction or the
appropriate Regional Trial Court: Provided, That the
Supreme Court in the exercise of its authority may
designate the Regional Trial Court branches that shall
exercise jurisdiction over these cases. The Commission
shall retain jurisdiction over pending cases involving
intra-corporate disputes submitted for final resolution
which should be resolved within 1 year from the
enactment of this Code. The commission shall retain
jurisdiction over pending suspension of
payments/rehabilitation cases filed as of 30 June 2000
until finally disposed.
Q: In 1970, Magno joined AMD Co as a Junior
Accountant. He steadily rose from the ranks until he
became AMD‘s Executive VP. Subsequently, however
because of his involvement in certain anomalies, the
AMD BOD considered him resigned from the company
due to loss of confidence. Aggrieved, Magno filed a
complaint in the SEC questioning the validity of his
termination, and seeking reinstatement to his former
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300
position, with backwages, vacation and sick leave
benefits, 13th month pay and Christmas bonus, plus
moral and exemplary damages, attorney‘s fees and
costs. AMD filed a motion to dismiss, arguing that the
SEC has no jurisdiction over cases of illegal dismissal,
and has no power to award damages. Should the
motion to dismiss be granted? Explain. (1996, 1997
Bar)
A: RTC has jurisdiction. Under section 5.2 of the SRC, the
commission’s jurisdiction over all cases enumerated
under section 5 of Presidential Decree No. 902-A is hereby
transferred to the Courts of general jurisdiction or the
appropriate Regional Trial Court: Provided, That the
Supreme Court in the exercise of its authority may
designate the Regional Trial Court branches that shall
exercise jurisdiction over these cases. The Commission
shall retain jurisdiction over pending cases involving
intra-corporate disputes submitted for final resolution
which should be resolved within 1 year from the
enactment of this Code. The commission shall retain
jurisdiction over pending suspension of
payments/rehabilitation cases filed as of 30 June 2000
until finally disposed.
Q: Jennifer and Gabriel owned the controlling stocks
in MFF Co and CLO Inc, both family corporations. Due
to serious disagreements, Jennifer assigned all her
shares in MFF to Gabriel, while Gabriel assigned all
his shares in CLO to Jennifer. Subsequently, Jennifer
and CLO filed a complaint against Gabriel and MFF in
the SEC seeking to recover the corporate records and
funds of CLO which Gabriel allegedly refused to turn
over, and which remained in the offices of MFF. Is
there an intra-corporate controversy in this case?
(1996 Bar)
A: Yes. An intra-corporate controversy is one which
"pertains to any of the following relationships: (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 license 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 associates
themselves." It is therefore clear that there exists an intra-
corporate controversy between MFF Co and CLO Inc.
Furthermore, in the case of SEC v. CA, G.R. 93832, August
23, 1991, it was held that the fact that when the complaint
in SEC Case No. 03328 was filed with the SEC, the private
respondents Ban Hua Uy-Flores and Ban Ha Uy-Chua
were no longer stockholders of the UBS Marketing
Corporation did not divest the SEC of its jurisdiction over
the case. Hence, there exists an intra-corporate
controversy (Lim v. DPDCI G.R. 194024, April 25, 2012).
Q: Under what jurisdiction does an action for illegal
dismissal of an ordinary employee fall?
A: When the officer claiming to have been illegally
dismissed is an ordinary employee of the corporation,
jurisdiction over the same lies with the labor arbiter. It is
only when the officer claiming to have been illegally
dismissed is classified as a corporate officer that the issue
 SECURITIES REGULATION CODE
is deemed intra-corporate dispute which falls within the
jurisdiction of the trial court designated as special
commercial court (Cosare v. Bradcom Asia, G.R. No.
201298, February 5, 2014).
Q: Under what jurisdiction does an intra-corporate
dispute involving a corporation under sequestration
of the PCGG fall?
A: An intra-corporate dispute involving a corporation
under sequestration of the PCGG falls under the
jurisdiction of the RTC, not the Sandiganbayan (Philippine
Overseas Telecommunications Corporation v. Africa, et. al.,
G.R. No. 184622, July 3, 2013).
Q: Is the office of Vice President for Finance and
Administration created by the President of the
Corporation pursuant to the pertinent provision in
the by-laws of the corporation a corporate office?
The power to elect the corporate officers is a
discretionary power that the law exclusively vested in the
Board of Directors, and cannot be delegated to
subordinate officers or agents. The office of Vice President
for Finance and Administration created by the President
of the Corporation pursuant to the pertinent provision in
the by-laws of the corporation was an ordinary, not a
corporate office (Matling Industrial and Commercial
Corporation v. Coros, supra).
Q: Is a complaint filed by the condominium unit
owners against the developer of the condominium for
unsound business practice and violation of the Master
Deed and Declaration of Restrictions an intra-
corporate controversy?
A: Yes. An intra-corporate controversy is one which
"pertains to any of the following relationships: (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 license 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 associates
themselves."
Based on the foregoing definition, there is no doubt that
the controversy in this case is essentially intra-corporate
in character, for being between a condominium
corporation and its members-unit owners (Go v.
Distinction Properties Development Corporation, G.R. No.
194024, April 25, 2012).
Q: Does the completion of sale of a condominium unit
bar the condominium unit owner from questioning
the amount of the unpaid dues?
A: The propriety and legality of the sale of the
condominium unit is different from the propriety and
legality of the unpaid assessment dues. The latter
partakes of the nature of an intra-corporate dispute
(Chateau de Baie Condominium Corporation v. Spouses
Moreno, G.R. No. 186271, February 23, 2011).
301
Q: Is the rule on bill of particulars applicable to intra-
corporate controversies?
A: No. In ordinary cases, the failure to specifically allege
the fraudulent acts does not constitute a ground for illegal
dismissal since such a defect can be cured by a bill of
particulars. The above-stated rule, however, does not
apply to intra-corporate controversies. In cases governed
by the Interim Rules of Procedure on Intra-Corporate
Controversies a bill of particulars is a prohibited pleading.
It is essential, therefore, for the complaint to show on its
face what are claimed to be the fraudulent acts if the
complainant wishes to invoke the court’s special
commercial jurisdiction (Guy vs. Guy, G.R. No. 189486,
September 5, 2012).
Q: May the Board create appointive positions other
than the positions of corporate officers?
A: Yes. Though the Board may create appointive positions
other than the positions of corporate officers, the persons
occupying such positions cannot be viewed as corporate
officers under Sec. 25 of the Corporation Code (March II
Marketing v. Joson, G.R. No. 171993, December 12, 2011).
Q: What must be alleged in filing a derivative suit?
A: The stockholder filing a derivative suit should have
exerted all reasonable efforts to exhaust all remedies
available under the AOI, by-laws, laws or rules governing
the corporation to obtain the relief he desires and to
allege such fact with particularity in the complaint. The
allegation that the suing stockholder talked to the other
stockholder regarding the dispute hardly constitutes all
reasonable efforts to exhaust all remedies available. The
complaint should also allege the fact that there was no
appraisal right available for the acts complained of and
that the suit was not a nuisance or harassment suit. The
fact that the corporation involved is a family corporation
should not in any way exempt the suing stockholder from
the requirements and formalities for filing a derivative
suit (Yu v. Yukayguan, G.R. No. 177549, June 18, 2009).
Q: Is a derivative suit proper when the petitioners
seek the nullification of the election of the Board of
Directors who pushed through the election even if
petitioners had adjourned the meeting allegedly due
to lack of quorum?
A: No. Petitioners are the injured party, whose rights to
vote and to be voted upon were directly affected by the
election of the new set of board of directors. The party-in-
interest are the petitioners as stockholders, who wield
such right to vote. The cause of action devolves on
petitioners, not the condominium corporation, which did
not have the right to vote. Hence, the complaint for
nullification of the election is a direct action by
petitioners, who were members of the Board of Directors
of the corporation before the election, against
respondents, who are the newly-elected Board of
Directors. Under the circumstances, the derivative suit
filed by petitioners in behalf of the condominium
corporation is improper (Legaspi Towers 300 Inc., vs. Muer
et. al., supra).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
INDEPENDENT DIRECTORS

Requirement of independent director

The Securities Regulations Code requires an independent

director when any corporation with a class of equity
securities listed for trading on an exchange or with assets
in excess of Fifty Million Pesos and having two hundred or
more holders, at least 200 of which are holding at least
one hundred shares of a class of its equity securities or
which has sold a class of equity securities to the public
pursuant to sec. 12 must have at least two independent
directors or such directors must constitute at least twenty
percent of the board, whichever is less.

Q: Section 38 of The Securities Regulation Code

defines an independent director as a person who
must not have a relation with the corporation which
would interfere with his exercise of independent
judgment in carrying out the responsibilities of a
director. To ensure independence therefore, he must
be – (2012 Bar)

A: B. He must be nominated and elected by the minority

shareholders.

UNIVERSITY OF SANTO TOMAS

2016 GOLDEN NOTES
302
 BANKING LAWS
BANKING LAWS
THE NEW CENTRAL BANK ACT
(NCBA, R.A. 7653)
Bangko Sentral ng Pilipinas (BSP)
It is the state’s central monetary authority. It is the
government agency charged with the responsibility of
administering the monetary, banking and credit system of
the country and is granted the power of supervision and
examination over bank and non-bank financial
institutions performing quasi-banking functions,
including savings and loan associations (Busuego v. CA,
G.R. No. L-48955, June 30, 1987).
Bangko Sentral ng Pilipinas as an institution
The BSP is a government-owned corporation which
enjoys fiscal and administrative autonomy.
STATE POLICIES
Policy of the state with respect to the creation of the
Bangko Sentral ng Pilipinas
The State shall maintain a central monetary authority that
shall function and operate as an independent and
accountable body corporate in the discharge of its
mandated responsibilities concerning money, banking
and credit (NCBA, Sec 2). While it is a government owned
corporation it enjoys fiscal and administrative autonomy.
CREATION OF THE
BANGKO SENTRAL NG PILIPINAS (BSP)
Salient considerations on the creation of Bangko
Sentral ng Pilipinas
1. It is established as an independent central monetary
authority.
2. Its capital shall be P50,000,000,000, to be fully
subscribed by the Philippine Government.
3. The P10,000,000,000 of the capital shall be fully paid
for by the Government upon the effectivity of NCBA
and the balance to be paid for within a period of 2
years from the effectivity of NCBA in such manner
and form as the Government, through the Secretary
of Finance and the Secretary of Budget and
Management, may thereafter determine (ibid).
RESPONSIBILITY AND PRIMARY OBJECTIVE
Responsibilities of Bangko Sentral ng Pilipinas
(1992, 1998 Bar) (PSR)
1. To provide policy directions in the areas of money,
banking, and credit
2. To supervise bank operations
3. To regulate the operations of finance companies and
non-bank financial institutions performing quasi-
banking functions, and similar institutions (NCBA,
Sec. 3).
Primary objectives of Bangko Sentral ng Pilipinas
303
1. To maintain price stability conducive to a balanced
and sustainable growth of the economy; and
2. To promote and maintain monetary stability and the
convertibility of the peso (NCBA, Sec. 3).
Functions of Bangko Sentral ng Pilipinas (BRAGS-
CHB)
1. Banker of the government – the BSP shall be the
official depository of the Government and shall
represent it in all monetary fund dealings (NCBA,
Secs. 110- 116).
2. Custodian of Reserves (NCBA, Secs. 64-66, 94, 103)
3. Financial Advisor of the government (NCBA, Secs.
123-124) – Under Article VII, Sec. 20 of the 1987
Constitution, the President may contract or
guarantee foreign loans but with the prior
concurrence of the Monetary Board.
4. Government agent (NCBA, Secs. 117-122)
5. Source of credit (NCBA, Secs. 61-63, 81-89, 109)
6. Issuer of Currency (NCBA, Sec. 49-60)
7. Clearing channel or House; especially where the
PCHC does not operate (NCBA, Sec. 102)
8. Supervisor of the Banking system (NCBA, Sec. 25) –
shall include the power to:
a. Examine, which power extends to enterprises
wholly or majority-owned or controlled by the
bank (GBL, Sec. 7); this power may not be
restrained by a writ of injunction unless there is
convincing proof that the action of the BSP is
plainly arbitrary (NCBA, Sec. 25)
b. Place a bank under receivership or liquidation
(NCBA, Sec. 30)
c. Initiate criminal prosecution of erring officers of
banks
POWERS AND FUNCTIONS OF THE
MONETARY BOARD
Monetary Board
It is the body through which the powers and functions of
the BSP are exercised (NCBA, Sec 6).
Powers and functions of the Monetary Board (RASBI)
1. Issue Rules and regulations it considers necessary
for the effective discharge of the responsibilities and
exercise of its powers.
2. Direct the management, operations, and
Administration of the BSP, reorganize its personnel,
and issue such rules and regulations as it may deem
necessary or convenient for this purpose.
3. Establish a human resource management System.
4. Adopt an annual Budget for and authorize such
expenditures by the BSP as are in the interest of the
effective administration and operations of the BSP in
accordance with applicable laws and regulations.
5. Indemnify its members and other officials of the BSP,
including personnel of the departments performing
supervision and examination functions against all
costs and expenses reasonably incurred by such
persons in connection with any civil or criminal
action (NCBA, Sec 15).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
NOTE: In the event of a settlement or compromise,
indemnification shall be provided only in connection with
such matters covered by the settlement as to which the
BSP is advised by external counsel that the person to be
indemnified did not commit any negligence or
misconduct. The costs and expenses incurred in
defending the aforementioned action, suit or proceeding
may be paid by the BSP in advance of the final disposition
of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of the member, officer, or
employee to repay the amount advanced should it
ultimately be determined by the Monetary Board that he
is not entitled to be indemnified as provided in this
subsection (ibid.).
Liabilities of the members of the Monetary Board
Members of the Monetary Board, officials, examiners, and
employees of the BSP who:
1. Willfully violate RA 7653
2. Are guilty of negligence, abuses or acts of malfeasance
or misfeasance or
3. Fail to exercise extraordinary diligence in the
performance of his duties
Shall be held liable for any loss or injury suffered by the
BSP or other banking institutions as a result of such
violation, negligence, abuse, malfeasance, misfeasance or
failure to exercise extraordinary diligence (NCBA, Sec 16).
HOW BSP HANDLES BANKS IN DISTRESS
In case of a distressed bank, the BSP appoints a
conservator or receiver or closure of the bank.
CONSERVATORSHIP
Conservator (2006 Bar)
One appointed if the bank is in the state of illiquidity or
the bank fails or refuses to maintain a state of liquidity
adequate to protect its depositors and creditors. The bank
still has more assets than its liabilities but its assets are
not liquid or not in cash thus it cannot pay its obligation
when it falls due. The bank, not the BSP, pays for fees.
Powers of a conservator (CARe BEAr)
1. Collect all monies and debts due to the said bank
2. To take charge of the Assets, liabilities, and the
management thereof
3. REorganize, the management thereof
4. And such other powers as the monetary Board
deems necessary
5. Exercise all powers necessary to restore its viability,
with the power to overrule or revoke the actions of
the previous management and board of directors of
the bank or quasi-bank
6. To bring court actions to Assail or Repudiate
contracts entered into by the bank. (First Philippine
International Bank v. CA, G.R. No. 115849, Jan. 24,
1996).
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
304
Powers of a conservator do not extend to the
revocation of valid and perfected contracts
The powers of a conservator cannot extend to post facto
repudiation of valid and perfected transactions. Thus, the
law merely gives the conservator power to revoke
contracts that are deemed to be defective- void, voidable,
unenforceable or rescissible. Hence, the conservator
merely takes the place of the bank’s board.
Termination of conservatorship
Conservatorship is terminated when the Monetary Board
is satisfied that the bank can operate on its own.
NOTE: When the Monetary Board, on the basis of the
report of the conservator or of its own findings, determine
that the continuance in business of the institution would
involve probable losses to its depositors or creditors, the
bank will go under liquidation.
CLOSURE
Grounds for closure of a bank or a quasi-bank
1. Cash Flow test - Inability to pay liabilities as they
become due in the ordinary course of business
(NCBA, Sec. 30 [a], 1997 Bar).
2. Balance sheet test – Insufficiency of realizable assets
to meet its liabilities (NCBA, Sec 30 [b], 1997 Bar).
3. Inability to continue business without involving
probable losses to its depositors and creditors
(NCBA, Sec 30 [c], 1997 Bar).
4. Willful violation of a cease and desist order under
Section 37 that has become final, involving acts or
transactions which amount to fraud or a dissipation
of the assets (NCBA, Sec 30 [d], 1997 Bar).
5. Notification to the BSP or public announcement of a
bank holiday (GBL, Sec 53).
6. Suspension of payment of its deposit liabilities
continuously for more than 30 days (GBL, Sec 53).
7. Persisting in conducting its business in an unsafe or
unsound manner (GBL, Sec 56).
Close now-hear later doctrine
It is to prevent unwarranted dissipation of the bank’s
assets and as a valid exercise of police power to protect
the depositors, creditors, stockholders and the general
public. The law does not contemplate prior notice and
hearing before the bank may be directed to stop
operations and placed under receivership (Central Bank
of the Philippines v. CA, G.R. No. 76118 Mar. 30, 1993).
No prior hearing is necessary in appointing a receiver and
in closing the bank. It is enough that subsequent judicial
review is provided for. Indeed, to require such previous
hearings would not only be impractical but would tend to
defeat the very purpose of the law (Rural Bank of Lucena
v. Arca, G.R. No. L-21146, September 20, 1965).
BSP may order the closure of the bank even without prior
hearing. BSP may rely on the report of either the
conservator, receiver or the head of the supervising and
examining department. It is not required to conduct a
 BANKING LAWS
thorough audit of the bank before ordering its closure.
The "close now, hear later’’ doctrine justifies BSP in
ordering bank closures even without prior hearing. Thus,
injunction does not lie against BSP in the exercise of the
power and function. A contrary rule may lead to
dissipation of assets and trigger bank run. Judicial review
comes only after action of the Monetary Board if the same
was attended with bad faith and grave abuse of discretion
(Bangko Sentral ng Pilipinas v. Valenzuela, G.R. No. 184778,
October 2, 2009).
The closure and liquidation of a bank, which is
considered an exercise of police power may be the
subject of judicial inquiry
The validity of such exercise of police power is subject to
judicial inquiry and could be set aside if it is either
capricious, discriminatory, whimsical, arbitrary, unjust or
a denial or due process and equal protection clauses of the
Constitution (Central Bank v. CA, G.R. No. L-50031-32, July
27, 1981).
The order of closure (receivership or conservatorship)
may be assailed: a) by the stockholders representing at
least majority of the outstanding capital stock; b) within
ten days from receipt by the board of directors of the
order; c) thru a petition for certiorari on the ground that
the action taken by the BSP was in excess of jurisdiction
or with grave abuse of discretion as to amount to lack of
jurisdiction.
Under R.A .No. 7653, the power of the Monetary Board
(MB) over banks, including rural banks, was increased
and expanded. The Court, in several cases, upheld the
power of the MB to take over banks without need for prior
hearing. 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 closure and
receiver-ship of the erring bank are present. The MB,
under R.A. No. 7653, has been invested with more power
of closure and placement of a bank under receivership for
insolvency or illiquidity, or because the bank’s
continuance in business would probably result in the loss
to depositors or creditors.
The doctrine is founded on practical and legal
considerations to obviate unwarranted dissipation of the
bank’s assets and as a valid exercise of police power to
protect the depositors, creditors, stockholders, and the
general public. Swift, adequate and determined actions
must be taken against financially distressed and
mismanaged banks by government agencies lest the
public faith in the banking system deteriorate to the
prejudice of the national economy. (Vivas, on his behalf
and on behalf of the Shareholders of Eurocredit Community
Bank v. The Monetary Board of the Bangko Sentral ng
Pilipinas, G.R. No. 191424, August 07, 2013).
Q: Upon maturity of the time deposit, the bank failed
to remit. By reason of punitive action taken by Central
Bank, the bank has been prevented from performing
banking operations. Is the bank still obligated to pay
the time deposits despite the fact that its operations
were suspended by the Central Bank?
305
A: Yes, the suspension of operations of a bank cannot
excuse non-compliance with the obligation to remit the
time deposits of depositors which matured before the
bank’s closure (Overseas Bank of Manila v. CA, G.R. No.
45886, April 19, 1989).
Bank not liable to pay interest when closed
As a general rule, the bank is not liable to pay interest on
DEPOSIT once it is closed and ceased operations.
RECEIVERSHIP
Receiver (2006 Bar)
One appointed if the bank is already insolvent which
means that its liabilities are greater than its assets. The
Court has no authority to appoint a receiver for a bank if
the latter will function as such under BSP law. The power
to appoint belongs to BSP.
NOTE: For banks, the receiver would be the Philippine
Deposit Insurance Corporation; for quasi-banks, it could
be any person of recognized competence in banking or
finance (NCBA, Sec. 30).
Duties of a receiver
The receiver shall:
1. Immediately gather and take charge of all the assets
and liabilities of the institution.
2. Administer the same for the benefit of the creditors,
and exercise the general powers of a receiver under
the Revised Rules of Court
3. Not, with the exception of administrative
expenditures, pay or commit any act that will involve
the transfer or disposition of any asset of the
institution: Provided that the receiver may deposit or
place the funds of the institution in non-speculative
investments.
4. Within 90 days from the take-over, the receiver shall
determine whether the institution may be
rehabilitated or otherwise placed in such a condition
that it may be permitted to resume business with
safety to its depositors and creditors and the general
public
5. If the receiver determines that the institution cannot
be rehabilitated or permitted to resume business,
then the Monetary Board shall notify in writing the
board of directors of the institution of its findings and
direct the receiver to proceed with liquidation of the
institution (NCBA, Sec 30).
The receiver is not authorized to transact business in
connection with the bank’s assets and property
A receiver can only perform acts of administration and
not acts of dominion. The receiver cannot approve an
option to purchase real property. He has only the
authority to administer the same for the benefit of its
creditors (Abacus Real Estate Development Center, Inc. v.
Manila Banking Corp, G.R. No. 162270, Apr. 6, 2005).
Nature of order of receivership
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
While resolutions of the Monetary Board forbidding a
bank to do business on account of a condition of
insolvency and appointing a receiver to take charge of the
bank’s assets or determining whether the bank may be
rehabilitated or should be liquidated are by law “final and
executory.” However, they can be set aside by the court on
one specific ground - if the action is plainly arbitrary and
made in bad faith. Such contention can be asserted as an
affirmative defense or a counterclaim in the proceeding
for assistance in liquidation (Salud v. Central Bank, G.R. No.
L-17630, August 19, 1986).
LIQUIDATION
Liquidation of a bank
Acts of liquidation are those which constitute the
conversion of the assets of the banking institution to
money or the sale, assignment or disposition of the same
to creditors and other parties for the purpose of paying
debts of such institution (Banco Filipino v. Central Bank,
G.R. No. 70054, December 11, 1991).
Liquidator of a distressed bank can prosecute and
defend suits against the bank
Prosecution of suits, collection and the foreclosure of
mortgages against debtors of the bank by the liquidator
are among the usual and ordinary transactions pertaining
to the administration of a bank (Banco Filipino v. Central
Bank, ibid).
A liquidator may foreclose mortgages due to a bank
while the issue of receivership is pending
A liquidator can foreclose mortgages for and in behalf of
the bank even if the issue on receivership and liquidation
is still pending (Supra).
Q: An intra-corporate case was filed before RTC. On
the other hand, another complaint was filed before
BSP to compel a bank to disclose its stockholdings
invoking the supervisory power of the latter. Is there
a forum shopping?
A: None. The two proceedings are of different nature
praying for different relief. The complaint filed with the
BSP was an invocation of its supervisory powers over
banking operations which does not amount to a judicial
proceeding (Suan v. Monetary Board, A.C. No. 6377, March
12, 2007).
Commencement of liquidation proceedings bar the
filing of a separate action or petition to assail the
order of closure
Once liquidation proceedings have been initiated, the
majority stockholders of the bank can no longer file a
separate action or petition to assail the order of closure.
Instead, issues on validity of closure should be raised as
affirmative defenses in the liquidation proceeding. This is
necessary to prevent multiplicity of suits or conflicting
resolutions (Salud v. Central Bank of the Philippines, G.R.
No. L-17620, August 19, 1986).
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
306
Liquidation proceedings may be carried out with or
without tax clearance
Unlike in a voluntary dissolution of a corporation under
the Corporation Code, BSP can liquidate the bank with or
without tax clearance (GBL).
Filing of the claims against the insolvent bank
GR: All claims against the insolvent bank should be filed
in the liquidation proceeding. It is not necessary that a
claim be initially disputed in a court or agency before it is
filed with the liquidation court (Ong v. CA, G.R. No. 112830,
Feb. 1, 1996).
XPN: Where it is the bank that files a claim against
another person or legal entity, the claim should be filed in
the regular courts.
Reason: The judicial liquidation is intended to provide an
orderly mode for payment of all claims. In addition such
petition is not in the nature of a disputed claim against the
bank.
Q: Aaron, a well-known architect, is suffering from
financial reverses. He has four creditors with a total
claim of P 26 million. Despite his intention to pay
these obligations, his current assets are insufficient to
cover all of them. His creditors are about to sue him.
Consequently, he was constrained to file a Petition for
Insolvency (Act 1956).
a. Since Aaron was merely forced by circumstances
to petition the court to declare him insolvent, can
the judge properly treat the petition as one for
involuntary insolvency. Explain.
b. If Aaron is declared an insolvent by the court,
what would be the effect, if any, of such
declaration on his creditors? Explain.
c. Assuming that Aaron has guarantors for his
debts, are the guarantors released from their
obligations once Aaron is discharged from his
debts? Explain.
d. What remedies are available to the guarantors in
case they are made to pay the creditors? Explain.
(2005 Bar)
A:
a. No. In involuntary insolvency, it is the creditors who
ask for the declaration of the debtor’s insolvency. In
this case, it is the debtor who filed a petition for
insolvency. The fact that Aaron has the intention to
pay his obligations and was just constrained to file a
petition as one for involuntary insolvency.
b. A declaration of the court that the debtor is insolvent
shall have the following effects: (Sec. 59 of Insolvency
Law):
i. All debtor’s assets placed in sheriff custody
until a receiver or assignee has been
appointed;
ii. Payment to debtor of any debt due to him, or
delivery of any property due to him, and
transfer or conveyance of any property by
him, are forbidden;
iii. Time and place is fixed for a meeting of
creditors to select the assignee in insolvency;
 BANKING LAWS
iv. And all civil proceedings against insolvent are
stayed
c. No. By virtue of the doctrine of excussion provided
under Art. 2058, the creditor can go against the
guarantor after the former has exhausted all the
properties of the principal debtor and has resorted to
all legal remedies against such debtor. In this case,
Aaron has insufficient property to discharge his
obligations prompting him to file a petition for
insolvency which stays claims against him. The fact
that Aaron was declared insolvent permits the
creditor to enforce his claim against the guarantor.
d. The guarantor is entitled to be reimbursed by the
debtor for the following:
i. total amount of the debt paid;
ii. legal interest from the time payment was
made known to the debtor;
iii. expenses incurred after notifying debtor that
demand to pay was made upon him; and
iv. damages in accordance with law.
Bank deposits as a rule not preferred credits
The exception is when the deposits are covered by a
cashier's check purchased from the bank when the bank
officers knew or ought to have known that the bank is
insolvent (Miranda v. PDIC, G.R. No. 169334
September 8, 2006).
Rule of promissory estoppel
The BSP may not thereafter renege on its representation
and liquidate the bank after majority stockholders of the
bank complied with the conditions and parted with value
to the profit of CB, which thus acquired additional security
for its own advances, to the detriment of the bank’s
stockholders, depositors and other creditors (Ramos v.
Central Bank of the Philippines, G.R. No. L-29352, Oct. 4,
1971).
A final and executory judgment against an insolvent
bank may be stayed
After the Monetary Board has declared that a bank is
insolvent and has ordered it to cease operations, the
assets of the insolvent bank are held in trust for the equal
benefit of all creditors. One cannot obtain an advantage or
preference over another by attachment, execution or
otherwise. The final judgment against the bank should be
stayed as to execute the judgment would unduly deplete
the assets of the banks to the obvious prejudice of other
depositors and creditors (Lipana v. Development Bank of
Rizal, G.R. No. L-73884, Sept. 24, 1987).
Q: The Blue Star Corporation filed with the RTC a
petition for rehabilitation on the ground that it
foresaw impossibility of paying its obligations as they
fall due. Finding the petition sufficient in form and
substance, the court issued an Order appointing a
rehabilitation receiver and staying the enforcement
of all claims against the corporation. What is the
rationale for the Stay Order? (2006 Bar)
A: The reason behind the indiscriminate suspension or
stay order in relation to the creditors’ claim is to expedite
the rehabilitation of the distressed corporation by
enabling the management committee or the rehabilitation
receiver to effectively exercise its/his powers free from
any judicial or extrajudicial interference that might
unduly hinder or prevent the rescue of the debtor
company. It also recognizes the assets of a corporation
under rehabilitation held under trust for the equal benefit
of all creditors under the doctrine equality is equity,
whereby all the creditors ought to stand on equal footing,
and not one of them should be paid ahead of others.

Conservatorship vs. Receivership vs. Liquidation

CONSERVATORSHIP RECEIVERSHIP LIQUIDATION

Grounds 1. Continuing inability 1. Inability to pay liabilities as they fall 1. Insolvency

due e.g: bank run, rumors, etc.
2. Unwillingness to 2. Assets are less than its liabilities 2. Bank cannot be
maintain condition of 3. Cannot continue business rehabilitated
liquidity 4. without causing damage;
5. Violation of a cease and desist order
6. “Bank holiday” for more than 30
days (NCBA, Sec. 30).
Effects 1. Juridical personality is 1. Juridical personality is retained Same with
retained. 2. Suspension of operation /stoppage conservatorship
2. Perfected transactions of business
cannot be repudiated 3. Assets deemed in custodia legis
(Domingo v. NLRC, G.R. 156761,
October 17, 2006).

UNIVERSITY OF SANTO TOMAS

307 FACULTY OF CIVIL LAW
 MERCANTILE LAW
HOW BSP HANDLES EXCHANGE CRISIS
To protect the international reserves of the Bangko
Sentral in the imminence of, or during an exchange crisis,
or in time of national emergency and to give the Monetary
Board and the Government time in which to take
constructive measures to forestall, combat, or overcome
such a crisis or emergency, the Monetary Board, with the
concurrence of at least five (5) of its members and with
the approval of the President of the Philippines, may:
1. temporarily suspend or restrict sales of exchange by
the Bangko Sentral, and
2. may subject all transactions in gold and foreign
exchange to license by the Bangko Sentral, and
3. may require that any foreign exchange thereafter
obtained by any person residing or entity operating
in the Philippines be delivered to the Bangko Sentral
or to any bank or agent designated by the Bangko
Sentral for the purpose, at the effective exchange rate
or rates:
Provided, however, that foreign currency deposits made
under Republic Act No. 6426 shall be exempt from these
requirements. (NCBA, Sec. 72)
LEGAL TENDER POWER
Legal Tender (2000 Bar)
All notes and coins issued by the BSP are fully guaranteed
by the Republic and shall be legal tender in the Philippines
for all debts, both public and private (NCBA, Sec. 52).
Legal tender power of coins
1. 1-Peso, 5-Peso and 10-Peso coins:
In amounts not exceeding P1,000.00;
2. 25 centavo coin or less:
In amounts not exceeding P100.00 (Circular No.
537, 2006).
Notes, regardless of denomination, are legal tender for
any amount.
Rules on the authority of the BSP to replace legal
tender
1. Notes and coins called in for replacement shall
remain legal tender for a period of one year from the
date of call.
2. After that period, they shall cease to be legal tender
during the following year or for such longer period as
MB may determine.
3. After the expiration of this latter period, the notes
and coins which have not been exchanged shall cease
to be a liability of BSP and shall be demonetized
(NCBA, Sec. 57).
NOTE: Checks representing demand deposits do not have
legal tender power and their acceptance in the payment
of debts, both public and private, is at the option of the
creditor. However, a check which has been cleared and
credited to the account of the creditor shall be equivalent
to a delivery to the creditor of cash in an amount equal to
the amount credited to his account (NCBA, Sec. 60).
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
308
Period of replacement
1. Notes for any series or denomination – More than 5
years old
2. Coins – More than 10 years old
NOTE: Coins which show signs of filing, clipping or
perforation and notes which have lost more than 2/5s of
their surface or all of the signatures inscribed therein
shall be withdrawn from the circulation and demonitized
without compensation to the bearer.
Exercise of the power to determine rates of exchange
1. The MB shall determine the rates at which the BSP
shall buy and sell spot exchange, and shall establish
deviation limits from the effective exchange rate or
rates as it may deem proper.
2. The MB shall similarly determine the rates for other
types of foreign exchange transactions by the BSP,
including purchases and sales of foreign notes and
coins, but the margins between the effective
exchange rates and the rates thus established may
not exceed the corresponding margins for spot
exchange transactions by more than the additional
costs or expenses involved in each type of
transactions (NCBA, Sec. 74).
Instances where the Banko Sentral may exercise its
exchange regulating powers
1. The international reserve of the BSP falls to a level
which the Monetary Board considers inadequate to
meet the prospective demands
2. Whenever the international reserve appears to be in
imminent danger of falling to such a level
3. Whenever the international reserve is falling as a
result of payments or remittances abroad which, in
the opinion of the Monetary Board are contrary to
the national welfare (NCBA, Sec 67).
Actions taken by the Bangko Sentral when
international stability of Peso is threatened
1. Take such remedial measures as are appropriate and
within the powers granted to the Monetary Board,
and the BSP.
2. Submit to the President of the Philippines and the
Congress, and make public a detailed report which
shall include, as a minimum, a description and
analysis of:
a. The nature and causes of the existing or
imminent decline;
b. The remedial measures already taken or to be
taken by the Monetary Board
c. The monetary, fiscal or administrative
measures further proposed
d. The character and extent of the cooperation
required from other government agencies for
the successful execution of the policies of the
Monetary Board (NCBA, Sec. 67).
 BANKING LAWS
To ensure sufficiency of foreign exchange resources,
convertibility of the peso, and promotion of domestic
investment of bank resource, the Monetary Board may
require the banks to sell to the BSP or to other banks all
or part of their surplus holdings of foreign exchange.
(NCBA, Sec. 76)
Q: X maintains a savings deposit in the amount of
Php·1 Million with ABC Bank Corporation. X also has
obtained a loan from ABC Bank Corporation in the
amount of Php1 Million. In case of default: (2012 Bar)
a. ABC Bank can set-off the loan from the savings
account being maintained by X with ABC Bank.
b. Set-off is not possible because legal
compensation is not allowed in banking
transaction.
c. Deposit accounts are usually earmarked for
specific purpose hence offsetting is not legally
possible.
d. Off -setting is not possible because the obligation
of X is a "simple loan".
A: A. The relationship between a bank and its depositor is
that of creditor and debtor. For this reason, a bank has the
right to set-off the deposits in its hands for the payment of
a depositor’s indebtedness (Equitable PCI Bank v. Ng
Sheung Ngor, et al., 171545, December 19, 2007).
RATE OF EXCHANGE
The Monetary Board shall determine the exchange rate
policy of the country.
It shall:
1. Determine the rates at which the Bangko Sentral
shall buy and sell spot exchange, and shall establish
deviation limits from the effective exchange rate or
rates as it may deem proper. The Bangko Sentral
shall not collect any additional commissions or
charges of any sort, other than actual telegraphic or
cable costs incurred by it.
2. Determine the rates for other types of foreign
exchange transactions by the Bangko Sentral,
including purchases and sales of foreign notes and
coins, but the margins between the effective
exchange rates and the rates thus established may
not exceed the corresponding margins for spot
exchange transactions by more than the additional
costs or expenses involved in each type of
transactions. (NCBA, Sec. 74)
LAW ON SECRECY OF BANK DEPOSITS
(R.A. 1405, AS AMENDED)
PURPOSE
The purposes of RA 1405 are:
1. Encourage deposit in banking institutions; and
2. Discourage private hoarding so that banks may lend
such funds and assist in the economic development
of the country.
309
PROHIBITED ACTS
The following are the prohibited acts in RA 1405:
1. Examination/inquiry/looking into all deposits of
whatever nature with banks or banking institutions
in the Philippines (including investment in bonds
issued by the government) by any person,
government official or office (RA 1405, Sec. 2).
2. Disclosure by any official or employee of any banking
institution to any unauthorized person of any
information concerning said deposit (RA 1405, Sec.
3).
ACTS NOT COVERED BY THE PROHIBITION
Non-bank official or employee is not covered by the
prohibition. Neither is disclosure by a bank official or
employee of information about bank deposit in favor of a
co-employee in the course of the performance of his
duties covered by the prohibition.
Q: Manosa, a newspaper columnist, while making a
deposit in a bank, overheard a pretty bank teller
informing a co-employee that Gigi, a well-known
public official, has just a few hundred pesos in her
bank account and that her check will in all probability
bounce. Manosa wrote this information in his
newspaper column. Thus, Gigi filed a complaint with
the City Fiscal of Manila for unlawfully disclosing
information about her bank account.
a. Will the said suit prosper? Explain your answer.
b. Supposing that Gigi is charged with unlawfully
acquiring wealth under R.A. 1379 and that the
fiscal issued a subpoena duces tecum for the
records of the bank account of Gigi. May Gigi
validly oppose the said issuance on the ground
that the same violated the law on secrecy of bank
deposits? Explain your answer. (1990 Bar)
A:
a. No. The suit will not prosper. It is clear as provided
in section 3 of R.A. 1405 that it shall be unlawful for
any official or employee of a banking institution to
disclose to any person other than those mentioned in
section two of the said law any information
concerning said deposits. Manosa, as a columnist, is
not one of those persons contemplated under the
law. Furthermore, he merely overheard what
appeared to be a vague remark of the bank teller
therefore is not in a sense an inquiry or a disclosure.
b. No. Gigi cannot oppose the said issuance because the
law provides as an exception from the coverage of
R.A. 1405 that upon order of a competent court in
cases of anti-graft and corruption cases, the
examination of the deposits may be allowed.
DEPOSITS COVERED
1. All deposits of whatever nature with banks or
banking institutions found in the Philippines; or
2. Investments in bonds issued by the Philippine
government, its branches, and institutions. (R.A.
1405, Sec. 2)
3. Trust accounts are included in the scope of the law.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Meaning of the phrase "of whatever nature and kind"
R.A.1405 is no longer limited to deposits governed by the
law on loans giving rise to creditor-debtor relationship
but it covers fund of whatever nature so long as the bank
may use and utilize it in authorized loans.
Trust funds covered by the term “deposit”
The money deposited under the trust agreement (“Trust
account”) is intended not merely to remain with the bank
but to be invested by it elsewhere. To hold that this type
of account is not protected by R.A. 1405 would encourage
private hoarding of funds that could otherwise be
invested by banks in other ventures, contrary to the policy
behind the law (Ejercito v. Sandiganbayan, G.R. No.
157294-95, November 30, 2006).
NOTE: Despite such pronouncement that trust funds are
considered deposits, trust funds remain not covered by
PDIC.
Confidentiality granted by RA 1405 does NOT extend
to Letters of Credit and Trust Receipts
The confidentiality granted by the law does NOT extend
to other documents and records like L/C’s, TR’s, bank
drafts and promissory notes (Opinion of the Secretary of
Justice No. 5, Series of 1982; Opinion of the Secretary of
Justice No. 126, Series of 1989).
EXCEPTIONS
Instances where examination or disclosure of
information about deposits can be allowed (1990-
1992, 1994, 1995, 1997, 1998, 2000, 2001, 2004-
2006 Bar)
1. Upon written consent of the depositor (RA 1405,Sec.
2)
2. In cases of impeachment (ibid)
3. Upon order of competent court in cases of bribery or
dereliction of duty of public officials (ibid)
4. In cases where the money deposited or invested is
the subject matter of the litigation (ibid)
5. Upon order of the Commissioner of Internal Revenue
in respect of the bank deposits of a decedent for the
purpose of determining such decedent’s gross estate
(NIRC, Sec. 6[F][1])
6. Upon the order of the Commissioner of Internal
Revenue in respect of bank deposits of a taxpayer
who has filed an application for compromise of his
tax liability by reason of financial incapacity to pay
his tax liability (ibid)
7. The Commissioner of Internal Revenue is authorized
to inquire into bank deposits of a specific taxpayer
upon request for tax information from a foreign tax
authority pursuant to an international convention or
agreement on tax matters to which the Philippines is
a party (ibid)
8. In case of dormant accounts/deposits for at least 10
years under the Unclaimed Balances Act (Act No.
3936, Sec. 2)
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2016 GOLDEN NOTES
310
9. The prohibition against examination of bank deposit
does not preclude its garnishment to satisfy a
judgment against the depositor (Oñate v. Abrogar,
G.R. No. 107303, February 21, 1994)
10. Presidential Commission on Good Government
(PCGG) may require the production of bank records
material to its investigation (Opinion of the Secretary
of Justice, February 27, 1987)
11. The Anti-Money Laundering Council (AMLC) may
inquire into any deposit with any bank in case of
violation of the RA 9160 or the AMLA if there is
probable cause that it is related to an unlawful
activity (RA 9160, as amended, Sec. 11)
12. The PDIC and the BSP may examine deposit accounts
and all information related to them in case of a
finding of unsafe or unsound banking practices (RA
3591, as amended, Sec. 8)
13. With court order:
a. In cases of unexplained wealth under Sec. 8 of
the Anti-Graft and Corrupt Practices Act (PNB v.
Gancayco, L-18343, September 30, 1965)
b. In cases filed by the Ombudsman and upon the
latter’s authority to examine and have access to
bank accounts and records (Marquez v. Desierto,
GR 138569, September 11, 2003)
14. Without court order: If the AMLC determines that a
particular deposit or investment with any banking
institution is related to the following (HK-MADS):
a. Hijacking,
b. Kidnapping,
c. Murder,
d. Destructive Arson, and
e. Violation of the Dangerous Drugs Act.
f. Acts of Terrorism or in violation of Human
Security Act.
15. In case the law is repealed, superseded or modified
by any law to the contrary.
Q: The Bank Secrecy Law (RA 1405) prohibits
disclosing any information about deposit records of
an individual without court order except -
a. in an examination to determine gross estate of a
decedent.
b. in an investigation for violation of Anti-Graft and
Corrupt Practices.
c. in an investigation by the Ombudsman.
d. in an impeachment proceeding (2012 Bar)
A: C. In order that the Ombudsman may inspect a bank
deposit:
1. there must be a case pending in court,
2. the account must be clearly identified,
3. the inspection must be limited to the subject matter
of the pending case,
4. the inspection may cover only the account identified,
and
5. the bank personnel and the account holder must be
notified to be present during the inspection
(Marquez v. Desierto, G.R. No. 135882, June 27, 2001;
Office of the Ombudsman v. Ibay, G.R. No. 137538,
September 3, 2001).
 BANKING LAWS
Q: GP is suspected jueteng lord who is rumored to be
enjoying police and military protection. The envy of
many drug lords who had not escaped the dragnet of
the law, GP was summoned to a hearing of the
Committee on Racketeering and Other Syndicated
Crimes of the House of Representatives, which was
conducting congressional investigation-in aid of
legislation on the involvement of police and military
personnel, and possibly even of local government
officials, in the illegal activities of suspected gambling
and drug lords. Subpoenaed to attend the
investigation were officers of certain identified banks
with a directive to them to bring the records and
documents of bank deposits of individuals mentioned
in the subpoenas, among them GP. GP and the banks
opposed the production of the bank records of
deposits on the ground that no such inquiry is allowed
under the Law on Secrecy of Bank Deposits (R.A. 1405
as amended). Is the opposition of GP and the banks
valid? Explain. (2010 Bar)
A: Yes. The opposition is valid. GP is not a public official.
The investigation does not involve one of the exceptions
to the prohibition against the disclosure of any
information concerning bank deposits under the Law on
Secrecy of Bank Deposits. The Committee conducting the
investigation is not a competent court or the Ombudsman
authorized under the law involving such disclosure.
Q: An insurance company is deluded into releasing a
check to A for P35th o pay for Treasury Bills (T-Bills)
which A claims to be en route on board an armored
truck from a government bank. The check is delivered
to A who deposits it to his account with XYZ bank
before the insurance company realizes it as a scam.
Upon such realization, the insurance company files an
action against A for recovery for the amount
defrauded and obtains a writ of preliminary
attachment. In addition to the writ, the Bank is also
served a subpoena to examine the account records of
A. The Bank declines to provide any information in
response to the writ and moves to quash subpoena in
invoking secrecy of bank deposits under R.A. 1405
and a) not respond to the writ b)quash the subpoena
for examination? (1998 Bar)
A: Yes. Whether the transaction is considered a sale of
money placement does not make the money subject
matter of litigation within the meaning of Section 2 of R.A.
1405 which prohibits the disclosure or inquiry into bank
deposits except “in cases where the money deposited or
invested is the subject matter of litigation” nor will it
matter whether the money was “swindled”.
Foreign currency deposits
Foreign currency deposits are covered by R.A. 6426
otherwise known as the “Foreign Currency Deposits Act”.
Secrecy of foreign currency deposits
GR: Foreign currency deposits cannot be inquired or
looked into. All foreign currency deposits are absolutely
confidential (RA 6426, Sec. 8).
311
RA 6426 is a special law designed especially for foreign
currency deposits in the Philippines. RA 1405 which
covers all bank deposits in the Philippines is the general
law which does not nullify the special law on foreign
currency deposits. The surety which issued a bond to
secure the obligation of the principal debtor cannot
inquire into the foreign currency deposits of the debtor
even if its purpose is to determine whether or not the loan
proceeds were used for the purpose specified in the
surety agreement. The foreign currency deposits cannot
be examined without the consent of the depositor. The
subpoena issued by the bank should be quashed because
foreign currency deposits are not subject to court order
except for violation of the anti-money laundering law
(GSIS v. Court of Appeals GR 189206, June 8, 2011, in Divina,
2014).
XPNs:
1. The depositor has given his written permission
(ibid.)
2. Where the funds deposited in a joint foreign currency
savings account belonged exclusively to one of the
depositors and were held in trust for him by the other
depositor and the other depositor unilaterally closed
the joint account and transferred the funds to her
personal account, the latter cannot invoke the
exemption from court processes under RA 6426
because she is not the owner of the deposit in the
account. Consequently, the depositor who owned the
funds can have her enjoined from making
withdrawals from her personal account (Van Twest v.
Court of Appeals, G.R. No. 106235, February 10, 1994).
3. A father who sued his daughter for illegally
withdrawing funds from his foreign currency deposit
and transferring to another bank in the name of her
sister, can inquire into the deposit of the sister,
because the money deposited belongs to him (China
Banking Corp. v. CA, G.R. No. 140687, December 18,
2006).
4. The exemption from court process of foreign
currency deposits under RA 6426 cannot be invoked
by a foreign transient who raped a minor, escaped
and was held liable for damages to the victim. The
garnishment of his foreign currency deposit should
be allowed to prevent an injustice and for equitable
grounds. The law was enacted to encourage foreign
currency deposit and not to benefit a wrongdoer
(Salvacion v. Central Bank of the Philippines, G.R. No.
94723, August 21, 1997).
5. The Commissioner of Internal Revenue is authorized
to inquire into bank deposits of the following:
a. A decedent to determine his estate; and
b. Any taxpayer who has filed for an application for
compromise of his tax liability
c. A specific taxpayer upon request for tax
information from a foreign tax authority
pursuant to an international convention or
agreement on tax matters to which the
Philippines is a party. (NIRC, Sec. 6 [f])
6. AMLC may inquire into any deposit with a bank or
financial institution in case of violation of RA 9160 if
there is probable cause that it is related to an
unlawful activity (RA 9160, Sec. 11).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
7. Upon ex parte application by a law enforcer which are all in US Dollars. The police want to open
authorized by the Anti-Terrorism Council, the said account to know if there are really deposits in big
justices of the CA designated as special court to amounts. Which statement is most accurate?
handle anti-terrorism cases may authorize the
a. The same rules under Secrecy of Bank Deposit
examination of deposits in a financial institution
Act will apply.
upon finding probable cause of the commission of
b. An approval from the Monetary Board is
terrorism or conspiracy to commit terrorism (RA
9372, Sec. 27-28). necessary to open the account.
c. Because the deposit is in US Dollars, it is covered
8. PDIC and BSP may examine deposit accounts and all
by the Foreign Currency Deposit Act which allows
information related to them in case of a finding of
disclosure only upon the written permission of
unsafe or unsound banking practices (RA 3591, as
the depositor.
amended, Sec. 8).
d. Approval from the Court is necessary to order
9. AMLC can investigate (a) any property of funds
disclosure of the account (2012 Bar).
related to financing terrorism; (b) property or funds
of any person if there is probable cause to believe he
A: C. The deposit, being in US Dollars, is covered by the
is committing or attempting or conspiring to commit
Foreign Currency Deposit Act which allows disclosure
terrorism or financing terrorism (RA 10168, Sec. 10).
only upon the written permission of the depositor.
Q: Michael withdrew without authority funds of the
A bank can be compelled to disclose the records of the
partnership in the amounts of P500th and US$50th
accounts of a depositor under the investigation for
for services he claims rendered for the benefit of the
unexplained wealth
partnership. He deposited the P 500th in his personal
peso current account with Prosperity Bank and the
Since cases of unexplained wealth are similar to cases of
US$50th in his personal foreign currency savings
bribery and dereliction of duty, no reason is seen why it
account with Eastern Bank. The partnership
cannot be excepted from the rule making bank deposits
instituted an action in court against Michael,
confidential. In this connection, inquiry into illegally
Prosperity, and Eastern to compel Michael to return
acquired property in anti-graft cases extends to cases
the subject funds to the partnership and pending
where such property is concealed by being held or
litigation to order both banks to disallow any
recorded in the name of other persons. This is also
withdrawal from his accounts. At the initial hearing of
because the Anti-Graft and Corrupt Practices Act, bank
the case, the court ordered Prosperity to produce the
deposits shall be taken into consideration in determining
records of his Michael’s peso current account and
whether or not a public officer has acquired property
Eastern to produce the records of his foreign currency
manifestly out of proportion with his lawful income (PNB
savings account. Can the court compel Prosperity and
v. Gancayco, G.R. No. L-18343, September 30, 1965).
Eastern to disclose the bank deposits of Michael?
Discuss fully. (1995 Bar)
In an action filed by the bank to recover the money
transmitted by mistake, the bank is allowed to
A: Yes, with regard to Michael’s peso current account.
present the accounts which it believed were
This is pursuant to Section 2 of RA 1405 which allows the
responsible for the acquisition of the money
disclosure of bank deposits in case where the money
deposited is the subject matter of litigation. However with
RA 1405 allows the disclosure of bank deposits in cases
regard to his foreign currency savings account, the
where the money deposited is the subject matter of
disclosure cannot be allowed. Pursuant to the Foreign
litigation. In an action filed by the bank to recover the
Currency Law, the exemption to the prohibition against
money transmitted by mistake, necessarily, an inquiry
disclosure of information concerning foreign bank
into the whereabouts of the amount extends to whatever
deposits is to acquire the written consent of the depositor.
is concealed by being held or recorded in the name of the
persons other than the one responsible for the illegal
Q: A, an individual, secured a loan from XYZ Company.
acquisition.
C, a surety company, issued a bond to further secure
the obligation. A has dollar deposits with ABC Bank.
Q: Socorro received $10,000 from a foreign bank
Can C inquire to ABC Bank about the foreign currency
although she was entitled only to $1,000. In an
deposits of A to determine whether or not the loan
apparent plan to conceal erroneously sent amount,
proceeds were used for the purpose specified in their
she opened a dollar account with her local bank,
surety agreement?
deposited $ 10,000 and issued 4 checks in the amount
of $2,000 and 1 check for $1,000 each payable to
A: No. The surety company which issued the bond cannot
different individuals who deposited the same in their
inquire into the foreign currency deposits. It cannot be
respective dollar accounts with different local banks.
examined without the consent of the depositor except in
The sender bank then brought a civil suit before the
certain situations like violation of anti-money laundering
RTC for the recovery of erroneously send amount. In
law (GSIS v. CA, G.R. No. 189206, June 8, 2011).
the course of trial, the sender presented testimonies
of bank officials to show that the funds were, in fact,
Q: X, a private individual, maintains a dollar deposit
deposited in a bank by Socorro and paid out to several
with ABC Bank. X is suspected to be the leader of a
persons, who participated in the concealment and
Kidnap for Ransom Gang and he is suspected of
dissipation of the amount that Socorro had
depositing all ransom money in said deposit account
erroneously received. Socorro moved to strike out the

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2016 GOLDEN NOTES
312
 BANKING LAWS
testimonies from the record invoking the law on
secrecy of bank deposits. If you were the Judge, would
you issue and order to strike them out? Why? (1992
Bar)
A: If I am the judge I would not issue an order to strike
them out. The testimonies of the bank officials showing
that the funds were in fact deposited in a bank by Socorro
and paid out to several persons, who participated in the
concealment and dissipation of the amount that Socorro
had erroneously received, were presented in the course of
the trial. Therefore, the said testimonies must be
considered as involved in the litigation. In the case of
Mellon Bank v. Magsino, G.R. No. 71479, October 18, 1990,
it was held that R.A. 1405 allows the disclosure of bank
deposits in cases where the money deposited is the
subject matter of litigation. In an action filed by a bank to
recover money it transmitted by mistake, necessarily, an
inquiry to its whereabouts of the amount extends to
whatever concealed by, being held or recorded in the
name of the persons other than the one responsible for
illegal acquisition. Hence, in the case at bar, the disclosure
should be allowed and it should not be subject to an order
to strike out.
Q: The Law in Secrecy of Bank Deposits provides that
all deposits of whatever nature with banks or banking
institutions are absolutely confidential in nature and
may not be examined, inquired or looked into by any
person, government official, bureau or office.
However, the law provides exceptions in certain
instances. Which of the following may not be among
the exceptions:
1. In cases of impeachment
2. In cases involving bribery
3. In cases involving BIR inquiry
4. In cases of anti-graft and corrupt practices
5. In cases where the money involved is the subject
of litigation.
Explain your answer or choice briefly (2004 Bar)
A: Under Section 6 (F) of the NIRC, the CIR can inquire into
the deposits of a decedent for the purpose of determining
the gross estate of such decedent. Apart from this case, a
BIR inquiry into bank deposits cannot be made. Thus,
exception 3 may not be always applicable. Turning to
exception 4, an inquiry into bank deposits is possible only
in prosecutions for unexplained wealth under the Anti-
Graft and Corrupt Practices Act, according to the Supreme
Court in the cases of Philippine National Bank v. Gancayco,
G.R. No. L-18343, September 30, 1965 and Banco Filipino
Savings and Mortgage Bank v. Purisima, G.R. No. L-56429,
May 28, 1988. However, all other cases of anti-graft and
corrupt practices will not warrant an inquiry into bank
deposits. Thus, exception 4 may not always be applicable.
Like any other exception, it must be interpreted strictly.
Exceptions 1, 2 and 5, on the other hand, are provided
expressly in the Law on Secrecy of Bank Depositors. They
are available to depositors at all times.
Q: Miguel, a special customs agent is charged before
the Ombudsman with having acquired property out of
proportion to his salary, in violation of the Anti-Graft
and Corrupt Practices Act. The Ombudsman issued a
313
subpoena duces tecum to the Banco De Cinco
commanding its representative to furnish the
Ombudsman records of transactions by or in the
name of Miguel, his wife and children. A second
subpoena was issued expanding the first by including
the production of records of friends of Miguel in said
bank and in all its branches and extension offices,
specifically naming them, Miguel moved to quash the
subpoenas arguing that they violate the Secrecy of
Bank Deposits Law. In addition, he contends that the
subpoenas are in the nature of - fishing expedition or
general warrants and are constitutionally
impermissible with respect to private individuals
who are not under investigation. Is Miguel’s
contention tenable?
A: No. The contention of Miguel is not tenable. In the case
of Banco Filipino v. Purisima, it was held that the inquiry
into illegally acquired property-or property not
legitimately acquired- extends to cases where such
property is concealed by being held or recovered in the
name of other persons. This proposition is made clear by
RA 3019 which quite categorically states that the term
“legitimately acquired property of a public officer or
employee shall not include property unlawfully acquired
by the respondent, but its ownership is concealed by its
being recorded in the name of, or held by, respondent’s
spouse, ascendants, descendants, relatives or any other
persons. To sustain the petitioner’s theory, and restrict
the inquiry only to property held by or in the name of the
government official or employee, or his spouse and
unmarried children is unwarranted in the light of the
provisions of the statutes in question, and would make
available to persons in government who illegally acquire
property an easy and fool-proof means of evading
investigation and prosecution; all they have to do would
be to simply place the property in possession or name of
persons other than their spouse and unmarried children.
This is an absurdity that we will not ascribe to the
lawmakers.
GARNISHMENT OF DEPOSITS,
INCLUDING FOREIGN DEPOSITS
Garnishment of a bank deposit does not violate the
law
The prohibition against examination or inquiry does not
preclude its being garnished for satisfaction of judgment.
The disclosure is purely incidental to the execution
process and it was not the intention of the legislature to
place bank deposits beyond the reach of judgment
creditor (PCIB v. CA, G.R. No. 84526, January 28, 1991).
Garnishment of foreign currency deposits
GR: Foreign currency deposits shall be exempt from
attachment, garnishment, or any other order or process of
any court, legislative body, government agency or any
administrative body whatsoever (RA 6426, Sec 8).
XPN: The application of Sec. 8 of RA 6426 depends on the
extent of its justice. The garnishment of a foreign currency
deposit should be allowed to prevent injustice and for
equitable grounds, otherwise, it would negate Article 10
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
of the New Civil Code which provides that “in case of
doubt in the interpretation or application of laws, it is
presumed that the lawmaking body intended right and
justice to prevail (Salvacion v. Central Bank of the
Philippines, G.R. 94723, August 21, 1997).
The foreign currency deposit of a transient foreigner
who illegally detained and raped a minor Filipina can
be garnished to satisfy the award for damages to the
victim
The exemption from garnishment of foreign currency
deposits under R.A. 6426 cannot be invoked to escape
liability for the damages to the victim. The garnishment of
the transient foreigner’s foreign currency deposit should
be allowed to prevent injustice and for equitable grounds.
The law was enacted to encourage foreign currency
deposit and not to benefit a wrongdoer (Salvacion v.
Central Bank of the Philippines, G.R. 94723, August 21,
1997).
Penalties for violation of R.A. 1405
1. Imprisonment of not more than five (5) years
2. Fine of not more than P20,000.00
3. Both, in the discretion of the court (RA 1405, Sec. 5).
Q: R.A. 6832 creating a Commission to conduct a
Thorough Fact-Finding Investigation of the failed
Coup d’etat of December 1989, recommend measures
to prevent the occurrence of similar attempts at a
violent seizure of power and for other purposes,
provides that the Commission may ask the Monetary
Board to disclose information on and/or to grant
authority to examine any bank deposits, trust or
investment funds, or banking transactions in the
name of and/or utilized by a persons, natural or
juridical, under investigation by the Commission, in
any bank or banking institution in the Philippines,
when the Commission has reasonable ground to
believe that said deposits, trust or investment funds,
or banking transactions have been used in support or
in furtherance of the objectives of the said coup d’etat.
Does the above provision not violate the Law on
Secrecy of Bank Deposits (R.A. 1405)? (1991 Bar)
A: The above provision does not violate RA 1405 because
the enactment of RA 6832 is valid exercise of police
power. RA 1405 is in itself a statutory enactment which
can be validly modified, amended or repealed by a
subsequent law. The Secrecy of Bank Deposits Act did not
amount to a contract between the depositors and
depository banks within the meaning of the non-
impairment clause of the Constitution. Even if it did, the
police power of the State is superior to the non-
impairment clause.
GENERAL BANKING LAW OF 2000 (RA 8791)
Policy of the state behind the General Banking Act (RA
8791)
The State recognizes the vital role of banks in providing
an environment conducive to the sustained development
of the national economy and the fiduciary nature of
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
314
banking that requires high standards of integrity and
performance. In furtherance thereof, the State shall
promote and maintain a stable and efficient banking and
financial system that is globally competitive, dynamic and
responsive to the demands of a developing economy (RA
8791, Sec 2).
DEFINITION AND CLASSIFICATION OF BANKS
Bank
A bank is an entity engaged in the lending of funds
obtained from the public in the form of deposits.
Elements for an entity to be considered doing
business as a bank
1. The entity is engaged in the lending of funds
2. Funds obtained from the public with at least 20
depositors
3. Funds are in the form of deposits
NOTE: A transaction involving not a loan but purchase of
receivables at a discount within the purview of investing,
reinvesting, or trading in securities which an investment
company may perform is not banking.
Extent of ownership of foreign individuals and non-
bank corporations in a bank
Foreign individuals may own or control up to forty
percent (40%) of the voting stock of a domestic bank
(GBL, Sec 2).
Extent of ownership of a non-banking corporations in
a bank
GR: A corporation may only own 40% of the bank
XPNs:
1. A universal bank can own up to 100% of a thrift bank
2. A corporation whose shares are listed in the stock
exchange can own up to 60% of the bank. This
privilege can be exercised only once.
3. If the corporation is in existence for 10 years it can
own up to 60% of the bank. This privilege can be
exercised only once.
4. Under Foreign Bank Liberalization Law (RA 7721),
the Monetary Board may authorize foreign banks to
operate in the Philippines.
Ownership of foreign individuals in a bank
The percentage of foreign-owned voting stocks in a bank
shall be determined by the citizenship of the individual
stockholders in that bank. The citizenship of the
corporation which is a stockholder in a bank shall follow
the citizenship of the controlling stockholders of the
corporation, irrespective of the place of incorporation
(GBL, Sec 2).
Classifications of banks (2002, 2010 Bar)
1. Universal banks- Primarily governed by the GBL.
They can exercise the powers of an investment house
 BANKING LAWS
and invest in non-allied enterprises and have the
highest capitalization.
2. Commercial banks- Ordinary banks governed by the
GBL which have a lower capitalization requirement
than universal banks and can neither exercise the
powers of an investment house nor invest in non-
allied enterprises.
3. Thrift banks – These are a) Savings and mortgage
banks; b) Stock savings and loan associations; and c)
Private development banks, which are primarily
governed by the Thrift Banks Act (RA 7906).
4. Rural banks – These are mandated to make needed
credit available and readily accessible in the rural
areas on reasonable terms and which are primarily
governed by the Rural Banks Act of 1992 (RA 7353).
5. Cooperative banks – Banks whose majority shares are
owned and controlled by cooperatives primarily to
provide financial and credit services to cooperatives.
It shall include cooperative rural banks. They are
governed primarily by the Cooperative Code (RA
6938).
6. Islamic banks – Banks whose business dealings and
activities are subject to the basic principles and
rulings of Islamic Shari’ a, such as the Al Amanah
Islamic Investment Bank of the Philippines which
was created by RA 6848.
7. Other classification of banks as determined by the
Monetary Board of the BSP

Universal banks vs. Commercial banks vs. Thrift banks

UNIVERSAL BANKS COMMERCIAL BANKS THRIFT BANKS

Governing Laws General Banking Law (GBL)
1. Has the authority to exercise
the powers of a commercial
bank.
2. To act as an investment house
– a corporation that sells and
guarantees sale of securities and
Powers shares of stocks. i.e. Petron will
tap an investment house in
order to sell its stocks.
3. To engage in a non-allied
undertaking – which is not
related at all to banking.
e.g. Realty
4.95 Billion
Capitalization
Can be a stock holder in both
Equity Investment allied and non-allied
undertaking
Can invest but shall not exceed
Non- Allied 25% of the investee (receiving)
Transaction corporation.
GBL Thrift Banks Act (R.A. 7906)
To engage in allied All the powers of a
undertakings and, in addition commercial bank, except:
to the general powers incident
to a corporation, may exercise 1. To issue imported LC
all such powers as may be
2.To accept or open
necessary to carry on the
checking account except
business of commercial
with prior approval by the
banking.
Monetary Board (MB
requires at least a net asset
NOTE: Allied undertakings are
worth of 28M)
those activities or entities
which enhance or
complement banking.
2.4 Billion 1. Metro Manila – 1 Billion
2. Cebu and Davao – 500
Million
3. Elsewhere 250 Million
(BSP Circular No. 0715, Apr
2011)
Only allied undertaking Only allied undertaking
Cannot invest Cannot invest

Total Amount of Not to exceed 50% of the bank’s Not to exceed 35% of bank’s Not to exceed 35% of bank’s
Investment Equity net worth. net worth. net worth.
Single Equity Not to exceed 25% of bank’s net worth
Investment

UNIVERSITY OF SANTO TOMAS

315 FACULTY OF CIVIL LAW
 MERCANTILE LAW
DISTINCTION OF BANKS FROM QUASI-BANKS AND
TRUST ENTITIES
Quasi-bank
These are entities engaged in the borrowing of funds
through the issuance, endorsement or assignment with
recourse or acceptance of deposit substitutes for
purposes of re-lending or purchasing of receivables and
other obligations (GBL, Sec 4). Unlike banks, quasi-banks
do not accept deposits. Neither are funds obtained
insured with the PDIC.
Trust entities
These are entities engaged in trust business that act as a
trustee or administer any trust or hold property in trust
or on deposit for the use, benefit, or behalf of others (GBL,
Sec. 79). A bank does not act as a trustee.
Financial intermediaries
Persons or entities whose principal functions include the
lending, investing, or placement of funds on pieces of
evidence of indebtedness or equity deposited with them,
acquired by them or otherwise coursed through them,
either for their own account or for the account of others.
Deposit substitutes
It is an alternative form of obtaining funds from the
public, other than deposits, through the issuance,
endorsement, or acceptance of debt instruments, for the
borrower's own account, for the purpose of relending or
purchasing of receivables and other obligations. These
instruments may include, but need not be limited to,
banker’s acceptances, promissory notes, participations,
certificates of assignment and similar instruments with
recourse, and repurchase agreements.
Q: XYZ Corporation is engaged in lending funds to
small vendors in various public markets. To fund the
lending, XYZ Corporation raised funds through
borrowings from friends and investors. Which
statement is most accurate? (2012 Bar)
a. XYZ Corporation is a bank.
b. XYZ Corporation is a quasi-bank.
c. XYZ Corporation is an Investment Company.
d. XYZ is none of the above.
A: b. XYZ Corporation is a quasi-bank
BANK POWERS AND LIABILITIES
CORPORATE POWERS
1. All powers provided by the corporation code, like
issuance of stocks and entering into merger or
consolidation with other corporation or banks.
2. It can only acquire real property when it is needed
for business, in settlement of debt incurred in the
course of the business, property as may be
mortgaged to it to secure a debt in good faith and
property it may acquire during execution sale to
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
316
satisfy judgment. Banks cannot acquire real property
in settlement of a civil liability arising from crime.
3. A universal and commercial bank can both invest in
equity but only universal bank is allowed to invest in
equity of non-allied enterprises.
BANKING AND INCIDENTAL POWERS
Certificate of Authority to Register
This is a requirement before a bank may register or
amend their articles of incorporation with SEC. It is issued
by the Monetary Board (GBL, Sec. 14). The following must
be proven by the bank to satisfy the Monetary Board and
in order for the latter to grant such certificate:
1. All requirements of existing laws and regulations to
engage in the business for which the applicant is
proposed to be incorporated have been complied
with
2. That the public interest and economic conditions,
both general and local, justify the authorization
3. The amount of capital, the financing, organization,
direction and administration, as well as the integrity
and responsibility of the organizers and
administrators reasonably assure the safety of
deposits and the public interest. (ibid).
General powers and functions of a bank
1. Accepting drafts and issuing letters of credit
2. Discounting and negotiating promissory notes,
drafts, bills of exchange and other instrument
evidencing debt
3. Accepting or creating demand deposits, receiving
other types of deposit and deposit substitutes
4. Buying and selling FOREX and gold or silver bullion
5. Acquiring marketable bonds and other debt
securities
6. Extending credit
7. Determination of bonds and other debt securities
eligible for investment including maturities and
aggregate amount of such investment, subject to such
rules as the Monetary Board may promulgate.
8. And all other powers as may be necessary to carry on
the business of a bank (GBL, Sec. 29).
Rules regarding the issuance of stocks by a bank
1. The Monetary Board may prescribe rules and
regulations on the types of stock a bank may issue.
2. Banks shall issue par value stocks only (GBL, Sec. 9).
3. GR: No bank shall purchase or acquire shares of its
own capital stock or accept its own shares as a
security for a loan.
XPN: When authorized by the Monetary Board.
NOTE: That in every case the stock so purchased or
acquired shall, within six months from the time of its
purchase or acquisition, be sold or disposed of at a
public or private sale. (GBL, Sec. 10)
4. Foreign individuals and non-bank corporations may
own or control up to 40% of the voting stock of a
 BANKING LAWS
domestic bank. This rule shall apply to Filipinos and
domestic non-bank corporations.
NOTE: The percentage of foreign-owned voting
stocks in a bank shall be determined by the
citizenship of the individual stockholders in that
bank. The citizenship of the corporation which is a
stockholder in a bank shall follow the citizenship of
the controlling stockholders of the corporation,
irrespective of the place of incorporation. (GBL, Sec
11)
5. Stockholdings of individuals related to each other
within the fourth degree of consanguinity or affinity,
legitimate or common-law, shall be considered
family groups or related interests and must be fully
disclosed in all transactions by such corporations or
related groups of persons with the bank. (GBL, Sec
12)
6. Two or more corporations owned or controlled by
the same family group or same group of persons
(Corporate Stockholdings) shall be considered
related interests and must be fully disclosed in all
transactions by such corporations or related group of
persons with the bank. (GBL, Sec 13)
Instances when a bank is prohibited from declaring
dividends
1. Its clearing account with the Bangko Sentral is
overdrawn; or
2. It is deficient in the required liquidity floor for
government deposits for five or more consecutive
days, or
3. It does not comply with the liquidity
standards/ratios prescribed by the Bangko Sentral
for purposes of determining funds available for
dividend declaration; or
4. It has committed a major violation as may be
determined by the Bangko Sentral (GBL, Sec. 57).
Independent directors in banks
Sec. 16 of the GBL provides for two (2).
Effect of merger or consolidation of banks to the
number of directors allowed
The number of directors may be more than 15 but should
not exceed 21 (GBL, Sec. 17).
Q: XXX Bank Corporation and ZZZ Corporation were
merged into XX ZZ Bank Corporation. So as not to
create any unnecessary conflict, all the former
directors of both banks wanted to be appointed
/elected as members of the Board of Directors of the
merged bank. Each bank used to have eleven (11)
members of the board. The maximum number of
directors of the merged bank is - (2012 Bar)
A: C. In case of a merged bank, the maximum number of
directors is 21.
Limitation on the grant of compensation to the
directors by the Monetary Board
317
The Monetary Board may limit the grant of compensation
to the directors of a bank only in exceptional cases and
when the circumstances warrant, such as but not limited
to the following:
1. When a bank is under comptrollership or
conservatorship
2. When a bank is found by the Monetary Board to be
conducting business in an unsafe or unsound manner
3. When a bank is found by the Monetary Board to be in
an unsatisfactory financial condition (GBL, Sec. 18).
DILIGENCE REQUIRED BY BANKS
Degree of diligence required of banks in handling
deposits
Banks are expected to exercise extraordinary diligence in
its dealings with depositors. Consequently, the diligence
required of banks is more than that of a Roman pater
familias or a good father of a family (PCI Bank v Balcameda
G.R. No. 158143, September 21, 2011).
Q: FFCCI opened a savings/current and dollar savings
account PNB at its Timog Avenue Branch. Its
President Felipe and Secretary-Treasurer Angelita
were the named signatories for the said accounts.
While Felipe and Angelita were thus out of the
country, applications for cashiers and managers
checks bearing Felipe’s signature were presented to
and both approved by the PNB. When Angelita
returned to the country, she noticed the deductions of
P9,950,000.00 and P3,260,500.31. Claiming that
these were unauthorized and fraudulently made,
FFCCI requested PNB to credit back and restore to its
account the value of the checks. PNB refused, and thus
constrained [FFCCI] filed the instant suit for damages
against the PNB and its own accountant Aurea
Caparas. On its part, PNB alleged that it exercised due
diligence in handling the account of FFCCI; that the
applications for managers check have passed through
the standard bank procedures and it was only after
finding no infirmity that these were given due course;
that In fact, it was no less than Caparas, the
accountant of FFCCI, who confirmed the regularity of
the transaction. Is PNB guilty of negligence in
handling FFCCI’s account?
A: As between a bank and its depositor, where the bank’s
negligence is the proximate cause of the loss and the
depositor is guilty of contributory negligence, the greater
proportion of the loss shall be borne by the bank. The
bank was negligent because it did not properly verify the
genuineness of the signatures in the applications for
manager’s checks while the depositor was negligent
because it clothed its accountant/bookkeeper with
apparent authority to transact business with the Bank and
it did not examine its monthly statement of account and
report the discrepancy to the Bank. The court allocated
the damages between the bank and the depositor on a 60-
40 ratio (Philippine National Bank v. FF Cruz and Company,
G.R. No. 173259, July 25, 2011, in Divina, 2014).
Degree of diligence required of banks with its other
dealings
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
The diligence more than that of a Roman pater familias
only applies only to cases where banks act under their
fiduciary capacity, that is, as depositary of the deposits of
their depositors. The same degree of diligence is not
expected to be exerted by banks in commercial
transactions (Reyes v CA G.R. No. 118492. August 15, 2001).
Q: On Oct. 10, 2002, a check in the amount of
P1,000,000.00 payable to MMGI was presented for
deposit and accepted at petitioner’s Kawit Branch.
The check, post-dated “Oct. 9, 2003”, was drawn
against the account of Silva with BPI Bel-Air Branch.
The check was cleared by BPI and ABC credited the
account of MMGI with P1,000,000.00. On Oct. 22,
2002, MMGI’s account was closed and all the funds
therein were withdrawn. A month later, Silva
discovered the debit of P1,000,000.00 from his
account. In response to Silva’s complaint, BPI credited
his account with the aforesaid sum.
On March 21, 2003, respondent returned a photocopy
of the check to petitioner for the reason: “Postdated.”
Petitioner, however, refused to accept and sent back
to respondent a photocopy of the check. Thereafter,
the check, or more accurately, the Charge Slip, was
tossed several times from ABC to BPI, and back to
ABC, until on May 6, 2003, BPI requested the PCHC to
take custody of the check. Acting on the request, PCHC
directed BPI to deliver the original check and
informed it of PCHC’s authority under CHOM No. 279
dated 06 September 1996 to split 50/50 the amount
of the check subject of a “Ping-Pong” controversy
which shall be implemented thru the issuance of
Debit Adjustment Tickets against the outward
demands of the banks involved. PCHC likewise
encouraged respondent to submit the controversy for
resolution thru the PCHC Arbitration Mechanism. The
latter rendered its Decision in favor of ABC and
against BPI. Respondent filed a motion for
reconsideration14 but it was denied by the PCHC
Board of Directors. The RTC affirmed with
modification the Arbitration Committee’s decision.
By its Decision, the CA set aside the RTC judgment and
ruled for a 60-40 sharing of the loss as it found
petitioner guilty of contributory negligence in
accepting what is clearly a post-dated check.
A: A collecting bank is guilty of contributory negligence
when it accepted for deposit a post-dated check
notwithstanding that said check had been cleared by the
drawee bank which failed to return the check within the
24-hour reglementary period. The collecting bank which
accepted a post-dated check for deposit and sent it for
clearing and the drawee bank which cleared and honored
the check are both liable to the drawer for the entire face
value of the check (Allied Banking Corporation v. Bank of
the Philippine Islands, G.R. No. 188363, February 27, 2013,
in Divina, 2014).
Being a banking institution, DBP, the mortgagee, owed it
to Guariña Corporation to exercise the highest degree of
diligence, as well as to observe the high standards of
integrity and performance in all its transactions because
its business was imbued with public interest. Yet, the
UNIVERSITY OF SANTO TOMAS
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318
bank failed in its duty to exercise the highest degree of
diligence by prematurely foreclosing the mortgages and
unwarrantedly causing the foreclosure sale of the
mortgaged properties despite the mortgagor not being
yet in default (DBP V. Guariña Agricultural and Realty
Development Corporaiton,G.R. No. 160758, January 15,
2014, in Divina, 2014).
Effect when the teller gave the passbook to a wrong
person
Banks must exercise a high degree of diligence in insuring
that they return the passbook only to the depositor of his
authorized representative. For failing to return the
passbook to authorized representative of the depositor,
the bank presumptively failed to observe such high degree
of diligence in safeguarding the passbook and insuring its
return to the party authorized to receive the same.
However, a bank’s liability may be mitigated by the
depositor’s contributory negligence such as allowing a
withdrawal slip signed by authorized signatories to fall
into the hands of an impostor (Consolidated Bank and
Trust Corporation v. CA, GR No, 138569, September
11, 2003).
The bank is liable when an employee encashed a
check without the required indorsement
The fiduciary nature of the relationship between the bank
and the depositors must always be of paramount concern
(Philippine Savings Bank v. Chowking, G.R. No. 177526, July
4, 2008).
NATURE OF BANK FUNDS AND BANK DEPOSITS
Deposit function of banks
The function of the bank to receive a thing, primarily
money, from depositors with the obligation of safely
keeping it and returning the same.
Kinds of deposits between a bank and its depositors
1. As debtor-creditor:
2. Special Kinds of Deposits
a. Demand deposits – all those liabilities of banks
which are denominated in the Philippine
currency and are subject to payment in legal
tender upon demand by representation of
checks.
b. Savings deposits – the most common type of
deposit and is usually evidenced by a passbook.
NOTE: The requirement of presentation of
passbooks is required by the Manual of Regulations
for Banks. A bank is negligent if it allows the
withdrawal without requiring the presentation of
passbook (BPI v. CA, GR No. 112392, February 29,
2000).
c. Negotiable order of withdrawal account (NOWA) –
Interest-bearing deposit accounts that combine
the payable on demand feature of checks and
investment feature of saving accounts.
 BANKING LAWS
d. Time deposit – an account with fixed term;
payment of which cannot be legally required
within such a specified number of days.
3. As trustee-trustor:
Trust account – a savings account, established under
a trust agreement containing funds administered by
the bank for the benefit of the trustor or another
person or persons.
4. As agent-principal:
a. Deposit of checks for collection
b. Deposit for specific purpose
c. Deposit for safekeeping
Types of deposit accounts
1. Savings
2. Current
3. Time
Deposit accounts may also be classified as:
1. Individual; or
2. Joint:
a. “And” account – the signature of both co-
depositors are required for withdrawals.
b. “And/or” account – either one of the co-
depositors may deposit and withdraw from
the account without the knowledge consent
and signature of the other.
Joint accounts may be subject of a survivorship
agreement whereby the co-depositors agree to
permit either of them to withdraw the whole deposit
during their lifetime and transferring the balance to
the survivor upon the death of one of them (Vitug v.
CA, G.R. No. 82027, March 29, 1990).
Anonymous account
GR: Anonymous accounts or those under fictitious names
are prohibited (R.A. 9160 as amended by R.A. 9194; BSP
Circular No. 251, July 21, 2000).
XPN: In case where numbered accounts is allowed such as
in foreign currency deposits. However, banks/non-bank
financial institutions should ensure that the client is
identified in an official or other identifying documents
(R.A. 6426 as amended, FCDA, Sec. 8).
Nature of a bank deposit
All kinds of bank deposits are loan. The bank can make use
as its own the money deposited. Said amount is not being
held in trust for the depositor nor is it being kept for
safekeeping (Tang Tiong Tick v. American Apothecaries,
G.R. No. 43682, March 31, 1938).
Mandamus will not lie in the enforcement of
obligations concerning deposit
All kinds of deposit are loans. Thus, the relationship being
contractual in nature, mandamus cannot be availed of
because mandamus will not lie to enforce the
319
performance of contractual obligations (Lucman v.
Alimatar Malawi, G.R. No. 159794, Dec. 19, 2006).
Contract between banks and depositors is not a trust
agreement
The fiduciary nature of the bank-depositor relationship
does not convert the contract between banks and
depositors to a trust agreement. Thus, failure by the bank
to pay the depositor is failure to pay simple loan, and not
a breach of trust (Consolidated Bank and Trust Corp. v. CA,
G.R. No. 138569, September 11, 2003).
Nature of safety deposit box
The contract for the use of a safety deposit box should be
governed by the law on lease.
In the case of Sia v. CA and Security Bank and Trust
Company and under the old banking law, a safety deposit
box is a special deposit. However, the new General
Banking Law, while retaining the renting of safe deposit
box as one of the services that the bank may render,
deleted reference to depository function (Divina,
Handbook on Philippine Commercial Law).
Q: After procuring a checking account, the depositor
issued several checks. He was surprised to learn later
that they had been dishonored for insufficient funds.
Investigation disclosed that deposits made by the
depositor were not credited to its account. Is the bank
liable for damages?
A: Yes, the depositor expects the bank to treat his account
with utmost fidelity, whether such account consist only of
a few hundred pesos or of millions. The bank must record
every single transaction accurately, down to the last
centavo, and as promptly as possible. This has to be done
if the account is to reflect at any given time the amount of
money the depositor can dispose of as he sees fit,
confident that the bank will deliver it as and to whomever
he directs. A blunder on the part of the bank, such as the
dishonor of the check without good reason, can cause the
depositor not a little embarrassment if not also financial
loss and perhaps even civil and criminal litigation (Simex
Intl. v. CA, G.R. No. 88013, March 19, 1990).
STIPULATION ON INTERESTS
Rules on stipulation of interests
Old rule
1. Central Bank Circular 416 – 12% per annum in cases
of:
a. Loans
b. Forbearance of money, goods and credits
c. Judgment involving such loan or forbearance, in
the absence of express agreement as to such rate
of interest
2. Interest accruing from unpaid interest– interest due
shall earn interest from the time it is judicially
demanded although the obligation may be silent
upon this point.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
NEW RULE
Through Circular No. 799, the Monetary Board declared
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% per annum
(Section 1, Circular 799, Series of 2013 amending Section 2
of Circular No. 905, Series of 1982).
This means that if the parties fail to state in writing the
interest payable on any of the transactions mentioned, or
on account of a court judgment involving a related money
claim, the imposable interest is 6% every year.
A bank forbidden by Central Bank to do business is
NOT obligated to pay interest on deposit
A bank lends money, engages in international
transactions, acquires foreclosed mortgaged properties
or their proceeds and generally engages in other banking
and financing activities in order that it can derive income
therefrom. Therefore, unless a bank can engage in those
activities from which it can derive income, it is
inconceivable how it can carry on as a depository
obligated to pay interest on money deposited with it
(Fidelity & Savings and Mortgage Bank v. Cenzon, G.R. No.
L-46208, April 5, 1990).
GRANT OF LOANS AND SECURITY REQUIREMENTS
RATIO OF NET WORTH TO TOTAL RISK ASSETS
Net worth
The total of the unimpaired paid-in surplus, retained
earnings and undivided profit, net of valuation reserves
and other adjustments as may be required by the BSP
(GBL, Sec. 24.2).
Risked based capital
The minimum ratio prescribed by the Monetary Board
which the net worth of a bank must bear to its total risk
assets which may include contingent accounts.
NOTE: The Monetary Board may require or suspend
compliance with such ratio whenever necessary for a
maximum period of one year and that such ratio shall be
applied uniformly to banks of the same category (GBL,Sec.
34).
Effect of non-compliance with the ratio
1. Distribution of net profits may be limited or
prohibited and MB may require that part or all of the
net profits be used to increase the capital accounts of
the bank until the minimum requirement has been
met; or
2. GR: Acquisition of major assets and making of new
investments may be restricted.
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
320
XPN: Purchases of evidence of indebtedness
guaranteed by the Government can be exempted
from restrictions (GBL, Sec. 34).
SINGLE BORROWER’S LIMIT
Limitations imposed upon banks with respect to its
loan function
1. GR: Single borrower’s limit – The total amount of
loans, credit accommodations and guarantees that
the bank could grant should at no time exceed 25%
of the bank’s net worth (GBL, Sec 35.1, 2002 Bar,
2015 Bar).
XPN:
a. As the Monetary Board may otherwise prescribe
for reasons of national interest
b. Deposits of rural banks with GOCC financial
institutions like LBP, DBP, and PNB.
2. The total amount of loans, credit accommodations
and guarantees prescribed in (a) may be increased
by an additional 10% of the net worth of such bank
provided that additional liabilities are adequately
secured by trust receipt, shipping documents,
warehouse receipts and other similar documents
which must be fully covered by an insurance (GBL,
Sec. 35.2).
3. Loans and other credit accommodations secured by
REM shall not exceed 75% of the appraised value of
the real estate security plus 60% of the appraised
value of the insured improvements (GBL, Sec. 37)
CM/intangible property such as patents, trademarks,
etc. shall not exceed 75% of the appraised value of the
security (GBL, Sec. 38).
4. Loans being contractual, the period of payment may
be subject to stipulation by the parties. In the case of
amortization, the amortization schedule has no fixed
period as it depends on the project to be financed
such that if it was capable of raising revenues, it
should be at least once a year with a grace period of
3 years if the project to be financed is not that
profitable which could be deferred up to 5 years if the
project was not capable of raising revenues (GBL, Sec.
44).
5. Loans granted to DOSRI:
a. Director
b. Officer
c. Stockholder, having at least 1% ownership over
the bank
d. Related Interests, such as DOS’s spouses, their
relatives within the first degree whether by
consanguinity or affinity, partnership whereby
DOS is a partner or a corporation where DOS
owns at least 20%.
Exclusions from the aforesaid loan limitations
Non-risk loans, such as:
1. Loans secured by obligations of the BSP or the
Philippine Government
2. Loans fully guaranteed by the Government
3. Loans covered by assignment of deposits maintained
in the lending bank and held in the Philippines
 BANKING LAWS
4. Loans, credit accommodations and acceptances
under letters of credit to the extent covered by
margin deposits
5. Other loans or credit accommodations which the MB
may specify as non-risk items.
Joint and solidary signature (JSS) practice
It is a common banking practice requiring as an additional
security for a loan granted to a corporation the joint and
solidary signature of a major stockholder or corporate
officer of the borrowing corporation (Security Bank v.
Cuenca, G.R. No. 138544, October 3, 2000).
RESTRICTIONS ON BANK EXPOSURE TO DOSRI
(DIRECTORS, OFFICERS, STOCKHOLDERS AND THEIR
RELATED INTERESTS)
Requirements that must be complied with in case of
DOSRI accounts (2002 Bar)
1. Procedural requirement - Loan must be approved by
the majority of all the directors not including the
director concerned. CB approval is not necessary;
however, there is a need to inform them prior to the
transaction. Loan must be entered in the books of the
corporation (GBL, Sec. 36).
2. Substantive requirement - Loan must not exceed the
paid in contribution and unencumbered deposits.
(Not to exceed 15% of the portfolio or 100% of the
net worth, whichever is lower) (GBL, Sec. 36 [4]).
In the case of Go v. Bangko Sentral ng Pilipinas, G.R.
No. 178429, October 23, 2009, it was held that the
requirements are: (1) Approval requirement which
means that the DOSRI transaction must be approved
by at least majority of the directors excluding the
director concerned. (2) Reportorial requirement
means that the transaction must be recorder in the
books of the bank and reported to the BSP. (3) Ceiling
requirement which means that the amount of the
loan shall not exceed the book valued of the paid-in
contribution and the amount of the unencumbered
deposits. Three different offenses are committed by
those who fail to observe the board approval,
reporting and ceiling requirements.
Effect of non-compliance with the foregoing
requirement
Violation of DOSRI is a crime and carries with it penal
sanction.
It does not make the transaction void but only renders the
responsible officers and directors criminally liable.
(Republic v. Sandiganbayan, G.R. No. 166859, 169203,
180702, April 12, 2011).
Transactions covered by the DOSRI regulation
The transactions covered are loan and credit
accommodation. Not being a loan, the ceiling will not
apply to lease and sale. However, it should still comply
with the procedural requirement.
321
Arms-length rule
It provides that any dealings of a bank with any of its
DOSRI shall be upon terms not less favorable to the bank
than those offered to others (GBL, Sec. 36 [2]).
The bank may terminate the loan and demand
immediate payment if the borrower used the funds
for purposes other than that agreed upon
If the bank finds that the borrower has not employed the
funds borrowed for the purpose agreed upon between the
bank and the borrower, the bank may terminate the loan
and demand immediate payment (Banco de Oro v. Bayuga,
G.R. No. L-49568, Oct. 17, 1979).
Q: Pio is the president of Western Bank. His wife
applied for a loan with the said bank to finance an
internet cafe. The loan officer told her that her
application will not be approved because the grant of
loand to related interests of bank directors, officers,
and stockholders is prohibited by the General
Banking Law. Explain whether the loan officer is
correct. (2006 Bar)
A: No. The loan officer should have advised the wife to ask
her husband to secure approval of the bank’s Board of
Directors for the intended loan and to limit the same in an
amount not to exceed its unencumbered deposits and
book value of its paid in capital contribution in the bank;
if the intended loan should exceed the foregoing limit, the
borrower should have the same secured by a non-risk
assets determined by the Monetary Board, unless the loan
shall be in the form of a fringe benefit. (GBL, Sec. 36)
A bank officer violates the DOSRI law when he acquires
bank funds for his personal benefit, even if such
acquisition was facilitated by a fraudulent loan
application. Directors, officers, stockholders, and their
related interests cannot be allowed to interpose the
fraudulent nature of the loan as a defense to escape
culapability or their circumvention of the law. The
prohibition under the law covers loan by a bank director
or officer which are made directly, indirectly, for himself
or as the representative or agent of others. At the same
time, he is liable for estafa through falsification of
commercial documents. The bank money which came to
his possession as a result of the fraudulent loan
application was not his. He remained bank’s fiduciary
with respect to that money, which makes it capable of
misappropriation or conversion in his hands (Soriano v.
People of the Philippines, et al., G.R. No. 162336, February
1, 2010, in Divina, 2014).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Basic Principles
INTELLECTUAL PROPERTY CODE
National Treatment - A Member country shall accord to
INTELLECTUAL PROPERTY RIGHTS IN GENERAL the nationals of other Member countries treatment no less
favorable than it accords to its own national with regard
INTELLECTUAL PROPERTY RIGHTS to the protection of intellectual property.

Coverage of intellectual property rights Most Favored Nation - Any advantage, favor, privilege or
immunity granted by a Member to the nationals of any
1. Copyright and Related Rights; other country shall be accorded immediately and
2. Trademarks and Service Marks; unconditionally to the nationals of all other Members
3. Geographic indications;
4. Industrial designs;
5. Patents;
6. Layout designs (Topographies) of Integrated
Circuits;
7. Protection of Undisclosed Information (TRIPS).

INTELLECTUAL
DEFINITION
PROPERTY RIGHTS
Copyright and Related exists over original and derivative intellectual creations in the literary and artistic domain
Rights protected from the moment of their creation.
Trademarks and Service any visible sign capable of distinguishing the goods (trademark) or services (service mark)
Marks of an enterprise and shall include a stamped or marked container of goods.
indications which identify a good as originating in the territory of a Member of the
Agreement, or a region or locality in that territory, where a given quality, reputation or
Geographic Indications
other characteristic of the good is essentially attributable to its geographical origin. (Article
22, TRIPS Agreement)
any composition of lines or colors or any three-dimensional form, whether or not
associated with lines or colors, provided that such composition or form gives a special
Industrial Designs
appearance to and can serve as pattern for an industrial product or handicraft. It must be
new or ornamental.
any technical solution of a problem in any field of human activity which is new, involves an
Patents inventive step and is industrially applicable. It may be, or may relate to, a product, or
process, or an improvement of any of the foregoing.
synonymous with 'Topography' and means the three-dimensional disposition, however
expressed, of the elements, at least one of which is an active element, and of some or all of
Layout Designs
the interconnections of an integrated circuit, or such a three-dimensional disposition
prepared for an integrated circuit intended for manufacture.
protection of information lawfully held from being disclosed to, acquired by, or used by
others without their consent in a manner contrary to honest commercial practices so long
as such information: (a) is secret in the sense that it is not, as a body or in the precise
Protection of Undisclosed configuration and assembly of its components, generally known among or readily
Information accessible to persons within the circles that normally deal with the kind of information in
question; (b) has commercial value because it is secret; and (c) has been subject to
reasonable steps under the circumstances, by the person lawfully in control of the
information, to keep it secret. (Article 39, TRIPS Agreement)
a plan or process, tool, mechanism or compound known only to its owner and those of his
employees to whom it is necessary to confide it. The definition also extends to: (a) a secret
formula or process not patented, but known only to certain individuals using it in
compounding some article of trade having a commercial value; or (b) any formula, pattern,
Trade Secrets
device, or compilation of information that: (1) is used in one's business; and (2) gives the
employer an opportunity to obtain an advantage over competitors who do not possess the
information. (Air Philippines Corporation v. Pennwell, Inc., G.R. No. 172835 December 13,
2007)

TECHNOLOGY TRANSFER ARRANGEMENTS property rights, including licensing of computer software

except computer software developed for mass market
Technology transfer arrangement (IPC, Sec. 4.2).

Contracts or agreements involving the transfer of Nature of technology transfer arrangement

systematic knowledge for the manufacture of a product,
the application of the process, or rendering of a service It is in the nature of a Voluntary License Contract. It is a
including management contracts; and the transfer, contract between an intellectual property right owner
assignment or licensing of all forms of intellectual (licensor) and a second party (licensee), authorizing the
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
322
 INTELLECTUAL PROPERTY CODE
latter to commercially exploit the same intellectual 3. Industrial Design – any composition of lines or colors
property right under specified terms and conditions or any three-dimensional form, whether or not
(Salao, 2012). associated with lines or colors, provided that such
composition or form gives a special appearance to
Undisclosed information and can serve as pattern for an industrial product or
handicraft. It must be new or ornamental (Sec. 112,
1. a secret in the sense that it is not, as a body or in 113 IPC).
precise configuration and assembly of components,
generally known among, or readily accessible to Generally speaking, an industrial design is the
persons within the circles that normally deal with the ornamental or aesthetic aspect of a useful article
kind of information in question; (Amador, 2007).
2. Has commercial value because it is a secret;
3. Has been subjected to reasonable steps under the An industrial design is not considered new if it differs
circumstances, by the person lawfully in control of from prior designs only in minor respects that can be
the information, to keep it a secret (TRIPS Agreement, mistaken as such prior designs by an ordinary
Article 39). observe (World Intellectual Property Organization,
2004).
Nature of undisclosed information or trade secret
PATENTABLE INVENTIONS
Those trade secrets are of a privileged nature. The
protection of industrial property encourages investments Patentable inventions
in new ideas and inventions and stimulates creative
efforts for the satisfaction of human needs. It speeds up Any technical solution of a problem in any field of human
transfer of technology and industrialization, and theresby activity which is new, involves an inventive step and is
bring about social and economic progress. industrially applicable. It may be, or may relate to, a
product, or process, or an improvement of any of the
Verily, the protection of industrial secrets is inextricably foregoing (IPC, Sec. 21).
linked to the advancement of our economy and fosters
healthy competition in trade (Air Philippines Corporation Product patent vs. Process patent
v. Pennswell, Inc., G.R. No. 172835, Dec. 13, 2007).
PRODUCT PATENT PROCESS PATENT
PATENTS The right to make, use, The right to restrain, prevent
sell, and import the or prohibit any unauthorized
General Principles product. person or entity from using the
process, and from
The primary purpose of the patent system is not the e.g. machine, a device, a manufacturing, dealing in,
reward of the individual but the advancement of the arts microorganism. using, selling or offering for
and sciences. The function of a patent is to add to the sum sale, or importing any product
of useful knowledge and one of the purposes of the patent obtained directly or indirectly
system is to encourage dissemination of information from such process. (IPC, Sec.
concerning discoveries and inventions (Manzano vs. Court 71)
of Appeals, G.R. No. 113388, September 5, 1997).
e.g. a method of use, a method
The patent law has a threefold purpose: of manufacturing, a non-
biological process, a
1. Patent law seeks to foster and reward invention; microbiological process.
2. It promotes disclosures of inventions to stimulate
further innovation and to permit the public to Improvement – enhancement or modification of any of
practice the invention once the patent expires; and the foregoing subject to patentability criteria.
3. The stringent requirements for patent protection
seek to ensure that ideas in the public domain remain Criteria for Patentability
there for the free use of the public (Pearl & Dean
(Phil.), Incorporated v. Shoemart, Incorporated, G.R. 1. Novelty – An invention shall not be considered new
No. 148222, August 15, 2003). if it forms part of a prior art (Sec. 23, IPC).
2. Inventive Step –if, having regard to prior art, it is not
Coverage of patents obvious to a person skilled in the art at the time of the
filing date or priority date of the application claiming
1. Invention – any technical solution of a problem in any the invention.
field of human activity which is new, involves an 3. Industrially Applicable – An invention that can be
inventive step and is industrially applicable. It may be, produced and used in any industry (IPC, Sec. 27).
or may relate to, a product, or process, or an
improvement of any of the foregoing (Sec. 21, IPC). The burden of proving want of novelty of an invention is
2. Utility Model – An invention qualifies for registration on the person who avers it and the burden is a heavy one
as a utility model if it is new and industrially which is met only by clear and satisfactory proof which
applicable. (Sec. 109, IPC)

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323 FACULTY OF CIVIL LAW
 MERCANTILE LAW
overcomes every reasonable doubt (Manzano v. CA, G.R.
No. 113388, Sept. 5, 1997).
Prior Art
a. Everything which has been made available to the
public anywhere in the world, before the filing date
or the priority date of the application claiming the
invention; and
b. The whole contents of an earlier published
Philippine application or application with earlier
priority date of a different inventor.
Only prior art made available to the public before the
filing date or priority date is considered in assessing
inventive step (Revised IRR for RA 8293, Rule 206).
Public disclosure
The ultimate goal of a patent system is to bring new
designs and technologies into the public through
disclosure; hence ideas, once disclosed to the public
without protection of a valid patent, are subject to
appropriation without significant restraint (Pearl & Dean
vs. Shoemart Inc., G.R. No. 148222, August 15, 2003).
GR: When a work has already been made available to the
public, it shall be non-patentable for absence of novelty.
XPNs: Non-prejudicial disclosure – the disclosure of
information contained in the application during the 12-
month period before the filing date or the priority date of
the application if such disclosure was made by:
1. The inventor;
2. A patent office and the information was contained:
a. In another application filed by the inventor and
should have not have been disclosed by the
office, or
b. In an application filed without the knowledge or
consent of the inventor by a third party which
obtained the information directly or indirectly
from the inventor;
3. A third party who obtained the information directly
or indirectly from the inventor (IPC, Sec. 25).
If the disclosure was made by the designer in the case of
industrial design, the period is 6 months. In other words,
the application must be filed within 6 months after
disclosure for it to be non-prejudicial.
Inventive step
GR: An invention involves an inventive step if, having
regard to prior art, it is not obvious to a person skilled in
the art at the time of the filing date or priority date of the
application claiming the invention (IPC Sec. 26).
XPN: In the case of drugs and medicines, there is no
inventive step if the invention results from the mere
discovery of a new form or new property of a known
substance which does not result in the enhancement of
the known efficacy of that substance (IPC, as amended by
R.A. 9502, Sec. 26.2).
UNIVERSITY OF SANTO TOMAS
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324
Test of Non-Obviousness
If any person possessing ordinary skill in the art was able
to draw the inferences and he constructs that the
supposed inventor drew from prior art, then the latter did
not really invent it.
Person skilled in the art
A person with ordinary skills in a certain art or field who
is aware of what is a common general knowledge in the
field at the time of the application. “He is presumed to
have knowledge of all references that are sufficiently
related to one another and to the pertinent art and to have
knowledge of all arts reasonably pertinent to the
particular problems with which the inventor was
involved. He is presumed also to have had at his disposal
the normal means and capacity for routine work and
experimentation” (Revised IRR for R.A. No. 8293, Rule 207).
A process pertaining to an improvement of the old
process of tile making is patentable
An improvement in the tile making process is indeed
inventive and goes beyond the exercise of mechanical
skill. The applicant has introduced a new kind of tile for a
new purpose. He has improved the old method of making
tiles and pre-cast articles which were not satisfactory
because of an intolerable number of breakages, especially
if deep engravings are made on the tile. He has overcome
the problem of producing decorative tiles with deep
engraving, but with sufficient durability (Aguas v. De Leon,
G.R. No. L-32160, January 30, 1982).
Utility model
A name given to inventions in the mechanical field.
Utility models differ from inventions for which patents for
invention are available mainly in two respects. First, the
technological progress required is smaller than the
technological progress (“inventive step”) required in the
case of an invention for which a patent for invention is
available. Second, the maximum term of protection
provided in the law for a utility model is generally much
shorter than the maximum term of protection provided in
the law for an invention for which a patent for invention
is available (WIPO Handbook, Chapter 2, “Fields of
Intellectual Property Protection”, WIPO Publication No.
489 (E), 2nd Edition, p. 40.).
The provisions regarding non-patentable subject-matter,
industrial applicability, novelty and sufficiency of
disclosure under invention patent will apply, mutatis
mutandis, to utility models (Revised Implementing Rules &
Regulations for RA 8293, pp. 36-38.).
Requisites for an invention to be considered as a
utility model
If it is new and industrially applicable. A model of
implement or tools of any industrial product even if not
possessed of the quality of invention but which is of
practical utility (IPC, Sec. 109.1).
 INTELLECTUAL PROPERTY CODE
Industrial Applicability NON-PATENTABLE INVENTIONS

An invention that can be produced and used in any Non-patentable inventions

industry meets the industrial application requirement of
patent registrability. This means an invention is not 1. Plant varieties or animal breeds or essentially
merely theoretical, but also has a practical purpose. If the biological process for the production of plants or
invention is a product, it should be able to produce a animals. This provision shall not apply to micro-
product and if the invention is a process, it should be able organisms and non-biological and microbiological
to lay out a process (WIPO, IP Handbook 2nd Edition, processes
Chapter 2: “Fields of Intellectual Property Protection” 2. Aesthetic creations
Publication No. 489 (E), p. 18.) 3. Discoveries, scientific theories and mathematical
methods
Term of a utility model 4. Schemes, rules and methods of performing mental
acts, playing games or doing business, and programs
7 years from date of filing of the application (IPC, Sec. for computers
109.3). 5. Anything which is Contrary to public order or
morality (IPC as amended by R.A. 9502, Sec. 22).
Other forms of patentable inventions 6. Methods for treatment of the human or animal body
7. In the case of drugs and medicines, mere discovery of
1. Integrated circuit – A product, in its final form, or an a new form or new property of a known substance
intermediate form, in which the elements, at least which does not result in the enhancement of the
one of which is an active elements and some of all of efficacy of that substance
the interconnections are integrally formed in and or
on a piece of material, and in which is intended to Patentability of computer programs
perform an electronic function.
GR: Computer programs are not patentable but are
2. Layout design/topography – The three copyrightable.
dimensional disposition, however expressed, of the
elements, at least one of which is an active element, XPN: They can be patentable if they are part of a process
and of some or all of the interconnections of an
integrated circuit, or such a three-dimensional (e.g. business process with a step involving the use of a
disposition prepared for an integrated circuit computer program).
intended for manufacture. Registration is valid for 10
years without renewal counted from date of Q: Supposing Albert Einstein were alive today and he
commencement of protection. filed with the Intellectual Property Office (IPO) an
application for patent for his theory of relativity
Invention vs. Utility model vs. Industrial design expressed in the formula E=mc2. The IPO
disapproved Einstein's application on the ground that
ELEMENTS TERM OF his theory of relativity is not patentable. Is the IPO's
PROTECTION action correct? (2006 Bar)
INVENTION New Twenty (20) years
Inventive Step from the date of A: Yes, the IPO is correct because under the Intellectual
Industrial filing with Property Code, discoveries, scientific theories and
Applicability payment of mathematical methods are classified to be as "non-
annuities. No patentable inventions". Einstein's theory of relativity falls
renewal (IPC, Sec. within the category of being a non-patentable "scientific
54). theory".
UTILITY New Seven (7) years
MODEL Industrial from the date of OWNERSHIP OF A PATENT
Applicability filing without
renewal (IPC, Sec. RIGHT TO A PATENT
109.3).
Persons entitled to a patent
INDUSTRIAL New or Five (5) years
DESIGN Ornamental from the date of 1. Inventor, his heirs, or assigns (IPC, Sec 28);
filing with 2 five 2. Joint invention – Jointly by the inventors (IPC, Sec.
year term 28);
renewals upon 3. Two or more persons invented separately and
payment of fees independently of each other – To the person who filed
(IPC, Sec. 118.2). an application;
4. Two or more applications are filed – the applicant
who has the earliest filing date or, the earliest
priority date. First to file rule (IPC, Sec. 29).

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325 FACULTY OF CIVIL LAW
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FIRST-TO-FILE RULE
1. If two (2) or more persons have made the invention
separately and independently of each other, the right
to the patent shall belong to the person who filed an
application for such invention, or
2. Where two or more applications are filed for the
same invention, to the applicant which has the
earliest filing date (IPC, Sec. 29).
INVENTIONS CREATED PURSUANT
TO A COMMISSION
Pursuant to a commission: The person who
commissions the work shall own the patent, unless
otherwise provided in the contract.
Pursuant to employment: In case the employee made
the invention in the course of his employment contract,
the patent shall belong to:
a. The employee, if the inventive activity is not a part
of his regular duties even if the employee uses the
time, facilities and materials of the employer;
b. The employer, if the inventive activity is the result of
the performance of his regularly-assigned duties,
unless there is an agreement, express or implied, to
the contrary (IPC, Sec. 30).
RIGHT OF PRIORITY
Priority date
An application for patent filed by any person who has
previously applied for the same invention in another
country which by treaty, convention, or law affords
similar privileges to Filipino citizens, shall be considered
as filed as of the date of filing the foreign application(IPC,
Sec. 31).
Filing Date is accorded only when all the requirements
provided under Section 40 are present. Priority Date
comes into play when there is an application for patent for
the same invention that was filed in another country
(Salao, 2012).
Conditions in availing of priority date
1. The local application expressly claims priority;
2. It is filed within 12 months from the date the earliest
foreign application was filed; and
3. A certified copy of the foreign application together
with an English translation is filed within 6 months
from the date of filing in the Philippines (Sec. 31, IPC).
Three (3) Main Areas of Activity in the Grant of
Invention Patent
1. Examination as to form or formality examination;
2. Classification, search and first publication; and
3. Examination as to substance or substantive
examination
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Steps in the registration of a patent
The procedure for the grant of patent may be summarized
as follows:
1. Filing of the application
2. Accordance of the filing date
3. Formality examination
4. Classification and Search
5. Publication of application
6. Substantive examination
7. Grant of Patent
8. Publication upon grant
9. Issuance of certificate (Salao, 2008).
Manner of making disclosure
The application shall disclose the invention in a manner
sufficiently clear and complete for it to be carried out by a
person skilled in the art.
Claim
Defines the matter for which protection is sought. Each
claim shall be clear and concise, and shall be supported by
the description. It must point out and distinctly show the
part, improvement, or combination which the applicant
regards as his invention.
Abstract
A concise summary of the disclosure of the invention as
contained in the description, claims and merely serves as
technical information.
The purpose of requiring a definite and accurate
description of the process is to apprise the public of what
the patentee claims as his invention, to inform the Courts
as to what they are called upon to construe, and to convey
to competing manufacturers and dealers information of
exactly what they are bound to avoid.
Unity of invention
The application shall relate to one invention only or to a
group of inventions forming a single general inventive
concept (IPC, Sec. 38.1). If several independent inventions
which do not form a single general inventive concept are
claimed in one application, the application must be
restricted to a single invention (IPC, Sec. 38.2).
Divisional applications
Divisional applications come into play when two or more
inventions are claimed in a single application but are of
such a nature that a single patent may not be issued for
them. The applicant, is thus required to “divide”, that is, to
limit the claims to whichever invention he may elect,
whereas those inventions not elected may be made the
subject of separate applications which are called
“divisional applications” (Smith-Kline Beckman Corp. v. CA,
GR No. 126627, August 14, 2003).
Q: Leonard and Marvin applied for Letters Patent
claiming the right of priority granted to foreign
 INTELLECTUAL PROPERTY CODE
applicants. Receipt of petitioners’ application was
acknowledged by respondent Director on March 6,
1954. Their Application for Letters Patent in the US
for the same invention indicated that the application
in the US was filed on March 16, 1953. They were
advised that the "Specification" they had submitted
was "incomplete" and that responsive action should
be filed with them four months from date of mailing,
which was August 5, 1959. On July 3, 1962, petitioners
submitted two complete copies of the Specification.
Director of patents held that petitioners' application
may not be treated as filed. Is the director correct?
A: Yes, it is imperative that the application be complete in
order that it may be accepted. It is essential to the validity
of Letters Patent that the specifications be full, definite,
and specific. To be entitled to the filing date of the patent
application, an invention disclosed in a previously filed
application must be described within the instant
application in such a manner as to enable one skilled in
the art to use the same for a legally adequate utility
(Boothe v. Director of Patents, G.R. No. L-24919, Jan. 28,
1980).
First publication
The applicant shall have all the rights of a patentee against
any person who, without his authorization, exercised any
of the rights conferred under Section 71 in relation to the
invention claimed in the published patent application, as
if a patent had been granted for that invention, provided
that the said person had:
1. Actual knowledge that the invention that he was
using was the subject matter of a published
application; or
2. Received written notice that the invention was the
subject matter of a published application being
identified in the said notice by its serial number.
The action may not be filed until after the grant of a patent
on the published application and within four (4) years
from the commission of the acts complained of (IPC, Sec.
46).
Effectivity of a patent
A patent shall take effect on the date of the publication of
the grant of the patent in the IPO Gazette (IPC, Sec. 50.3).
GROUNDS FOR CANCELLATION OF A PATENT
Any interested party may petition to cancel any patent or
any claim or parts of a claim any of the following grounds:
1. The invention is not new or patentable;
2. The patent does not disclose the invention in a
manner sufficiently clear and complete for it to be
carried out by any person skilled in the art; or
3. Contrary to public order or morality (IPC, Sec. 61.1);
4. Patent is found invalid in an action for infringement
(IPC, Sec. 82);
5. The patent includes matters outside the scope of the
disclosure contained in the application (IPC, Sec 21,
Regulations on Inter Partes Proceeding, Sec.1).
327
If the ground for cancellation relates to some of the claims
or parts of the claim only, cancellation may be effected to
such extent only (IPC, Sec. 61.2).
Grounds for cancellation of a utility model
1. The invention does not qualify for registration as a
utility model;
2. That the description and the claims do not comply
with the prescribed requirements;
3. Any drawing which is necessary for the
understanding of the invention has not been
furnished;
4. That the owner of the utility model registration is not
the inventor or his successor in title (IPC, Sec. 109.4).
Grounds for cancellation of an industrial design
1. The subject matter of the industrial design is not
registrable;
2. The subject matter is not new; or
3. The subject matter of the industrial design extends
beyond the content of the application as originally
filed (IPC, Sec. 120).
Grounds for Cancellation of Layout-Design of
Integrated Circuits
1. The layout-design is not protectable;
2. The right holder is not entitled to protection:
3. Where the application for registration of the layout-
design, was not filed within two (2) years from its
first commercial exploitation anywhere in the world.
Where the grounds for cancellation are established with
respect only to a part of the layout-design, only the
corresponding part of the registration shall be cancelled
(IPC, Sec. 120.3, IPC, as amended by RA 9150)
REMEDY OF THE TRUE AND ACTUAL INVENTOR
Remedies of persons with a right to a patent
If a person other than the applicant is declared by final
court order or decision as having the right to a patent, he
may within 3 months after such decision has become
final:
1. Prosecute the application as his own
2. File a new patent application
3. Request the application to be refused; or
4. Seek cancellation of the patent (IPC, Sec. 67.1).
Remedies of the true and actual inventor (1993, 2005
Bar)
If a person, who was deprived of the patent without his
consent or through fraud is declared by final court order
or decision to be the true and actual inventor, the court
shall order for his substitution as patentee, or at the option
of the true inventor, cancel the patent, and award actual
damages in his favor if warranted by the circumstances
(IPC, Sec. 68).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
In the two circumstances aforementioned, the court shall
furnish the Office a copy of the order or decision which
shall be published in the IPO Gazette within three (3)
months from the date such order or decision became final
and executor, and shall be recorded in the register of the
Office (IPC, Sec. 69).
Time to file action in court
The actions indicated in Sections 67 and 68 shall be filed
within one (1) year from the date of publication made in
accordance with Sections 44 and 51, respectively (IPC,
Sec. 70).
Q: Cezar works in a car manufacturing company
owned by Joab. Cezar is quite innovative and loves to
tinker with things. With the materials and parts of the
car, he was able to invent a gas-saving device that will
enable cars to consume less gas. Francis, a co-worker,
saw how Cezar created the device and likewise, came
up with a similar gadget, also using scrap materials
and spare parts of the company. Thereafter, Francis
filed an application for registration of his device with
the Bureau of Patents. Eighteen months later, Cezar
filed his application for the registration of his device
with the Bureau of Patents.
a. Is the gas-saving device patentable? Explain.
b. Assuming that it is patentable, who is entitled to
the patent? What, if any, is the remedy of the
losing party? (2005 Bar)
A:
a. Yes. For the gas saving device to be patentable
invention it must be new; must involve an inventive
step; and must be industrially applicable. In the
given case, it shows that the gas saving device is new
and with the innovativeness of Cezar using certain
materials of the car, it provides a useful application
to save on the consumption of gas.
b. Cezar is entitled to the patent because he is the true
and actual inventor. While it is true that Francis was
the first to file the application for registration of
patent, the same will not work in his favor because
he was in bad faith. However, considering that under
the IP Code, it adopts the first to file rule, Cezar will
have to take action against Francis within one (1)
year from the date of publication. If he is declared by
final court order or decision as having the right to a
patent, he may within 3 months after such decision
has become final: a) prosecute the application as his
own application in place of the applicant; b) file a
new patent application in respect of the same
invention; c) request the application to be refused; or
d) seek cancellation of the patent, if one has already
been issued.
REMEDY IN CASES OF
INTERLOCUTORY ORDERS OF BLA-IPO
R.A. No 8293 is silent with respect to any remedy
available to litigants who intend to question an inter-
locutory order issued by the BLA-IPO. Moreover, Section
1(c), Rule 14 of the Rules and Regulations on
Administrative Complaints for Violation of Laws
Involving Intellectual Property Rights simply provides
UNIVERSITY OF SANTO TOMAS
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that interlocutory orders shall not be appealable. The said
Rules and Regulations do not prescribe a procedure
within the administrative machinery to be followed in
assailing orders issued by the BLA-IPO pending final
resolution of a case filed with them. Hence, in the absence
of such a remedy, the provisions of the Rules of Court shall
apply in a suppletory manner, as provided under Section
3, Rule 1 of the same Rules and Regulations. Hence, in the
present case, respondents correctly resorted to the filing
of a special civil action for certiorari with the CA to
question the as-sailed Orders of the BLA-IPO, as they
cannot appeal therefrom and they have no other plain,
speedy and adequate remedy in the ordinary course of
law. This is consistent with Sections 1 and 4, Rule 65 of
the Rules of Court, as amended (Philippine Pharmawealth
v. Pfizer Inc., G.R. No. 167715, November 17, 2010, in Divina,
2014).
Q: Pfizer is the registered owner of a patent
pertaining to Sulbactam Ampicillin. It is marketed
under the brand name “Unasyn.” Pfizer later on
discovered that Pharmawealth submitted bids for the
supply of Sulbactam Ampicillin to several hospitals
without the Pfizer’s consent. Pfizer filed a complaint
for patent infringement with a prayer for permanent
injunction and forfeiture of the infringing products. A
preliminary injunction effective for 90 days was
granted by the IPO’s Bureau of Legal Affairs (IPO-
BLA). Aggrieved by the denial of the motion for
extension of the preliminary injunction, Pfizer then
filed a Special Civil Action for Certiorari in the Court
of Appeals (CA) assailing the denial. The CA
subsequently issued a temporary restraining order in
favor of Pfizer. While the case was pending in the CA,
Pfizer filed with the Regional Trial Court of Makati
(RTC) a complaint for infringement and unfair
competition against Pharmawealth. Pending the said
case, a motion to dismiss the case was filed for being
moot and academic, contending that Pfizer's patent
had already lapsed. In the same manner,
Pharmawealth also moved for the reconsideration of
the temporary restraining order issued by the CA on
the same basis that the patent right sought to be
protected has been extinguished due to the lapse of
the patent license and on the ground that the CA has
no jurisdiction to review the order of the BLA-IPO as
said jurisdiction is vested by law in the Office of the
Director General of the IPO.
a. Can Pfizer validly seek for the issuance of a
restraining order or injunction to enjoin
Pharmawealth from selling the product when the
patent allegedly infringed has already lapsed?
b. Did the Court of Appeals have jurisdiction to rule
on the order of the IPO-BLA?
A:
a. No. The exclusive right to make, use and sell the
patented machine, article, product, and to use the
patented process for the purpose of industry or
commerce, throughout the territory of the
Philippines exists only during the term of the patent.
Since the patent has expired, there is no more basis
for the issuance of a restraining order or injunction
 INTELLECTUAL PROPERTY CODE
against Pharmawealth insofar as the disputed patent
is concerned.
b. Yes. In the case at bar, the question in the CA
concerns an interlocutory order, and not a decision.
According to IP Code, it is the Director General of the
IPO that exercises exclusive jurisdiction over
decisions of the IPO-BLA. However, the IP Code and
the Rules and Regulations are bereft of any remedy
regarding interlocutory orders of the IPO-BLA, the
only remedy available to Pfizer is to apply the Rules
of Court suppletorily. Under the Rules of Court, a
petition for certiorari to the CA is the proper remedy.
Hence, the CA had jurisdiction to rule on the order.
RIGHTS CONFERRED BY A PATENT
Rights conferred by a patent
1. In case of Product – Right to restrain, prohibit and
prevent any unauthorized person or entity from
making, using, offering for sale, selling or importing
the product.
2. In case of Process – Right to restrain prohibit and
prevent any unauthorized person or entity from
manufacturing, dealing in, using, offering for sale,
selling or importing any product obtained directly or
indirectly from such process (IPC, Sec. 71).
3. Right to assign the patent, to transfer by succession,
and to conclude licensing contracts (IPC, Sec. 71.2).
The rights conferred by a patent application take effect
after publication in the Official Gazette (IPC, Sec 46).
LIMITATIONS OF PATENT RIGHTS
The owner of a patent has no right to prevent third parties
from making, using, offering for sale, selling or importing
a patented product in the following circumstances:
a. Using a patented product after it has been put on the
market in the Philippines by the owner of the product,
or with his express consent.
In case of drugs or medicines, the said limitation
applies after a drug or medicine has been introduced
in the Philippines or anywhere else in the world by
the patent owner, or by any party authorized to use
the invention. This allows parallel importation for
drugs and medicines.
The right to import the drugs and medicines shall be
available to any government agency or any private
third party (IPC, Sec. 72.1, as amended by RA No. 9502)
b. Where the act is done privately and on a non-
commercial scale or for a non-commercial purpose
(IPC, Sec. 72.2).
c. Exclusively for experimental use of the invention for
scientific purposes or educational purposes. (IPC,
Sec. 72.3).
d. In the case of drugs and medicines, where the act
includes testing, using, making or selling the
invention including any data related thereto, solely
for purposes reasonably related to the development
and submission of information and issuance of
329
approvals by government regulatory agencies
required under any law of the Philippines or of
another country that regulates the manufacture,
construction, use or sale of any product.
The data submitted by the original patent holder may
be protected from unfair commercial use provided in
Article 39.3 of the TRIPS Agreement (IPC, Sec. 72.4).
e. Where the act consists of the preparation for
individual cases, in a pharmacy or by a medical
professional, of a medicine in accordance with a
medical prescription (Sec. 72.5, IPC).
f. Where the invention is used in any ship, vessel,
aircraft, or land vehicle of any other country entering
the territory of the Philippines temporarily or
accidentally: Provided, That such invention is used
exclusively for the needs of the ship, vessel, aircraft,
or land vehicle and not used for the manufacturing of
anything to be sold within the Philippines (IPC, Sec.
72.5).
Prior user
Person other than the applicant, who in good faith, started
using the invention in the Philippines, or undertaken
serious preparations to use the same, before the filing
date or priority date of the application shall have the right
to continue the use thereof, but this right shall only be
transferred or assigned further with his enterprise or
business (IPC, Sec. 73).
Q: X invented a device which, through the use of noise,
can recharge a cellphone battery. He applied for and
was granted a patent on his device, effective within
the Philippines. As it turns out, a year before the grant
of X's patent, Y, also an inventor, invented a similar
device which he used in his cellphone business in
Manila. But X files an injunctive suit against Y to stop
him from using the device on the ground of patent
infringement. Will the suit prosper? (2011 Bar)
A: No, since Y is a prior user in good faith.
Use by Government
A Government agency or third person authorized by the
Government may exploit the invention even without
agreement of the patent owner where:
a. The public interest, in particular, national security,
nutrition, health or the development of other sectors,
as determined by the appropriate agency of the
government, so requires; or
b. A judicial or administrative body has determined
that the manner of exploitation, by the owner of the
patent or his licensee, is anti- competitive; or
c. In the case of drugs and medicines, there is a national
emergency or other circumstance of extreme
urgency requiring the use of the invention; or
d. In the case of drugs and medicines, there is a public
non-commercial use of the patent by the patentee,
without satisfactory reason; or
e. In the case of drugs and medicines, the demand for
the patented article in the Philippines is not being
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
met to an adequate extent and on reasonable terms,
as determined by the Secretary of the Department of
Health.
The use by the Government, or third person authorized by
the Government, shall be subject, where applicable, to the
following provisions:
1. In situations of national emergency or other
circumstances of extreme urgency, the right holder
shall be notified as soon as reasonably practicable;
2. In the case of public non-commercial use of the patent
by the patentee, without satisfactory reason, the right
holder shall be informed promptly;
3. If the demand for the patented article in the
Philippines is not being met to an adequate extent
and on reasonable terms as determined by the
Secretary of Health, the right holder shall be
informed promptly;
4. The scope and duration of such use shall be limited
to the purpose for which it was authorized;
5. Such use shall be non-exclusive;
6. The right holder shall be paid adequate
remuneration in the circumstances of each case,
taking into account the economic value of the
authorization; and
7. The existence of a national emergency or other
circumstances of extreme urgency, in the case of
drugs and medicines shall be subject to the
determination of the President of the Philippines for
the purpose of determining the need for such use or
other exploitation, which shall be immediately
executory.
Reverse reciprocity of foreign law
Any condition, restriction, limitation, diminution,
requirement, penalty or any similar burden imposed by
the law of a foreign country on a Philippine national
seeking protection of intellectual property rights in that
country, shall reciprocally be enforceable upon nationals
of said country, within Philippine jurisdiction (Sec. 231,
IPC).
Doctrine of exhaustion
Also known as the doctrine of first sale, it provides that the
patent holder has control of the first sale of his invention.
He has the opportunity to receive the full consideration
for his invention from his sale. Hence, he exhausts his
rights in the future control of his invention.
It espouses that the patentee who has already sold his
invention and has received all the royalty and
consideration for the same will be deemed to have
released the invention from his monopoly. The invention
thus becomes open to the use of the purchaser without
further restriction (Adams v. Burke, 84 U.S. 17, 1873).
GR: Patent rights are exhausted by first sale in the
Philippines (Domestic exhaustion).
XPN: On drugs and medicines: first sale in any jurisdiction
exhausts the rights of the owner thereof (International
exhaustion) (R.A. No. 9502).
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330
PATENT INFRINGEMENT
Civil Infringement
The making, using, offering for sale, selling, or importing
a patented product or a product obtained directly or
indirectly from a patented process, or the use of a
patented process without the authorization of the
patentee constitutes patent infringement.
Exemptions:
a. Parallel importation for patented drugs and
medicines;
Parallel importer is one which imports, distributes,
and sells genuine products in the market,
independently of an exclusive distributorship or
agency agreement with the manufacturer.
b. In the case of drugs and medicines, where the act
includes testing, using, making or selling the
invention including any data related thereto, solely
for purposes reasonably related to the development
and submission of information and issuance of
approvals by government regulatory agencies
required under any law of the Philippines or of
another country that regulates the manufacture,
construction, use or sale of any product;
c. Use of Invention by Government;
d. Compulsory licensing;
e. Procedures on Issuance of a Special Compulsory
License under the TRIPS Agreement for patented
drugs and medicines.
Contributory Infringement
Anyone who actively induces the infringement of a patent
or provides the infringer with a component of a patented
product or of a product produced because of a patented
process knowing it to be especially adopted for infringing
the patented invention and not suitable for substantial
non-infringing use shall be liable as a contributory
infringer and shall be jointly and severally liable with the
infringer (Sec. 76.6, IPC)
Criminal Infringement
If infringement is repeated by the infringer or by anyone
in connivance with him after finality of the judgment of
the court against the infringer, the offenders shall,
without prejudice to the institution of a civil action for
damages, be criminally liable (IPC, Sec. 84).
TESTS IN PATENT INFRINGEMENT
Literal Infringement
The extent of protection conferred by the patent shall be
determined by the claims, which are to be interpreted in
the light of description and drawings (Sec. 75, IPC).
 INTELLECTUAL PROPERTY CODE
In using literal infringement, resort must be had, in the
first instance, to the words of the claim. If accused matter
clearly falls within the claim, infringement is made out
and that is the end of it. To determine whether the
particular item falls within the literal meaning of the
patent claims, the Court must juxtapose the claims of the
patent and the accused product within the overall context
of the claims and specifications, to determine whether
there is exactly identity of all material elements (Godines
v. CA, G.R. No. 97343, September 13, 1993).
Doctrine of Equivalents (2015 Bar)
Account shall be taken of elements which are equivalent
to the elements expressed in the claims, so that a claim
shall be considered to cover not only all the elements
expressed therein, but also equivalents (Sec. 75, IPC).
According to the doctrine of equivalents, an infringement
also occurs when a device appropriates a prior invention
by incorporating its innovative concept and, despite some
modification and change, performs substantially the same
function in substantially the same way to achieve
substantially the same result (Godines v. CA, G.R. No.
97343, September 13, 1993).
The doctrine of equivalents thus requires satisfaction of
the function-means- and-result test, the patentee having
the burden to show that all three components of such
equivalency test are met (Smithkline Beckman
Corporation v. CA, G.R. No. 126627, August 14, 2003).
Meaning of “equivalent device”
It is such as a mechanic of ordinary skill in construction of
similar machinery, having the forms, specifications and
machine before him, could substitute in the place of the
mechanism described without the exercise of the inventive
faculty.
Q: Does the use of a patented process by a third
person constitute an infringement when the alleged
infringer has substituted, in lieu of some unessential
part of the patented process, a well-known
mechanical equivalent?
A: Yes, under the doctrine of mechanical equivalents, the
patentee is protected from colorable invasions of his
patent under the guise of substitution of some part of his
invention by some well-known mechanical equivalent. It
is an infringement of the patent, if the substitute performs
the same function and was well known at the date of the
patent as a proper substitute for the omitted ingredient
(Gsell v. Yap-Jue, G.R. No. L-4720, Jan. 19, 1909).
Doctrine of file wrapper estoppel
This doctrine balances the doctrine of equivalents.
Patentee is precluded from claiming as part of patented
product that which he had to excise or modify in order to
avoid patent office rejection, and he may omit any
additions that he was compelled to add by patent office
regulations.
331
Remedies of the owner of the patent against
infringers
1. Civil action for infringement – The owner may bring a
civil action with the appropriate Regional Trial Court
to recover from infringer the damages sustained by
the former, plus attorney’s fees and other litigation
expenses, and to secure an injunction for the
protection of his rights (IPC, Sec 76.2). If the damages
are inadequate or cannot be reasonably ascertained
with reasonable certainty, the court may award by
way of damages a sum equivalent to reasonable
royalty (IPC, Sec 76.3).
No damages can be recovered for acts of
infringement committed more than four (4) years
before the filing of the action for infringement (IPC,
Sec. 79).
2. Criminal action for infringement – If the infringement
is repeated, the infringer shall be criminally liable
and upon conviction, shall suffer imprisonment of
not less than six (6) months but not more than three
(3) years and/or a fine not less than P100,000.00 but
not more than P300,000.00.
The criminal action prescribes in three (3) years
from the commission of the crime (IPC, Sec. 84).
3. Administrative remedy – Where the amount of
damages claimed is not less than P200,000.00, the
patentee may choose to file an administrative action
against the infringer with the Bureau of Legal Affairs
(BLA). The BLA can issue injunctions, order direct
infringer to pay patentee damages, but unlike regular
courts, the BLA may not issue search and seizure
warrants or warrants of arrest.
4. Destruction of Infringing material- The court may, in
its discretion, order that the infringing goods,
materials and implements predominantly used in the
infringement be disposed of outside the channels of
commerce of destroyed, without compensation (IPC,
Sec.76.5).
Persons who can file an action for infringement
1. The patentee or his successors-in-interest may file an
action for infringement (Creser Precision Systems, Inc.
v. CA, G.R. No. 118708, Feb. 2, 1998).
A licensee cannot be considered a successor-in-
interest.
GR: A licensee may NOT maintain a suit for
infringement. Only the patentees, his heirs, assignee,
grantee or personal representatives may bring an
action for infringement.
XPN: If the licensing agreement provides that the
licensee may bring an action for infringement or if he
was authorized to do so by the patentee through a
special power of attorney.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
2. Any foreign national or juridical entity who meets the
requirements of Sec. 3 and not engaged in business
in the Philippines, to which a patent has been granted
or assigned, whether or not it is licensed to do
business in the Philippines (IPC, Sec. 77).
DEFENSES IN ACTION FOR INFRINGEMENT
Defenses in action for infringement
1. Invalidity of the patent (IPC, Sec. 81);
2. Any of the grounds for cancellation of patents:
a. That what is claimed as the invention is not new
or patentable
b. That the patent does not disclose the invention
in a manner sufficiently clear and complete for it
to be carried out by any person skilled in the art;
or
c. That the patent is contrary to public order or
morality (IPC, Sec. 61).
3. Prescription
The burden of proof to substantiate a charge of
infringement is with the plaintiff. But where the plaintiff
introduces the patent in evidence, and the same is in due
form, there is created a prima facie presumption of its
correctness and validity. The decision of the Director of
Patent in granting the patent is presumed to be correct.
The burden of going forward with the evidence (burden
of evidence) then shifts to the defendant to overcome by
competent evidence this legal presumption (Maguan v.
CA, G.R. No.L-45101, November 28, 1986).
LICENSING
Modes of obtaining license to exploit patent rights
1. Voluntary licensing (IPC, Sec. 85) and
2. Compulsory licensing (IPC, Sec. 93).
IMPORTANT NOTE: Licensing is EXCLUDED from the
coverage of 2016 Bar Examinations.
VOLUNTARY LICENSING
The grant by the patent owner to a third person of the
right to exploit a patented invention.
Rights of a licensor in voluntary licensing
In the absence of any provision to the contrary in the
technology transfer arrangement, the grant of a license
shall not prevent the licensor from granting further
licenses to third person nor from exploiting the subject
matter of the technology transfer arrangement himself
(IPC, Sec. 89).
Prohibited clauses
1. Those which impose upon the licensee the obligation
to acquire from a specific source capital goods,
intermediate products, raw materials, and other
technologies, or of permanently employing
personnel indicated by the licensor;
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2. Those pursuant to which the licensor reserves the
right to fix the sale or resale prices of the products
manufactured on the basis of the license;
3. Those that contain restrictions regarding the volume
and structure of production;
4. Those that prohibit the use of competitive
technologies in a non-exclusive technology transfer
agreement;
5. Those that establish a full or partial purchase option
in favor of the licensor;
6. Those that obligate the licensee to transfer for free to
the licensor the inventions or improvements that
may be obtained through the use of the licensed
technology;
7. Those that require payment of royalties to the
owners of patents for patents which are not used;
8. Those that prohibit the licensee to export the
licensed product unless justified for the protection of
the legitimate interest of the licensor such as exports
to countries where exclusive licenses to manufacture
and/or distribute the licensed product(s) have
already been granted;
9. Those which restrict the use of the technology
supplied after the expiration of the technology
transfer arrangement, except in cases of early
termination of the technology transfer arrangement
due to reason(s) attributable to the licensee;
10. Those which require payments for patents and other
industrial property rights after their expiration,
termination arrangement;
11. Those which require that the technology recipient
shall not contest the validity of any of the patents of
the technology supplier;
12. Those which restrict the research and development
activities of the licensee designed to absorb and
adapt the transferred technology to local conditions
or to initiate research and development programs in
connection with new products, processes or
equipment;
13. Those which prevent the licensee from adapting the
imported technology to local conditions, or
introducing innovation to it, as long as it does not
impair the quality standards prescribed by the
licensor;
14. Those which exempt the licensor for liability for non-
fulfillment of his responsibilities under the
technology transfer arrangement and/or liability
arising from third party suits brought about by the
use of the licensed product or the licensed
technology; and
15. Other clauses with equivalent effects (IPC, Sec. 87).
Exception on prohibited clauses
In exceptional or meritorious cases where substantial
benefits will accrue to the economy, such as high
technology content, increase in foreign exchange
earnings, employment generation, regional dispersal of
industries and/or substitution with or use of local raw
materials, or in the case of Board of Investments,
registered companies with pioneer status, exemption
from any of the above requirements may be allowed by
the Documentation, Information and Technology
Transfer Bureau after evaluation thereof on a case by case
basis (IPC, Sec. 91).
 INTELLECTUAL PROPERTY CODE
Mandatory provisions
1. That the laws of the Philippines shall govern the
interpretation of the same and in the event of
litigation, the venue shall be the proper court in the
place where the licensee has its principal office;
2. Continued access to improvements in techniques and
processes related to the technology shall be made
available during the period of the technology transfer
arrangement;
3. In the event the technology transfer arrangement
shall provide for arbitration, the Procedure of
Arbitration of the Arbitration Law of the Philippines
or the Arbitration Rules of the United Nations
Commission on International Trade Law
(UNCITRAL) or the Rules of Conciliation and
Arbitration of the International Chamber of
Commerce (ICC) shall apply and the venue of
arbitration shall be the Philippines or any neutral
country; and
4. The Philippine taxes on all payments relating to the
technology transfer arrangement shall be borne by
the licensor (IPC, Sec. 88).
Effect of non-conformance with the prohibited
clauses and mandatory provisions
GR: Non-conformance shall automatically render the
technology transfer arrangement unenforceable.
XPN: Unless said technology transfer arrangement is
approved and registered with the Documentation,
Information and Technology Transfer Bureau under the
provisions of Section 91 on exceptional cases (IPC, Sec.
92).
COMPULSORY LICENSING
Jurisdiction
1. The Director of Legal Affairs may grant a license to
exploit a patented invention, even without the
agreement of the patent owner, in favor of any
person who has shown his capability to exploit the
invention (IPC, Sec. 93).
2. R.A. No. 9502 (Universally Accessible Cheaper and
Quality Medicines Act of 2008) however amended Sec.
93 so that it is the Director General of the IPO who
may grant a license to exploit patented invention
under the grounds enumerated therein.
NOTE: Clarification either by legislation or judicial
interpretation as to who has jurisdiction should be made
to avoid confusion (Salao, 2012).
The Director General of the Intellectual Property Office
may grant a license to exploit a patented invention, even
without the agreement of the patent owner, in favor of any
person who has shown his capability to exploit the
invention, under any of the following circumstances:
1. National emergency or other circumstances of
extreme urgency;
2. Where the public interest, in particular, national
security, nutrition, health or the development of
333
other vital sectors of the national economy as
determined by the appropriate agency of the
Government, so requires; or
3. Where a judicial or administrative body has
determined that the manner of exploitation by the
owner of the patent or his licensee is anti-
competitive; or
4. In case of public non-commercial use of the patent by
the patentee, without satisfactory reason;
5. If the patented invention is not being worked in the
Philippines on a commercial scale, although capable
of being worked, without satisfactory reason:
Provided, that the importation of the patented article
shall constitute working or using the patent; and
6. Where the demand for patented drugs and medicines
is not being met to an adequate extent and on
reasonable terms, as determined by the Secretary of
the Department of Health (IPC, Sec. 93, as amended by
RA 9502).
Procedure on Issuance of a Special Compulsory
License under the TRIPS Agreement
The Director General of the Intellectual Property Office,
upon the written recommendation of the Secretary of the
Department of Health, shall, upon filing of a petition, grant
a special compulsory license for the importation of
patented drugs and medicines. The special compulsory
license for the importation contemplated under this
provision shall be an additional special alternative
procedure to ensure access to quality affordable
medicines and shall be primarily for domestic
consumption: Provided, that adequate remuneration shall
be paid to the patent owner either by the exporting or
importing country. The compulsory license shall also
contain a provision directing the grantee the license to
exercise reasonable measures to prevent the re-
exportation of the products imported under this
provision.
The grant of a special compulsory license shall be
immediately executory.
No court, except the Supreme Court of the Philippines,
shall issue any temporary restraining order or
preliminary injunction or such other provisional
remedies that will prevent the grant of the special
compulsory license.
A compulsory license shall also be available for the
manufacture and export of drugs and medicines to any
country having insufficient or no manufacturing capacity
in the pharmaceutical sector to address public health
problems: Provided, That, a compulsory license has been
granted by such country or such country has, by
notification or otherwise, allowed importation into its
jurisdiction of the patented drugs and medicines from the
Philippines in compliance with the TRIPS Agreement.
The right to grant a special compulsory license under this
section shall not limit or prejudice the rights, obligations
and flexibilities provided under the TRIPS Agreement and
under Philippine laws, particularly Section 72.1 and
Section 74 of the Intellectual Property Code, as amended
under this Act. It is also without prejudice to the extent to
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
which drugs and medicines produced under a compulsory
license can be exported as allowed in the TRIPS
Agreement and applicable laws (IPC, Sec. 93-A, as
amended by RA 9502).
Requirement to obtain authorization from the patent
owner on reasonable commercial terms and
conditions
General Rule: The license will only be granted after the
petitioner has made efforts to obtain authorization from
the patent owner on reasonable commercial terms and
conditions but such efforts have not been successful
within a reasonable period of time (IPC, Sec. 95.1).
Exceptions:
1. Where the petition for compulsory license seeks to
remedy a practice determined after judicial or
administrative process to be anti-competitive;
2. In situations of national emergency or other
circumstances of extreme urgency;
3. In cases of public non-commercial use; and
4. In cases where the demand for the patented drugs
and medicines in the Philippines is not being met to
an adequate extent and on reasonable terms, as
determined by the Secretary of the Department of
Health (R.A. 8293, Sec. 95 as amended by R.A. 9502).
Compulsory License Based on Interdependence of
Patents
If the invention protected by a patent, hereafter referred
to as the "second patent," within the country cannot be
worked without infringing another patent, hereafter
referred to as the "first patent," granted on a prior
application or benefiting from an earlier priority, a
compulsory license may be granted to the owner of the
second patent to the extent necessary for the working of
his invention, subject to the following conditions:
1. The invention claimed in the second patent involves
an important technical advance of considerable
economic significance in relation to the first patent;
2. The owner of the first patent shall be entitled to a
cross-license on reasonable terms to use the
invention claimed in the second patent;
3. The use authorized in respect of the first patent shall
be non- assignable except with the assignment of the
second patent; and
4. The terms and conditions of Sections 95, 96 and 98
to 100 of IP Code.
Compulsory Licensing of Patents Involving Semi-
Conductor Technology.
In the case of compulsory licensing of patents involving
semi-conductor technology, the license may only be
granted in case of public non-commercial use or to
remedy a practice determined after judicial or
administrative process to be anti-competitive (IPC, Sec.
96).
Terms and condition of a compulsory license
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334
1. The scope and duration of such license shall be
limited to the purpose for which it was authorized;
2. The license shall be non-exclusive;
3. The license shall be non-assignable, except with that
part of the enterprise or business with which the
invention is being exploited;
4. Use of the subject matter of the license shall be
devoted predominantly for the supply of the
Philippine market: Provided, that this limitation shall
not apply where the grant of the license is based on
the ground that the patentee's manner of exploiting
the patent is determined by judicial or administrative
process, to be anti-competitive.
5. The license may be terminated upon proper showing
that circumstances which led to its grant have ceased
to exist and are unlikely to recur: Provided, That
adequate protection shall be afforded to the
legitimate interest of the licensee; and
6. The patentee shall be paid adequate remuneration
taking into account the economic value of the grant
or authorization, except that in cases where the
license was granted to remedy a practice which was
determined after judicial or administrative process,
to be anti-competitive, the need to correct the anti-
competitive practice may be taken into account in
fixing the amount of remuneration (IPC, Sec. 100).
Amendment of compulsory license
Upon the request of the patentee or the licensee, the
Director of Legal Affairs may amend the decision granting
the compulsory license, upon proper showing of new facts
or circumstances justifying such amendment (IPC, Sec.
101.1).
Cancellation of compulsory license
Upon the request of the patentee, the Director may cancel
the compulsory license:
a. If the ground for the grant of the compulsory license
no longer exists and is unlikely to recur;
b. If the licensee has neither begun to supply the
domestic market nor made serious preparation
therefor;
c. If the licensee has not complied with the prescribed
terms of the license (IPC, Sec. 101.2).
Surrender of compulsory license
The licensee may surrender the license by a written
declaration submitted to the Intellectual Property Office.
The Director shall cause the amendment, surrender, or
cancellation in the Register, notify the patentee, and/or
the licensee, and cause notice thereof to be published in
the IPO Gazette (IPC, Sec. 101.3 and 101.4).
Licensee’s exemption from liability
Any person who works a patented product, substance
and/or process under a license granted under this
Chapter, shall be free from any liability for infringement:
Provided however, that in the case of voluntary licensing,
no collusion with the licensor is proven. This is without
 INTELLECTUAL PROPERTY CODE
prejudice to the right of the rightful owner of the patent
to recover from the licensor whatever he may have
received as royalties under the license (Sec. 102, IPC).
ASSIGNMENT AND TRANSMISSION OF RIGHTS
Patents or applications for patents and invention to which
they relate, shall be protected in the same way as the
rights of other property under the Civil Code.
Inventions and any right, title or interest in and to patents
and inventions covered thereby, may be assigned or
transmitted by inheritance or bequest or may be the
subject of a license contract (IPC, Sec. 103).
Assignment of Inventions
An assignment may be of the entire right, title or interest
in and to the patent and the invention covered thereby, or
of an undivided share of the entire patent and invention,
in which event the parties become joint owners thereof.
An assignment may be limited to a specified territory (IPC,
Sec. 104).
Form of Assignment.
The assignment must be in writing, acknowledged before
a notary public or other officer authorized to administer
oath or perform notarial acts, and certified under the
hand and official seal of the notary or such other officer
(Sec. 105, IPC).
Manner of effecting transfer of rights
1. By inheritance or bequest
2. License contract
Effect of an assignment of a patent
The assignment works as an estoppel by deed, preventing
the assignor from denying the novelty and utility of the
patented invention when sued by the assignee for
infringement.
Effect if the assignment was not recorded in the IPO
A deed of assignment affecting title shall be void as against
any subsequent purchaser or mortgagee for valuable
consideration and without notice unless, it is so recorded
in the Office, within three (3) months from the date of said
instrument, or prior to the subsequent purchase or
mortgage. However, even without recording, the
instruments are binding upon the parties.
TRADEMARK
DEFINITION OF MARKS, COLLECTIVE MARKS,
TRADE NAMES
Mark means any visible sign capable of distinguishing the
goods (trademark) or services (service mark) of an
enterprise and shall include a stamped or marked
container of goods.
335
Collective mark means any visible sign designated as
such in the application for registration and capable of
distinguishing the origin or any other common
characteristic, including the quality of goods or services of
different enterprises which use the sign under the control
of the registered owner of the collective mark.
Trade name means the name or designation identifying
or distinguishing an enterprise (IPC, Sec. 121.1, 121.2,
121.3).
Trademark vs. Trade name
TRADEMARK TRADE NAME
Identifies or distinguishes Identifies or distinguishes
the goods or services the business or enterprise
Registration is not
Registration is required
required.
Functions of trademark
1. Indicator of source or origin;
2. Indicator of quality;
3. Indicator of goodwill or business reputation;
4. Advertise the product or service it symbolizes
Obligations under the Paris Convention
In view of the obligations under the Paris Convention, the
Philippines is obligated to assure nationals of the
signatory-countries that they are afforded an effective
protection against violation of their intellectual property
rights in the Philippines in the same way that their own
countries are obligated to accord similar protection to
Philippine nationals. "Thus, under Philippine law, a trade
name of a national of a State that is a party to the Paris
Convention, whether or not the trade name forms part of
a trademark, is protected "without the obligation of filing
or registration. Thus, the applicant for registration of
trademark is not the lawful owner thereof and is not
entitled to registration if the trademark has been in prior
use by a national of a country which is a signatory to the
Paris Convention (Ecole De Cuisine Manille Inc. v. Renaud
Cointreau & Cie and Le Condron Bleu Int’l B.V., GR 185830,
June 5, 2013, in Divina, 2014).
ACQUISITION OF OWNERSHIP OF MARK
The right to register a trademark should be based on
ownership. When the applicant is not the owner of the
trademark being applied for, he has no right to apply for
the registration of the same. Under the Trademark Law,
only the owner of the trademark, trade name or service
mark used to distinguish his goods, business or service
from the goods, business or service of others is entitled to
register the same. An exclusive distributor does not
acquire any proprietary interest in the principal's
trademark and cannot register it in his own name unless
it is has been validly assigned to him (Superior
Commercial Enterprises, Inc. v. Kunnan Enterprises, G.R.
No. 169974, April 20, 2010).
The rights in a mark shall be acquired through
registration made validly in accordance with the
provisions of the IP Code (IPC, Sec. 122).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Registration does not confer upon the registrant an
absolute right to the registered mark. The certificate of
registration is merely a prima facie proof that the
registrant is the owner of the registered mark or trade
name. Evidence of prior and continuous use of the mark
or trade name by another can overcome the presumptive
ownership of the registrant and may very well entitle the
former to be declared owner in an appropriate case.
Q: Birkenstock, applied for various trademark
registrations before the IPO. However, registration
proceedings of the subject applications were
suspended in view of an existing registration of the
mark "BIRKENSTOCK AND DEVICE" in the name of
STIIC, predecessor-in-interest of PSEMC. Birkenstock
filed a cancellation case on the ground that it is the
lawful and rightful owner of the Birkenstock marks.
However, STIIC/PSEMC’s registration expired,
thereby resulting in the cancellation of such mark.
Accordingly, the cancellation case was dismissed for
being moot and academic.
The aforesaid cancellation paved the way for the
publication of the subject applications in the IPO e-
Gazette. In response, respondent filed three (3)
separate Inter Partes Cases. The BLA-IPO sustained
STIIC/PSEMC’s opposition. IPO Director General
reversed and set aside the ruling of the BLA. The CA
reversed and set aside the ruling of the IPO Director
General and reinstated that of the BLA. Did
Birkenstock acquire ownership over the said marks
by mere application or registration?
A: No. It is not the application or registration of a
trademark that vests ownership thereof, but it is the
ownership of a trademark that confers the right to
register the same. A trademark is an industrial property
over which its owner is entitled to property rights which
cannot be appropriated by un-scrupulous entities that, in
one way or another, happen to register such trademark
ahead of its true and lawful owner. The presumption of
ownership accorded to a registrant must then necessarily
yield to superior evidence of actual and real ownership of
a trademark (Birkenstock Orthopaedie GMBH and Co. KG v.
Philippine Shoe Expo Marketing Corporation G.R. No.
194307, November 20, 2013, in Divina, 2014).
Q: E.Y. Industrial is a domestic corporation engaged in
the production, distribution and sale of air
compressors and other industrial tools and
equipment. Shen Dar is a Taiwan-based foreign
corporation engaged in the manufacture of air
compressors. Both companies claimed to have the
right to register the trademark "VESPA" for air
compressors.
On June 9, 1997, Shen Dar filed Trademark
Application with the IPO for the mark "VESPA,
Chinese Characters and Device" for use on air
compressors and welding machines. On July 28, 1999,
EYIS filed Trademark Application also for the mark
"VESPA," for use on air compressors.
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On June 21, 2004, Shen Dar filed a Petition for
Cancellation of EYIS’ COR. Shen Dar primarily argued
that the issuance of the COR in favor of EYIS violated
Section 123.1 paragraphs (d), (e) and (f) of Republic
Act No. (RA) 8293, otherwise known as the
Intellectual Property Code (IP Code), having first filed
an application for the mark.
Who is the true owner of the mark?
A: E.Y. Industrial is the true owner of the mark. Under the
Intellectual Property Code, the registration of a mark is
prevented with the filing of an earlier application for
registration. This must not, however, be interpreted to
mean that ownership should be based upon an earlier
filing date. Notably, the Court has ruled that the prior and
continuous use of a mark may even overcome the
presumptive ownership of the registrant and be held as
the owner of the mark. Registration, without more, does
not confer upon the registrant an absolute right to the
registered mark. The certificate of registration is merely a
prima facie proof that the registrant is the owner of the
registered mark or trade name. Evidence of prior and
continuous use of the mark or trade name by another can
overcome the presumptive ownership of the registrant
and may very well entitle the former to be declared owner
in an appropriate case.
E.Y. Industrial’s prior adoption and continuous use of the
mark "VESPA" on air compressors is bolstered by
numerous documentary evidences. The use by E.Y.
Industrial in the concept of owner is shown by
commercial documents, sales invoices unambiguously
describing the goods as "VESPA" air compressors. E.Y.
Industrial have sold the air compressors bearing the
"VESPA" to various locations in the Philippines, as far as
Mindanao and the Visayas since the early 1990’s.
As such, E.Y. Industrial must be considered as the prior
and continuous user of the mark "VESPA" and its true
owner and is entitled to the registration of the mark in its
name (E.Y. Industrial Sales v. Shen Dar Electricity and
Machinery Co., Ltd., G.R. No. 184850, October 20, 2010).
Q: CHEN, Inc., a Taiwanese company, is a
manufacturer of tires with the mark Light Year. From
2009 to 2014, Clark Enterprises, a Philippine-
registered corporation, imported tires from CHEN,
Inc. under several sales contracts and sold them here
in the Philippines. In 2015, CHEN, Inc. filed a
trademark application with the Intellectual Property
Office (IPO) for the mark Light Year to be used for
tires. The IPO issued CHEN, Inc. a certificate of
registration (COR) for said mark. Clark Enterprises
sought the cancellation of the COR and claimed it had
a better right to register the mark Light Year. CHEN,
Inc. asserted that it was the owner of the mark and
Clark Enterprises was a mere distributor. Clark
Enterprises argued that there was no evidence on
record that the tires it imported from CHEN, Inc. bore
the mark Light Year and Clark Enterprises was able to
prove that it was the first to use the mark here in the
Philippines. Decide the case. (2015 Bar)
 INTELLECTUAL PROPERTY CODE
A: Chen’s prior actual use of the trademark even in
another country bars Clark from applying for the
registration of the same trademark. While R.A. No. 8293
removed the previous requirement of proof of actual use
prior to the filing of an application for registration of a
mark, proof of prior and continuous use is necessary to
establish ownership of trademark. Such ownership of the
trademark confers the right to register the trademark.
Since Chen owns the trademark as evidenced by its actual
and continuous use prior to the Clark Enterprises, then it
is the one entitled to the registration of the trademark.
The fact that Clark was the first one to use the mark here
in the Philippines will not matter.
Also, a mere distributor does not own the trademark to
the goods he distributes and his rights over the trademark
cannot prevail over the owner.
Marks which may be registered
Any word, name, symbol, emblem, device, figure, sign,
phrase, or any combination thereof except those
enumerated under Section 123, IPC.
Requirements for a mark to be registered
1. A visible sign (not sounds or scents); and
2. Capable of distinguishing one’s goods and services
from another.
Q: Is there an infringement of trademark when two
similar goods use the same words, “PALE PILSEN”?
A: None, because “pale pilsen” are generic words
descriptive of the color (pale) and of a type of beer
(pilsen), which is a light bohemian beer with strong hops
flavor that originated in the City of Pilsen in
Czechoslovakia. Pilsen is a primarily geographically
descriptive word, hence, non-registrable and not
appropriable by any beer manufacturer (Asia Brewery, Inc.
v. CA, G.R. No. 103543, July 5, 1993).
Person who may file an opposition to trademark
registration and grounds for filing the same
Any person who believes that he would be damaged by
the registration of a mark may, upon payment of the
required fee and within thirty (30) days after the
publication referred to in Subsection 133.2, file with the
Office an opposition to the application (IPC, Sec. 134).
ACQUISITION AND OWNERSHIP OF TRADE NAME
Acquisition of trade names
A name or designation may not be used as a trade name if
by its nature or the use to which such name or designation
may be put, it is contrary to public order or morals and if,
in particular, it is liable to deceive trade circles or the
public as to the nature of the enterprise identified by that
name.
In particular, any subsequent use of the trade name by a
third party, whether as a trade name or a mark or
collective mark, or any such use of a similar trade name or
337
mark, likely to mislead the public, shall be deemed
unlawful (Sec. 165, IPC).
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 registration of the mark without
actual use thereof, the former prevails over the latter. For
a rule widely accepted and firmly entrenched is that
actual use in commerce or business is a pre requisite to
the acquisition of the right of ownership (Shangri-la Hotel
Management Ltd. v Developers Group of companies, March
31, 2006 G.R. No. 159938).
The two concepts of corporate name or business name
and trademark or service mark, are not mutually
exclusive. It is common, indeed likely, that the name of a
corporation or business is also a trade name, trademark
or service mark (Shangri- La International Hotel
Management, Ltd. vs. Developers Group of Companies, Inc.,
G.R. No. 159938, March 31, 2006).
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
prior filing or registration.” (Fredco Manufacturing
Corporation vs President and Fellows of Harvard College
(Harvard University), G.R. No. 185917, June 1, 2011).
A trade name need not be registered with the IPO before
an infringement suit may be filed by its owner against the
owner of an infringing trademark. All that is required is
that the trade name is previously used in trade or
commerce in the Philippines. A corporation has the
exclusive right to use its name. The right proceeds from
the theory that it is a fraud on the corporation which has
acquired a right to that name and perhaps carried on its
business thereunder, that another should attempt to use
the same name, or the same name with a slight variation
in such a way as to induce persons to deal with it in the
belief that they are dealing with the corporation which
has given a reputation to the name (Coffee Partners, Inc. v.
San Francisco Coffee & Roastery, Inc., G.R. No. 169504,
March 3, 2010).
Q: Jinggy went to Kluwer University (KU) in Germany
for his doctorate degree (Ph.D.). He completed his
degree with the highest honors in the shortest
time. When he came back, he decided to set-up his
own graduate school in his hometown in
Zamboanga. After seeking free legal advice from his
high-flying lawyer-friends, he learned that the
Philippines follows the territoriality principle in
trademark law, i.e., trademark rights are acquired
through valid registration in accordance with the
law. Forthwith, Jinggy named his school the Kluwer
Graduate School of Business of Mindanao and
immediately secured registration with the Bureau of
Trademarks. KU did not like the unauthorized use of
its name by its top alumnus no less. KU sought your
help. What advice can you give KU? (2014 Bar)
A: I can advise KU to file a petition to cancel the
registration of the name “Kluwer Graduate School of
Business of Mindanao” (“KGSBM”) with the Bureau of
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Trademarks. The petition could be anchored on the
following facts:
Kluwer University is the owner of the name “Kluwer.”
Jiggy registered the trademark in bad faith. He came to
know of the trademark because he went to Kluwer
University in Germany for his doctorate degree. KU is the
owner of the name “Kluwer” has the sole right to register
the same. Foreign marks that are not registered are still
accorded protection against infringement and/or unfair
competition under the Paris Convention for the
Protection of Industrial Property. Both the Philippines
and Germany are signatories to the Paris Convention.
Under the said Convention, the trademark of a national or
signatory to the Paris Convention is entitled to its
protection in other countries that are also signatories to
the Convention without need of registering the
trademark.
The petition could also be based on the fact, if it were
proven by KU, that “Kluwer” is a well-known mark and
entitled to protection as KU and KGSBM belong to the
same class of services, i.e., education and entertainment.
KU must also prove that a competent authority of the
Philippines has designated “Kluwer” to be well know
internationally and in the Philippines.
Finally, the petition could also be based on the fact, if it
were proven by KU, that “Kluwer” is a trade name that KU
has adopted and used before its use and registration by
Jiggy (Ecole de Cuisine Manille, Inc. v. Renaud Cointreau &
Cie, G.R. No. 185830, June 5, 2013).
NON-REGISTRABLE MARKS
Non-registrable marks
1. Consists of immoral, deceptive or scandalous matter
or falsely suggest a connection with persons,
institutions, beliefs, or national symbols;
2. Consists of the flag or coat of arms or other insignia
of the Philippines or any of its political subdivisions,
or of any foreign nation;
3. Consists of a name, portrait or signature identifying a
particular living individual except by his written
consent, or the name, signature, or portrait of a
deceased President of the Philippines, during the life
of his widow except by written consent of the widow;
4. Identical with a registered mark belonging to a
different proprietor or a mark with an earlier filing or
priority date, in respect of:
a. The same goods or services, or
b. Closely related goods or services, or
c. If it nearly resembles such a mark as to be likely
to deceive or cause confusion;
The law does not prohibit or enjoin every similarity.
The similarity must be such that the ordinary
purchaser will be deceived into the belief that the
goods are those of another (The Alhambra Cigar and
Cigarette Manufacturing Co. v. Compania General de
Tabacos De Filipinas, G. R. No. 11490, October 14,
1916);
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338
5. Is identical with an internationally well-known mark,
whether or not it is registered here, used for identical
or similar goods or services;
6. Is identical with an internationally well-known mark
which is registered in the Philippines with respect to
non-similar goods or services. Provided, that the
interests of the owner of the registered mark are
likely to be damaged by such use;
7. Is likely to mislead the public as to the nature, quality,
characteristics or geographical origin of the goods or
services;
8. Consists exclusively of signs that are generic for the
goods or services that they seek to identify;
9. Consists exclusively of signs that have become
customary or usual to designate the goods or services
in everyday language and established trade practice;
10. Consists exclusively that may serve in trade to
designate the kind, quality, quantity, intended
purpose, value, geographical origin, time or
production of the goods or rendering of the services,
or other characteristics of the goods or services;
11. Consists of shapes that may be necessitated by
technical factors or by the nature of the goods
themselves or factors that affect their intrinsic value;
12. Consists of color alone, unless defined by a given form;
or
13. Is contrary to public order or morality (IPC, Sec. 123).
Q: Laberge, Inc., manufactures and markets after-
shave lotion, shaving cream, and deodorants using
the trademark “PRUT”, which is registered with the
Intellectual Property Office. Laberge does not
manufacture briefs and underwear and these items
are not specified in the certificate of registration. JG
who manufactures briefs and underwear, wants to
know whether, under our laws, he can use and
register the trademark “PRUTE” for his merchandise.
Can JG register the trademark?
A: Yes. The trademark registered in the name of Laberge,
Inc covers only after-shave lotion, shaving cream,
deodorant, talcum powder and toilet soap. It does not
cover briefs and underwear. The limit of the trademark is
stated in the certificate issued to Laberge Inc. It does not
include briefs and underwear which are different
products protected by Larberge’s trademark. JG can
register the trademark “PRUTE” to cover its briefs and
underwear (Faberge Inc. v. IAC, G.R. No. 71189, November
4, 1992).
Q: CPI was registered with the SEC in January 2001. It
has a franchise agreement with Coffee Partners Ltd.
(CPL) for a non-exclusive right to operate coffee shops
in the Philippines using trademarks designed by CPL
such as SAN FRANCISCO COFFEE.
SFCRI was registered with the SEC in May 1995. It
registered the business name SAN FRANCISCO
COFFEE & ROASTERY, INC. with the DTI in June 1995.
 INTELLECTUAL PROPERTY CODE
In June 2001, SFCRI discovered that CPI was about to
open a coffee shop under the name SAN FRANCISCO
COFFEE in Libis, Quezon City. SFCRI sent a letter to CPI
demanding that the latter stop using the name SAN
FRANCISCO COFFEE. Does CPI ‘s use of the trademark
SAN FRANCISCO COFFEE constitutes infringement of
SFCRI ‘s trade name SAN FRANCISCO COFFEE &
ROASTERY, INC., even if the trade name is not
registered with the Intellectual Property Office (IPO)?
A: Yes. Petitioner’s argument that “San Francisco” is just
a proper name referring to the famous city in California
and that “coffee” is simply a generic term, is untenable.
Respondent has acquired an exclusive right to the use of
the trade name “SAN FRANCISCO COFFEE & ROASTERY,
INC.” since the registration of the business name with the
DTI in 1995. Thus, respondent’s use of its trade name
from then on must be free from any infringement by
similarity. Of course, this does not mean that respondent
has exclusive use of the geographic word “San Francisco”
or the generic word “coffee.” Geographic or generic words
are not, per se, subject to exclusive appropriation. It is
only the com-bination of the words “SAN FRANCISCO
COFFEE,” which is respondent’s trade name in its coffee
business, that is protected against infringement on
matters related to the coffee business to avoid confusing
or deceiving the public (Coffee Partners, Inc. v. San
Francisco Coffee and Roastery, Inc., G.R. No. 169504, March
3, 2010, in Divina, 2014).
In trademark registration, while both competing marks
refer to the word “KOLIN” written in upper case letters
and in bold font, but one is italicized and colored black
while the other is white in pantone red color background
and there are differing features between the two,
registration of the said mark could be granted. It is
hornbook doctrine that emphasis should be on the
similarity of the products involved and not on the
arbitrary classification or general description of their
properties or characteristics. The mere fact that one
person has adopted and used a trademark on his goods
would not, without more, prevent the adoption and use of
the same trademark by others on unrelated articles of a
different kind (Taiwan Kolin Corporation, LTD. v. Kolin
Electronics Co., Inc., G.R. No. 209843, March 25, 2015).
Person who may file an opposition to application for
trademark registration
Any person who believes that he would be damaged by
the registration of a mark may, upon payment of the
required fee and within thirty (30) days after the
publication referred to in Subsection 133.2 of the IP Code,
file with the IP Office an opposition to the application (IPC,
Sec. 134).
Admission of non-compliance with the requirement of
filing a Declaration of Actual Use is tantamount to a
judicial admission of abandonment of trademark (Mattel,
Inc. v. Francisco, G.R. No. 166886, July 30, 2008).
NOTE: Failure to file a Declaration of Actual Use (DAU)
within the required period results in the automatic
cancellation of registration of a trademark. In turn, such
failure is tantamount to the abandonment or withdrawal of
339
any right or interest the registrant has over his trademark
(Birkenstock Orthopaedie GMBH and Co. KG v. Philippine
Shoe Expo Marketing Corporation, G. R. No. 194307,
November 20, 2013).
Instances when non-use of a mark is excused
1. If caused by circumstances arising independently of
the will of the owner. Lack of funds is not an excuse.
2. A use which does not alter its distinctive character
though the use is different from the form in which it is
registered.
3. Use of mark in connection with one or more of the
goods/services belonging to the class in which the
mark is registered.
4. The use of a mark by a company related to the
applicant/registrant.
5. The use of a mark by a person controlled by the
registrant (IPC, Section 152).
PRIOR USE OF MARK AS A REQUIREMENT
Actual prior use in commerce in the Philippines has been
abolished as a condition for the registration of trademark.
Q: S Development Corporation sued Shangrila
Corporation for using the “S” logo and the trade name
“Shangrila.” The former claims that it was the first to
register the logo and the trade name in the
Philippines and that it had been using the same in its
restaurant business.
Shangrila Corporation counters that it is an affiliate of
an international organization which has been using
such logo and trade name “Shangrila” for over 20
years.
However, Shangrila Corporation registered the trade
name and logo in the Philippines only after the suit
was filed.
a. Which of the two corporations has a better right
to use the logo and the trade name? Explain.
b. How does the international affiliation of
Shangrila Corporation affect the outcome of the
dispute? Explain. (2005 Bar)
A:
a. S Corporation. Sec. 122 of the Intellectual Property
Code provides that the rights in a trademark are
acquired through valid registration. Actual prior use
in commerce in the Philippines has been abolished as
a condition for the registration of a trademark
(Record of the Senate, Vol. II, No. 29, 8 Oct.1996;
Journal of the House of Representatives, No. 35. 12 Nov.
1996, 34).
b. Shangrila’s international affiliation shall result in
a decision favorable to it. The Paris Convention
mandates that protection should be afforded to
internationally known marks as signatory to the
Paris Convention, without regard as to whether the
foreign corporation is registered, licensed or doing
business in the Philippines. Shangrila’s separate
personalities from their mother corporation cannot
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
be an obstacle in the enforcement of their rights as
part of the Kuok Group of Companies and as official
repository, manager and operator of the subject
mark and logo. Besides, R.A. No. 166 did not require
the party seeking relief to be the owner of the mark
but "any person who believes that he is or will be
damaged by the registration of a mark or trade
name." (Shangri-la International Hotel Management,
LTD., et.a.l v. Developers Group of Companies, Inc. G.R.
No. 159938, March 31, 2006).
TEST TO DETERMINE CONFUSING
SIMILARITY BETWEEN MARKS
The likelihood of confusion is a relative concept; to be
determined only according to the particular, and
sometimes peculiar, circumstances of each case. In
trademark cases, even more than in any other litigation,
precedent must be studied in light of the facts of the
particular case. The wisdom of the likelihood of confusion
test lies in its recognition that each trademark
infringement case presents its own unique set of facts.
Two (2) types of confusion
1. Confusion of Goods – The ordinarily prudent
purchaser would be induced to purchase one product
in the belief that he was purchasing the other.
2. Confusion of Origin (Confusion of Business) – The
goods of the parties are different, the defendant’s
product is such as might reasonably be assumed to
originate from the plaintiff, and the public would
then be deceived either into that belief or into the
belief that there is some connection between the
plaintiff and defendant which, in fact, does not exist.
Two (2) tests to determine colorable imitation
1. Dominancy Test
2. Holistic Test
DOMINANCY TEST
It focuses on the similarity of the prevalent features of the
competing marks. If the competing trademark contains
the main or essential or dominant features of another, and
confusion and deception are likely to result, infringement
takes place. Duplication or imitation is not necessary; nor
is it necessary that the infringing label should suggest an
effort to imitate (C. Neilman Brewing Co. v. Independent
Brewing Co., 191 F. 489, 495, citing Eagle White Lead Co. vs.
Pflugh [CC] 180 FED. 579). The question is whether the use
of marks involved is likely to cause of confusion or
mistake in the mind of the public or deceive purchasers.
(2012 Bar)
Instances where dominancy test is applied
1. NS Northern Organic Fertilizer’s “NS D-10 PLUS”
vs. Berris’ “D-10 80 WP”
Comparing Berris’ mark "D-10 80 WP" with Abyadang’s
mark "NS D-10 PLUS," as appearing on their respective
packages, one cannot but notice that both have a common
component which is "D-10." On Berris’ package, the "D-
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2016 GOLDEN NOTES
340
10" is written with a bigger font than the "80 WP."
Admittedly, the "D-10" is the dominant feature of the
mark. The "D-10," being at the beginning of the mark, is
what is most remembered of it. Although it appears in
Berris’ certificate of registration in the same font size as
the "80 WP," its dominancy in the "D-10 80 WP" mark
stands since the difference in the form does not alter its
distinctive character.
Applying the Dominancy Test, it cannot be gainsaid that
Abyadang’s "NS D-10 PLUS" is similar to Berris’ "D-10 80
WP," that confusion or mistake is more likely to occur.
Undeniably, both marks pertain to the same type of goods
– fungicide with 80% Mancozeb as an active ingredient
and used for the same group of fruits, crops, vegetables,
and ornamental plants, using the same dosage and
manner of application. They also belong to the same
classification of goods under R.A. No. 8293. Both
depictions of "D-10," as found in both marks, are similar
in size, such that this portion is what catches the eye of the
purchaser. Undeniably, the likelihood of confusion is
present (Berris Agricultural Co., Inc., v. Norvy Abyadang,
G.R. No. 183404, October 13, 2010).
2. Nestle’s “NAN” vs. 5M Enterprise’ “NANNY”
Applying the dominancy test in the present case, the Court
finds that NANNY is confusingly similar to NAN. NAN is
the prevalent feature of Nestles line of infant powdered
milk products. It is written in bold letters and used in all
products. The line consists of PRE-NAN, NAN-H.A., NAN-
1, and NAN-2. Clearly, NANNY contains the prevalent
feature NAN. The first three letters of NANNY are exactly
the same as the letters of NAN. When NAN and NANNY are
pronounced, the aural effect is confusingly similar.
NANNY and NAN have the same classification, descriptive
properties and physical attributes. Both are classified
under Class 6, both are milk products, and both are in
powder form. Also, NANNY and NAN are displayed in the
same section of stores the milk section (Societes Des
Products Nestle vs. Dy,Jr.,, G.R. No. 172276, August 8, 2010).
3. Sketcher’s “S” rubber shoes vs. Inter Pacific
Industrial Trading Corp.’s (PITC) “Strong” rubber
shoes
Applying the Dominancy Test, the Court finds that the use
of the stylized "S" by PITC in its Strong rubber shoes
infringes on the mark already registered by Sketcher with
the IPO. While it is undisputed that Sketcher’s stylized "S"
is within an oval design, to the Court’s 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 PITC did not use an oval design,
the mere fact that it used the same stylized "S", the same
being the dominant feature of Sketcher’s trademark,
already constitutes infringement under the Dominancy
Test.
PITC did not simply use the letter "S," but it appears that
based on the font and the size of the lettering, the stylized
"S" utilized by PITC is the very same stylized "S" used by
Sketcher; a stylized "S" which is unique and distinguishes
Sketcher’s trademark. Indubitably, the likelihood of
confusion is present as purchasers will associate the
 INTELLECTUAL PROPERTY CODE
PITC’s use of the stylized "S" as having been authorized by
Sketcher or that PITC’s product is connected with
Sketcher’s business.
4. Societe Des Produits Nestle’s “MASTER ROAST”
and “MASTER BLEND” vs. CFC Corp’s “FLAVOR
MASTER”
CFC Corporation filed an application for the registration
of the trademark "FLAVOR MASTER" for instant coffee.
Societe Des Produits Nestle filed an unverified Notice of
Opposition, claiming that the trademark of CFC Corp.’s
product is "confusingly similar to its trademarks for
coffee and coffee extracts, to wit: MASTER ROAST and
MASTER BLEND." Nestle claimed that the use, if any, by
CFC of the trademark FLAVOR MASTER and its
registration would likely cause confusion in the trade; or
deceive purchasers and would falsely suggest to the
purchasing public a connection in the business of Nestle,
as the dominant word present in the three (3) trademarks
is "MASTER"; or that the goods of CFC might be mistaken
as having originated from the latter.
If the ordinary purchaser is "undiscerningly rash" in
buying such common and inexpensive household
products as instant coffee, and would therefore be "less
inclined to closely examine specific details of similarities
and dissimilarities" between the two competing products,
then it would be less likely for the ordinary purchaser to
notice that CFC’s trademark FLAVOR MASTER carries the
colors orange and mocha while that of Nestle’s uses red
and brown. The application of the totality or holistic test
is improper since the ordinary purchaser would not be
inclined to notice the specific features, similarities or
dissimilarities, considering that the product is an
inexpensive and common household item.
Hence, in applying the dominancy test, it is sufficiently
established that the word MASTER is the dominant
feature of opposer's mark. The word MASTER is printed
across the middle portion of the label in bold letters
almost twice the size of the printed word ROAST. Further,
the word MASTER has always been given emphasis in the
TV and radio commercials and other advertisements
made in promoting the product. This can be gleaned from
the fact that Robert Jaworski and Atty. Ric Puno Jr.., the
personalities engaged to promote the product, are given
the titles Master of the Game and Master of the Talk Show,
respectively. In due time, because of these advertising
schemes the mind of the buying public had come to learn
to associate the word MASTER with the opposer's goods
(Societe Des Produits Nestle, S.A. and Nestle Phils. v. CA, GR.
No. 112012, April 4, 2001).
5. McDonald’s Corp.’s “BIG MAC” vs. L.C. Big Mak
Burger, Inc.’s “BIG MAK”
McDonald's owns the "Big Mac" mark for its "double-
decker hamburger sandwich. Based on this Home
Registration, McDonald's applied for the registration of
the same mark in the PBPTT (now IPO). PBPTT allowed
registration of the "Big Mac. On the other hand, L.C. Big
Mak Burger, Inc. is a domestic corporation which operates
fast-food outlets and snack vans in Metro Manila and
nearby provinces. It applied with the PBPTT for the
341
registration of the "Big Mak" mark for its hamburger
sandwiches, which was opposed by McDonald's.
Applying the dominancy test, L.C. Big Mak Burger’s use of
the "Big Mak" mark results in likelihood of confusion.
Aurally the two marks are the same, with the first word of
both marks phonetically the same, and the second word
of both marks also phonetically the same. Visually, the
two marks have both two words and six letters, with the
first word of both marks having the same letters and the
second word having the same first two letters
(McDonald’s Corp v. L.C. Big Mak Burger, Inc., G.R. No.
143993, August 18, 2004).
6. UFC Philippines (now merged with Nutri-Asia)
“PAPA” vs. Barrio Fiesta Manufacturing’s “PAPA
BOY & DEVICE”
Barrio Fiesta Manufacturing Corporation filed application
for the mark PAPA BOY & DEVICE” for goods under Class
30, specifically for lechon sauce. Nutri-Asia opposed the
application, contending that "Papa Boy & Device" is
confusingly similar with its "Papa" marks, considering
that its ketchup product and Barrio Fiesta’s lechon sauce
product are related articles that fall under the same Class
30.
Applying the dominancy test, it is found that the word
"Papa" is the dominant feature of UFC's mark "Papa
Ketsarap." Contrary to Barrio Fiesta's contention,
"Ketsarap" cannot be the dominant feature of the mark as
it is merely descriptive of the product. Furthermore, it is
the "Papa" mark that has been in commercial use for
decades and has established awareness and goodwill
among consumers. Also, the word "Papa" is the dominant
feature of Barrio Fiesta's "Papa Boy & Device" mark
subject of the application, such that the word "Papa" is
written on top of and before the other words such that it
is the first word/figure that catches the eyes. The part of
Barrio Fiesta's mark which appears prominently to the
eyes and ears is the phrase "Papa Boy" and that is what a
purchaser of Barrio Fiesta’s product would immediately
recall, not the smiling hog in the logo.
Since UFC's product, catsup, is also a household product
found on the same grocery aisle, in similar packaging, the
public could think that UFC had expanded its product mix
to include lechon sauce, and that the "Papa Boy" lechon
sauce is now part of the "Papa" family of sauces (UFC
Philippines vs. Barrio Fiesta Manufacturing, G.R. No.
198889, January 20, 2016).
Q: On October 21, 2006, Dermaline, Inc. filed before
the Intellectual Property Office (IPO) an application
for registration of the trademark DERMALINE
DERMALINE, INC. On May 8, 2007, Myra
Pharmaceuticals, Inc. filed a Verified Oppositio
alleging that the trademark sought to be registered by
Dermaline so resembles its trademark DERMALIN
and will likely cause confusion, mistake and
deception to the purchasing public. Myra claimed
that, despite Dermaline’s attempt to differentiate its
applied mark, the dominant feature is the term
DERMALINE, which is practically identical with its
own DERMALIN, more particularly that the first eight
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
(8) letters of the marks are identical, and that
notwithstanding the additional letter E by Dermaline,
the pronunciation for both marks are identical.
Further, both marks have three (3) syllables each,
with each syllable identical in sound and appearance,
even if the last syllable of DERMALINE consisted of
four (4) letters while DERMALIN consisted only of
three (3).
Dermaline countered that a simple comparison of the
trademark DERMALINE DERMALINE, INC. vis-a-vis
Myra’s DERMALIN trademark would show that they
have entirely different features and distinctive
presentation, thus it cannot result in confusion,
mistake or deception on the part of the purchasing
public. Dermaline contended that, in determining if
the subject trademarks are confusingly similar, a
comparison of the words is not the only determinant,
but their entirety must be considered in relation to
the goods to which they are attached, including the
other features appearing in both labels.
Are the arguments of Dermaline tenable?
A: No. Dermaline’s insistence that its applied trademark
DERMALINE DERMALINE, INC. had differences too
striking to be mistaken from Myra’s DERMALIN cannot,
therefore, be sustained. While it is true that the two marks
are presented differently Dermaline’s mark is written
with the first DERMALINE in script going diagonally
upwards from left to right, with an upper case D followed
by the rest of the letters in lower case, and the portion
DERMALINE, INC. is written in upper case letters, below
and smaller than the long-hand portion; while Myra’s
mark DERMALIN is written in an upright font, with a
capital D and followed by lower case letters the likelihood
of confusion is still apparent. This is because they are
almost spelled in the same way, except for Dermaline’s
mark which ends with the letter E, and they are
pronounced practically in the same manner in three (3)
syllables, with the ending letter E in Dermaline’s mark
pronounced silently. Thus, when an ordinary purchaser,
for example, hears an advertisement of Dermaline’s
applied trademark over the radio, chances are he will
associate it with Myra’s registered mark.
Further, Dermaline’s stance that its product belongs to a
separate and different classification from Myra’s products
with the registered trademark does not eradicate the
possibility of mistake on the part of the purchasing public
to associate the former with the latter, especially
considering that both classifications pertain to treatments
for the skin.
Thus, the public may mistakenly think that Dermaline is
connected to or associated with Myra, such that,
considering the current proliferation of health and beauty
products in the market, the purchasers would likely be
misled that Myra has already expanded its business
through Dermaline from merely carrying pharmaceutical
topical applications for the skin to health and beauty
services (Dermaline, Inc. v. Myra Pharmaceuticals, Inc., G.R.
No. 190065, August 16, 2010).
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342
TOTALITY OR HOLISTIC TEST
Confusing similarity is to be determined on the basis of
visual, aural, connotative comparisons and
overall impressions engendered by the marks in
controversy as they are encountered in the marketplace.
The trademarks in their entirety as they appear in their
respective labels are considered in relation to the goods
to which they are attached. The discerning eye of the
observer must focus not only on the predominant words
but also on the other features appearing in both labels in
order that he may draw his conclusion whether one is
confusingly similar to the other (Bristol Myers Co. vs.
Director of Patents, 17 SCRA 131; See also Fruit of the Loom
Inc. vs. CA, GR No. L-32747, November 29, 1984.)
The dominancy test only relies on visual comparisons
between two trademarks whereas the totality or holistic
test relies not only on the visual but also on the aural and
connotative comparisons and overall impressions
between the two trademarks (Societe Des Produits Nestl,
S.A. v. CA, G.R. No. 112012, Apr. 4, 2001).
Instances when Holistic test is applied
1. Emerald Garment’s “STYLISTIC MR. LEE” vs. H.D.
Lee’s “LEE”
H.D. Lee Co. Inc, a foreign corporation, filed a petition to
cancel the registration OF the trademark “STYLISTIC MR.
LEE” issued in the name of Emerald Garment
Manufacturing Corp. H.D. Lee asserts that Emerald's
trademark tends to mislead and confuse the public and
thus constitutes an infringement of its own mark, since
the dominant feature therein is the word "LEE." Emerald
contends that its trademark "STYLISTIC MR. LEE" is
entirely different from and not confusingly similar to H.D.
Lee’s "LEE" trademark.
The holistic test mandates that the entirety of the marks
in question must be considered in determining confusing
similarity. Applying the foregoing, Emerald’s "STYLISTIC
MR. LEE" is not confusingly similar to H.D. Lee’s "LEE"
trademark. Emerald's trademark is the whole "STYLISTIC
MR. LEE." Although on its label the word "LEE" is
prominent, the trademark should be considered as a
whole and not piecemeal. The dissimilarities between the
two marks become conspicuous in view of the following
variables. First, the products involved in the case at bar
are, in the main, various kinds of jeans. These are not your
ordinary household items like catsup, soysauce or soap
which are of minimal cost. Maong pants or jeans are not
inexpensive. Accordingly, the casual buyer is predisposed
to be more cautious and discriminating in and would
prefer to mull over his purchase. Confusion and
deception, then, is less likely. Second, like his beer, the
average Filipino consumer generally buys his jeans by
brand. He does not ask the sales clerk for generic jeans but
for, say, a Levis, Guess, Wrangler or even an Armani. He is,
therefore, more or less knowledgeable and familiar with
his preference and will not easily be distracted. Finally,
more credit should be given to the ordinary purchaser
who is not the "completely unwary consumer" but is the
"ordinarily intelligent buyer" considering the type of
 INTELLECTUAL PROPERTY CODE
product involved (Emerald Garment v. CA, G.R. No. 100098,
December 29, 1995).
2. Mighty Corp’s “GALLO” for cigarettes vs. E. & J.’s
“GALLO” for wines
Mighty Corporation is engaged in the cultivation,
manufacture, distribution and sale of tobacco products
for which they have been using the GALLO trademark for
their cigarettes. E. & J. Gallo sued Mighty Corporation for
trademark infringement and unfair competition, when
one of their employees saw the Gallo cigarettes displayed
together with Gallo wines in a supermarket.
Applying the holistic test, wines and cigarettes are not
identical or competing products, neither do they belong to
the same class of goods. Product classification alone
cannot serve as the decisive factor to determine if wines
and cigarettes are related goods. Emphasis should be on
the similarity of the products involved and not on the
arbitrary classification or general description of their
properties or characteristics. The mere fact that one
person has adopted and used a particular trademark for
his goods does not prevent the adoption and use of the
same trademark by others on articles of a different
description. There is no trademark infringement if the
public does not expect the plaintiff to make or sell the
same class of goods as those made or sold by the
defendant (Mighty Corp v. E. & J. Gallo Winery, G.R. No.
154342, July 14, 2004).
3. Philip Morris’ “MARK VII” and “MARK TEN” vs.
Fortune Tobacco’s “MARK” for both cigarettes
Philip Morris, Inc. is the the registered owner of the
trademark "MARK VII" for cigarettes. Two of its
subsidiaries are the registered owner of the trademarks,
“MARK TEN” and “LARK”. On the other hand, Fortune
Tobacco manufactures and sells cigarettes using the
trademark “MARK”. Philip Morris filed a Complaint for
Infringement of Trademark and Damages against Fortune
arguing that the latter’s use of the trademark "MARK" is
likely to cause confusion or would deceive purchasers and
the public in general into buying these products under the
impression and mistaken belief that they are buying
Philip’s products.
The holistic test entails a consideration of the entirety of
the marks as applied to the products, including the labels
and packaging, in determining confusing similarity. In
light of the peculiarity of this case, there is no likelihood
of confusion. After comparing the trademarks involved in
their entirety as they appear on the products, the striking
dissimilarities are significant enough to warn any
purchaser that one is different from the other. Indeed,
although the perceived offending word "MARK" is itself
prominent in Philip’s trademarks "MARK VII" and "MARK
TEN," the entire marking system should be considered as
a whole and not dissected, because a discerning eye
would focus not only on the predominant word but also
on the other features appearing in the labels. Only then
would such discerning observer draw his conclusion
whether one mark would be confusingly similar to the
other and whether or not sufficient differences existed
343
between the marks (Philip Morris v. Fortune Tobacco, Inc.,
G.R. No. 158589, June 27, 2006).
Q: N Corporation manufactures rubber shoes under
the trademark “Jordann” which hit the Philippine
market in 1985, and registered its trademark with the
Bureau of Patents, Trademarks and Technology in
1990. PK Company also manufactures rubber shoes
with the trademark “Javorski” which it registered
with BPTTT in 1978. In 1992, PK Co adopted and
copied the design of N Corporation’s “Jordann” rubber
shoes, both as to shape and color, but retained the
trademark “Javorski” on its products. May PK
Company be held liable to N Co? Explain. (1996 Bar)
A: Yes. PK Co may be liable for unfairly competing against
N Co. By copying the design, shape and color of N
Corporation’s “Jordann” rubber shoes and using the same
in its rubber shoes trademarked “Javorski,” PK is
obviously trying to pass off its shoes for those of N. It is of
no moment that the trademark “Javorski” was registered
ahead of the trademark “Jordann.”
Priority in registration is not material in an action for
unfair competition as distinguished from an action for
infringement of trademark. The basis of an action for
unfair competition is confusing and misleading similarity
in general appearance, not similarity of trademarks
(Converse Rubber Co. v. Jacinto Rubber & Plastics Co., G.R.
Nos. 27425, 30505, April 28, 1980).
Principle of related goods
Goods are related when they belong to the same class or
have the same descriptive properties; when they possess
the same physical attributes or essential characteristics
with reference to their form, composition, texture or
quality. They may also be related because they serve the
same purpose or are sold in grocery stores (Esso Standard
Eastern, Inc. vs. The Honorable Court of Appeals; Canon
Kabushiki Kaisha v. Court of Appeals, G.R. No. 120900, July
20, 2000).
In resolving whether goods are related, several factors
come into play:
a. the business (and its location) to which the goods
belong;
b. the class of product to which the goods belong;
c. the product’s quality, quantity, or size, including the
nature of the package, wrapper or container;
d. the nature and cost of the article;
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. 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 distributed, marketed, displayed and
sold (Mighty Corporation vs. E. J. Gallo Winery, G.R. No.
154342, July 14, 2004).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Non-competing goods
Non-competing goods may be those which, though they
are not in actual competition, are so related to each other
that it might reasonably be assumed that they originate
from one manufacturer. Non-competing goods may also
be those which, being entirely unrelated, could not
reasonably be assumed to have a common source. In the
former case of related goods, confusion of business could
arise out of the use of similar marks; in the latter case of
non-related goods, it could not (Esso Standard Eastern,
Inc. v. The Honorable Court of Appeals, G.R. No. L-29971,
August 31, 1982).
In defining trademark infringement, Section 22 of RA 166
deleted the requirement in question and expanded its
scope to include such use of the mark or its colorable
imitation that is likely to result in confusion on "the
source or origin of such goods or services, or identity of
such business." Thus, while there is confusion of goods
when the products are competing, confusion of business
exists when the products are non-competing but related
enough to produce confusion of affiliation.
Modern law recognizes that the protection to which the
owner of a trademark is entitled is not limited to guarding
his goods or business from actual market competition
with identical or similar products of the parties, but
extends to all cases in which the use by a junior
appropriator of a trade-mark or trade-name is likely to
lead to a confusion of source, as where prospective
purchasers would be misled into thinking that the
complaining party has extended his business into the field
or is in any way connected with the activities of the
infringer; or when it forestalls the normal potential
expansion of his business (Mcdonald’s Corporation v. L &
C Big Mak Burger, Inc. August 18, 2004).
Doctrine of Unrelated Goods
The mere fact that one person has adopted and used a
trademark on his goods does not prevent the adoption
and use of the same trademark by others on unrelated
articles of a different kind. Since in this case the
trademark of petitioner is used in the sale of leather
wallets, key cases, money folds made of leather, belts,
men's briefs, neckties, handkerchiefs and men's socks,
and the trademark of registrant-appellant is used in the
sale of shoes, which have different channels of trade, the
Director of Patents ought to have reached a different
conclusion (Hickok Manufacturing Co., v. CA, G.R. No. L-
44707, August 31, 1982).
Generic figure
A trademark device is susceptible to registration if it is
crafted fancifully or arbitrarily and is capable of
identifying and distinguishing the goods of one
manufacturer or seller from those of another. Apart from
its commercial utility, the benchmark of trademark
registrability is distinctiveness. Thus, a generic figure as
that of a shark, if employed and designed in a distinctive
manner, can be a registrable trademark device, subject to
the provisions of the IP Code (Great White Shark
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
344
Enterprises, Inc. v. Danilo M. Caralde, Jr., G.R. No. 192294,
November 21, 2012).
Idem sonans rule
Two names are said to be "idem sonantes" if the attentive
ear finds difficulty in distinguishing them when
pronounced (Martin v. State, 541 S.W. 2d 605).
Similarity of sound is sufficient to rule that the two marks
are confusingly similar when applied to merchandise of
the same descriptive properties (Marvex Commercial v.
Director of Patent, G.R. No. L-19297, December 22, 1966).
Colorable imitation
Such a close or ingenious imitation as to be calculated to
deceive ordinary persons, or such a resemblance to the
original as to deceive an ordinary purchaser giving such
attention as a purchaser usually gives, as to cause him to
purchase the one supposing it to be the other (Societe des
Produits Nestlé, S.A. v. CA, G.R. No. 112012, April 4, 2001).
Doctrine of Secondary Meaning
This doctrine is to the effect that a word or phrase
originally incapable of exclusive appropriation with
reference to an article on the market, because
geographically or otherwise descriptive, might
nevertheless have been used so long and so exclusively by
one producer with reference to his article that, in that
trade and to that branch of the purchasing public, the
word or phrase has come to mean that the article was his
product (Ang vs. Teodoro, G. R. No. 48226, December 14,
1942).
Instances when there is no confusing similarity
between the trademarks
1. Great White Shark’s “GREG NORMAN SHARK LOGO
vs. Caralde’s “SHARK & LOGO”
While both marks use the shape of a shark, the Court
noted distinct visual and aural differences between them.
In Great White Shark's “GREG NORMAN LOGO,” there is
an outline of a shark formed with the use of green, yellow,
blue and red lines/strokes. In contrast, the shark in
Caralde's “SHARK & LOGO” mark is illustrated in letters
outlined in the form of a shark with the letter “S” forming
the head, the letter “H” forming the fins, the letters “A” and
“R” forming the body and the letter “K” forming the tail. In
addition, the latter mark includes several more elements
such as the word “SHARK” in a different font underneath
the shark outline, layers of waves, and a tree on the right
side, and liberally used the color blue with some parts in
red, yellow, green and white. The whole design is enclosed
in an elliptical shape with two linings. The visual
dissimilarities between the two (2) marks are evident and
significant, negating the possibility or confusion in the
minds of the ordinary purchaser, especially considering
the distinct aural difference between the marks (Great
White Shark Enterprises v. Caralde, G.R. No. 192294,
November 21, 2012).
2. “LEVI’s” vs. Diaz’s “LS JEANS”
 INTELLECTUAL PROPERTY CODE
The jeans trademarks of Levi’s Philippines and Diaz must
be considered as a whole in detemining the likelihood of
confusion between them. The consuming public could
easily discern if the jeans were original or fake or were
manufactured by other brands of jeans. Confusion and
deception were remote since maong jeans are expensive
and the casual buyer is predisposed to be more cautious
and discriminating in and would prefer to mull over his
purchase. Further, Diaz used the trade-mark “LS JEANS
TAILORING” for the jeans he produced and sold.
His trademark was visually and aurally different from the
trademark “LEVI STRAUSS & CO” appearing on the patch
of original jeans. Diaz also aptly noted that the design used
by LEVIS was an image of two horses but the evidence will
show that there was no such design in the seized jeans,
instead, what is shown is “buffalo design.” Moreover,
based on the certificate issued by the Intellectual Property
Office, “LS JEANS TAILORING” was a registered trademark
of Diaz. He had registered his trademark prior to the filing
of the present cases. The Intellectual Property Office
would certainly not have allowed the registration had
Diaz’s trademark been confusingly similar with the
registered trademark for LEVI’S 501 jeans (Diaz vs People
of the Philippines and Levi Strauss (Phil.), GR N0. 180677,
February 18, 2013, in Divina, 2014).
Trademark Dilution
It is the lessening of the capacity of a famous mark to
identify and distinguish goods or services, regardless of
the presence or absence of (1) competition between the
owner of the famous mark and other parties; or (2)
likelihood of confusion, mistake or deception. Subject to
the principles of equity, the owner of a famous mark is
entitled to an injunction against another person’s
commercial use in commerce of a mark or trade name, if
such use begins after the mark has become famous and
causes dilution of the distinctive quality of the mark (Levi
Strauss & Co., vs. Clinton Apparelle, Inc., G.R. No. 138900,
September 20, 2005).
WELL-KNOWN MARKS
The scope of protection initially afforded by Article 6bis
of the Paris Convention has been expanded via a
nonbinding recommendation that a well-known mark
should be protected in a country even if the mark is
neither registered nor used in that country (Sehwani,
Incorporated vs. In-N-Out Burger, Inc., G. R. No. 171053,
October 15, 2007).
A junior user of a well-known mark on goods or services
which are not similar to the goods or services, and are
therefore unrelated, to those specified in the certificate of
registration of the well-known mark is precluded from
using the same on the entirely unrelated goods or
services, subject to the following requisites, to wit:
1. The mark is well-known internationally and in the
Philippines;
2. The use of the well-known mark on the entirely
unrelated goods or services would result to the
likelihood of confusion of origin or business or some
345
business connection or relationship between the
registrant and the user of the mark;
3. The interests of the owner of the well-known mark
are likely to be damaged (246 Corporation, doing
business under the name and style of Rolex Music
Lounge v. Hon. Reynaldo B. Daway, in his capacity as
Presiding Judge of RTC Branch 90, Quezon City, G.R.
No. 157216, November 20, 2003).
Internationally well-known mark
The following constitutes internationally well-known
mark:
1. Considered by the competent authority of the
Philippines to be “well-known” internationally and in
the Philippines as the mark of a person other than the
applicant or registrant
2. Need not be used or registered in the Philippines
3. Need not be known by the public at large but only by
relevant sector of the public.
Rules regarding internationally-well known marks
A mark cannot be registered if it is identical with, or
confusingly similar to, or constitutes a translation of a
mark which is considered by the competent authority of
the Philippines to be well-known internationally and in
the Philippines, whether or not it is registered here, as
being already the mark of a person other than the
applicant for registration, and used for identical or
similar goods or services: Provided, That in determining
whether a mark is well-known, account shall be taken of
the knowledge of the relevant sector of the public, rather
than of the public at large, including knowledge in the
Philippines which has been obtained as a result of the
promotion of the mark;
A mark cannot be registered if it is identical with, or
confusingly similar to, or constitutes a translation of a
mark considered well-known in accordance with the
preceding paragraph, which is registered in the
Philippines with respect to goods or services which are
NOT similar to those with respect to which
registration is applied for: Provided, That use of the
mark in relation to those goods or services would indicate
a connection between those goods or services, and the
owner of the registered mark: Provided further, That the
interests of the owner of the registered mark are likely to
be damaged by such use (Sec. 123.IPC).
Factors to be considered in determining well-known
marks
Account shall be taken of the knowledge of the relevant
sector of the public, rather than of the public at large,
including knowledge in the Philippines which has been
obtained as a result of the promotion of the mark. The
following criteria or any combination thereof may be
taken into account in determining whether a mark is well-
known:
1. duration, extent and geographical area of any use of
the mark; in particular, the duration, extent and
geographical area of any promotion of the mark,
including advertising or publicity and the
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
presentation, at fairs or exhibitions, of the goods
and/or services to which the mark applies;
2. market share, in the Philippines and in other
countries, of the goods and/or services to which the
mark applies;
3. degree of the inherent or acquired distinction of the
mark;
4. quality image or reputation acquired by the mark;
5. extent to which the mark has been registered in the
world;
6. exclusivity of registration attained by the mark in the
world;
7. extent to which the mark has been used in the world;
8. exclusivity of use attained by the mark in the world;
9. commercial value attributed to the mark in the
world;
10. record of successful protection of the rights in the
mark;
11. outcome of litigations dealing with the issue of
whether the mark is a well-known mark; and
12. presence or absence of identical or similar marks
validly registered for or used on identical or similar
goods or services and owned by persons other than
the person claiming that his mark is a well-known
mark.
Provided, further, that the mark is well-known both
internationally and in the Philippines (Sec. 2, Rule 18, A.M.
No. 10-3-10-SC, October 18, 2011).
In Fredco Manufacturing Corporation vs. President and
Fellows of Harvard College, GR No. 185917, June 1, 2011,
Fredco Manufacturing Corporation (Fredco) filed before
the IPO a Petition for Cancellation of Registration issued
to Harvard University for the mark “Harvard Veritas
Shield Symbol”. Fredco claims that as early as 1982 the
mark was already used in the Philippines by its
predecessor-in-interest. Harvard University, on the other
hand, claimed that the name and mark “Harvard” was
adopted in 1639 as the name of Harvard College of
Cambridge, Massachusetts, USA. The mark had been used
in commerce since 1872, and was registered in more than
50 countries.
The Supreme Court ruled that "Harvard" is the trade
name of the world famous Harvard University, and it is
also a trademark of Harvard University. Under Article 8 of
the Paris Convention, as well as Section 37 of R.A. No. 166,
Harvard University is entitled to protection in the
Philippines of its trade name "Harvard" even without
registration of such trade name in the Philippines.
This means that no educational entity in the Philippines
can use the trade name "Harvard" without the consent of
Harvard University. Likewise, no entity in the Philippines
can claim, expressly or impliedly through the use of the
name and mark "Harvard," that its products or services
are authorized, approved, or licensed by, or sourced from,
Harvard University without the latter's consent.
To be protected under the two directives of the Ministry
of Trade, an internationally well-known mark need not be
registered or used in the Philippines. All that is required
is that the mark is well-known internationally and in the
Philippines for identical or similar goods, whether or not
the mark is registered or used in the Philippines. Section
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
346
123.1(e) of R.A. No. 8293 now categorically states that "a
mark which is considered by the competent authority of
the Philippines to be well-known internationally and in
the Philippines, whether or not it is registered here,"
cannot be registered by another in the Philippines.
Section 123.1(e) does not require that the well-known
mark be used in commerce in the Philippines but only that
it be well-known in the Philippines.
Division of application
Any application referring to several goods or services,
hereafter referred to as the "initial application," may be
divided by the applicant into two (2) or more applications,
hereafter referred to as the "divisional applications," by
distributing among the latter the goods or services
referred to in the initial application. The divisional
applications shall preserve the filing date of the initial
application or the benefit of the right of priority (Sec. 129,
IPC).
Priority right
An application for registration of a mark filed in the
Philippines by a person referred to in Section 3 of the IP
Code, and who previously duly filed an application for
registration of the same mark in one of those countries,
shall be considered as filed as of the day the application
was first filed in the foreign country. No registration of a
mark shall be granted until such mark has been registered
in the country of origin of the applicant (Sec. 131, IPC).
The owner of a mark seeking priority right is not entitled
to sue for acts committed prior to the date on which his
mark was registered in the Philippines: except in the case
of an owner of a well-known mark.
RIGHTS CONFERRED BY REGISTRATION
Certificate of registration prima facie evidence of
validity
A certificate of registration of a mark shall be prima facie
evidence of the validity of the registration, the registrant’s
ownership of the mark, and of the registrant’s exclusive
right to use the same in connection with the goods or
services and those that are related thereto specified in the
certificate (IPC, Sec. 138).
Issuance and publication of certificate
The certificate of registration shall be issued when the
period for filing the opposition has expired, or when the
Director of Legal Affairs shall have denied the opposition,
and upon payment of the required fee (IPC, Sec. 136).
The registered mark shall be published, in the form and
within the period fixed by the Regulations. Marks
registered at the Office may be inspected free of charge
and any person may obtain copies thereof at his own
expense. This provision shall also be applicable to
transactions recorded in respect of any registered mark
(IPC, Sec. 138).
Duration of a certificate of trademark registration
 INTELLECTUAL PROPERTY CODE
A certificate of registration shall remain in force for ten
(10) years, provided that the registrant shall file a
declaration of actual use and evidence to that effect, or
shall show valid reasons based on the existence of
obstacles to such use, as prescribed by the Regulations,
within one (1) year from the fifth anniversary of the date
of the registration of the mark. Otherwise, the mark shall
be removed from the Register by the Office (IPC, Sec. 145).
The applicant or the registrant shall file a declaration of
actual use of the mark with evidence to that effect, as
prescribed by the Regulations within three (3) years from
the filing date of the application. Otherwise, the
application shall be refused or the mark shall be removed
from the Register by the Director (IPC, Sec. 124.2).
Effect of failure to file Declaration of Actual Use
The applicant or the registrant shall file a declaration of
actual use (DAU) of the mark with evidence to that effect,
within three (3) years from the filing date of the
application. Otherwise, the application shall be refused or
the mark shall be removed from the Register by the
Director (IPC, Sec. 124.2).
A fifth anniversary use is also required. This is done by
filing a declaration of actual use and evidence to that
effect within one year from the fifth anniversary of the
registration. The form and evidence of use required are
similar to the third year DAU. Failure to submit the fifth
anniversary use and evidence to that effect shall merit the
cancellation of the mark.
Renewal of registration
A certificate of registration may be renewed for periods of
ten (10) years at its expiration. Each request for renewal
of registration must be made within 6 months before the
expiration of the registration or within 6 months after
such expiration on payment of the additional fee
prescribed (IPC, Sec. 146).
Rights of a registered mark owner
Except in cases of importation of drugs and medicines
allowed under Section 72.1 of the IP Code and of off-
patent drugs and medicines, the owner of a registered
mark shall have the exclusive right to prevent all third
parties not having the owner’s consent from using in the
course of trade identical or similar signs or containers for
goods or services which are identical or similar to those
in respect of which the trademark is registered where
such use would result in a likelihood of confusion. In case
of the use of an identical sign for identical goods or
services, a likelihood of confusion shall be presumed.
There shall be no infringement of trademarks or trade
names of imported or sold patented drugs and medicines
allowed under Section 72.1 of the IP Code, as well as
imported or sold off-patent drugs and medicines;
Provided, That said drugs and medicines bear the
registered marks that have not been tampered, unlawfully
modified, or infringed upon, under Section 155 of the IP
Code (Sec. 147, IPC).
347
Cancellation of trademark registration
A: A trademark registration may be cancelled by any
person who believes that he will be damaged by the
registration of the mark:
1. Within 5 years, from the date of the registration of the
mark; or
2. At any time;
a. If the registered mark becomes the generic name
for the goods or services, or a portion thereof, for
which it is registered;
b. If the mark has been abandoned;
c. If its registration was obtained fraudulently or
contrary to the provisions of the IPC;
d. If the registered mark is being used by, or with
the permission of, the registrant so as to
misrepresent the source of the goods or services
on or in connection with which the mark is used;
e. Non-use of the mark within the Philippines,
without legitimate reason, for an uninterrupted
period of 3 years.
NOTE: If in a petition for cancellation of a trademark, it
was established that the petitioner was not its owner,
prior registration can be cancelled without need of filing
a separate petition (E.Y. Industrial Sales, Inc. v. Shen Dar
Electricity and Machinery Co. Ltd., G.R. No. 184850, October
20, 2010).
USE BY THIRD PARTIES OF NAMES, ETC.
SIMILAR TO REGISTERED MARK
Use of indications by third parties for purposes other
than those for which the mark is used
Registration of the mark shall not confer on the registered
owner the right to preclude third parties from using bona
fide their names, addresses, pseudonyms, a geographical
name, or exact indications concerning the kind, quality,
quantity, destination, value, place of origin, or time of
production or of supply, of their goods or services.
INFRINGEMENT AND REMEDIES
Trademark infringement
Use without consent of the trademark owner of any
reproduction, counterfeit, copy or colorable limitation of
any registered mark or trade name. Such use is likely to
cause confusion or mistake or to deceive purchasers or
others as to the source or origin of such goods or services,
or Identity of such business (Esso Standard Eastern v. CA,
supra).
A crucial issue in any trademark infringement case is the
likelihood of confusion, mistake or deceit as to the
identity, source or origin of the goods or identity of the
business as a consequence of using a certain mark.
Likelihood of confusion is admittedly a relative term, to be
determined rigidly according to the particular (and some-
times peculiar) circumstances of each case. Thus, in
trademark cases, more than in other kinds of litigation,
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
precedents must be studied in the light of each particular
case (Mighty Corporation vs. E. J. Gallo Winery, G.R. No.
154342, 14 July 2004).
Failure to present proof of actual confusion does not
negate their claim of trademark infringement. Trademark
infringement requires the less stringent standard of
“likelihood of confusion” only. While proof of actual
confusion is the best evidence of infringement, its absence
is inconsequential (McDonalds Corporation v. L. C. Big Mak
Burger, Inc., G.R. No. 143993, August 18, 2004).
Elements to be established in trademark
infringement
a. The trademark or trade name is reproduced,
counterfeited, copied, or colorably imitated by the
infringer;
b. The infringing mark or trade name is used in
connection with the sale, offering for sale, or
advertising of any goods, business or services; or the
infringing mark or trade name is applied to labels,
signs, prints, packages, wrappers, receptacles or
advertisements intended to be used upon or in
connection with such goods, business or services;
c. The use or application of the infringing mark or trade
name is likely to cause confusion or mistake or to
deceive purchasers or others as to the goods or
services themselves or as to the source or origin of
such goods or services or the identity of such
business; and
d. It is without the consent of the trademark or trade
name owner or the assignee thereof (Prosource
International, Inc. vs. Horphag Research Management
SA, G.R. No. 180073, November 25, 2009; Diaz v. People
of the Philippines and Levi-Strauss (Phil.), G. R. No.
180677, February 18, 2013).
Counterfeit Goods vs. Colorable Imitation
distribution or advertising of goods or services which is
likely to cause confusion, mistake or deception among the
buyers or consumers can be considered as trademark
infringement (Republic Gas Corporation v. Petron
Corporation, G. R. No. 194062, June 17, 2013).
The trademark “Marlboro“ is not only valid for being
neither generic nor descriptive, it was also exclusively
owned by PMPI, as evidenced by the certificate of
registration issued by the Intellectual Property Office.
Infringement of trademark clearly lies since the
counterfeit cigarettes were intended to confuse and
deceive the public as to the origin of the cigarettes
intended to be sold, as they not only bore PMPI’s
trademark but they were packaged almost exactly as
PMPI’s products (Ong v. People of the Philippines, GR No.
169440, November 23, 2011).
Remedies of the owner of the trademark against
infringers
1. Civil —filed with the Regional Trial Courts. The
owner of the registered mark may ask the court to
issue a preliminary injunction to quickly prevent
infringer from causing damage to his business.
Furthermore, the court will require infringer to pay
damages to the owner of the mark provided
defendant is shown to have had notice of the
registration of the mark (which is presumed if a
letter R within a circle is appended) and stop him
permanently from using the mark.
2. Criminal— the owner of the trademark may ask the
court to issue a search warrant and in appropriate
cases, remedies available shall also include the
seizure, forfeiture and destruction of the
infringing goods and of any materials and
implements the predominant use of which has been
in the commission of the offense.

COUNTERFEIT GOODS COLORABLE 3. Administrative—same as in patent infringement

IMITATION cases. If the amount of damages claimed is not less
any goods, including "such a close or ingenious than P200,000.00, the registrant may choose to
packaging, bearing imitation as to be seek redress against the infringer by filing an
without authorization a calculated to deceive administrative action against the infringer with
trademark which is ordinary purchasers, or the Bureau of Legal Affairs.
identical to the trademark such resemblance of the
validly registered in infringing mark to the Ascertainment of the amount of damages in a civil
respect of such goods, or original as to deceive an action for infringement
which cannot be ordinary purchaser
distinguished in its giving such attention as a The owner of a trademark which has been infringed is
essential aspects from purchaser usually gives, entitled to actual damages:
such a trademark, and and to cause him to
which thereby infringes purchase the one 1. The reasonable profit which the complaining party
the rights of the owner of supposing it to be the would have made, had the defendant not infringed
the trademark in question other (Emerald vs. CA, G.R. his said rights; or
under the law of the No. 100098, December 29, 2. The profit which the defendant actually made out of
country of importation 1995). infringement; or
(TRIPs Agreement). 3. The court may award as damages a reasonable
percentage based upon the amount of gross sales of
Unauthorized use of container bearing a registered the defendant or the value of the services in
trademark connection with which the mark or trade name was
issued.
The mere unauthorized use of a container bearing a
registered trademark in connection with the sale,

UNIVERSITY OF SANTO TOMAS

2016 GOLDEN NOTES
348
 INTELLECTUAL PROPERTY CODE
In cases where actual intent to mislead the public or to
defraud the complainant is shown, in the discretion of the
court, the damages may be doubled (IPC, Sec. 156.3).
Jurisdiction over violations of intellectual property
rights
It is properly lodged with the Regional Trial Court even
if the penalty therefore is imprisonment of less than six
years, or from 2 to 5 years and a fine ranging from
P50,000 to P200,000.
R.A. No. 8293 and R.A. No. 166 are special laws conferring
jurisdiction over violations of intellectual property rights
to the Regional Trial Court. They should therefore prevail
over R.A. No. 7691, which is a general law (Samson v.
Daway, G.R. No. 160054-55, July 21, 2004).
Q: K-9 Corporation, a foreign corporation alleging
itself to be the registered owner of trademark “K-9”
and logo “K”, filed an Inter Partes case with the
Intellectual Property Office against Kanin
Corporation for the cancellation of the latter’s mark
“K-9” and logo “K.” During the pendency of the case
before the IPO, Kanin Corporation brought suit
against K-9 Corporation before the RTC for
infringement and damages. Could the action before
the RTC prosper? Why? (2003 Bar)
A: Yes, the action before the RTC can prosper. According
to Section 151.2 of the IPO, the filing of a suit to enforce
the registered mark with the proper court or agency shall
exclude any other court or agency from assuming
jurisdiction over a subsequently filed petition to cancel
the same mark. On the other hand, the earlier filing of
petition to cancel the mark with the Bureau of Legal
Affairs shall not constitute a prejudicial question that
must be resolved before an action to enforce the rights to
same registered mark may be decided. The issues raised
before the different the IPO and the RTC are different. The
issue raised before the IPO is whether or not the
cancellation of the subsequent trademark is proper
because of the prior ownership of the disputed mark by
K-9. While the issue raised before the RTC pertains to
infringement. Furthermore, an action for infringement or
unfair competition, as well as the remedy of injunction
and relief for damages, is explicitly and unquestionably
within the competence and jurisdiction of ordinary courts
(Shangri-la International Hotel Management, Ltd., v.
Makati Shangri-la Hotel and Resort Inc., G.R. No.
111580. June 21, 2001).
Venue in filing actions for infringment
A.M. 02-1-06-SC (The Rule on Search and Seizure in Civil
Ac-tions for Infringement of Intellectual Property Rights)
governs the issuance of a writ of search and seizure in a
civil action for infringement filed by an intellectual
property right owner against the supposed infringer of his
trademark or name. Under this rule, the claim for
damages should be filed with the same court that issued
the writ of search and seizure.
However, Philip Morris, the manufacturer of Marlboro
cigarettes did not go by this route. Philip Morris did not
349
file a civil action for infringement of its trademark against
the Del Rosarios before the RTC of Angeles City. Instead,
Philip Morris sought assistance from the NBI for the
apprehension and criminal prosecution of those
reportedly appropriating its trademark and selling fake
Marlboro cigarettes. In turn, the NBI instituted a police
action that included applying for a search and seizure
warrant under Sections 3, 4, 5 and 6 of Rule 126 of the
Rules of Criminal Procedure (not under the provisions of
A.M. 02-1-06-SC) against the Del Rosarios upon the belief
that they were storing and selling fake Marlboro
cigarettes in violation of the penal provisions of the
intellectual property law.
The proceeding under Rule 126, a limited criminal one,
does not provide for the filing of counterclaims for
damages against those who may have improperly sought
the issuance of the search warrant. Consequently, the Del
Rosarios had the right to seek damages, if the
circumstances warranted, by separate civil action for the
wrong inflicted on them by an improperly obtained or
enforced search warrant (Del Rosario, et al. v. Doanto, Jr.
et al., G.R. No. 180595, March 4, 2010, in Divina, 2014).
Limitations on the actions for infringement
1. Right of prior user– registered mark shall be without
affect against any person who, in good faith, before
filing or priority date, was using the mark for
purposes of his business (IPC, Sec 159.1).
2. Relief against publisher– injunction against future
printing against an innocent infringer who is
engaged solely in the business of printing the mark
(IPC, Sec. 159.2).
3. Relief against newspaper –injunction against the
presentation of advertising matter in future issues of
the newspaper, magazine or in electronic
communications in case the infringement
complained of is contained in or is part of paid
advertisement in such materials(IPC, Sec. 159.3)
UNFAIR COMPETITION
Employing deception or any other means contrary to
good faith by which a person passes off his goods or
business or services for those of one who has already
established goodwill thereto (IPC, Sec. 168.2).
It is the passing off (or palming off) or attempting to pass
off upon the public of the goods or business of one person
as the goods or business of another with the end and
probable effect of deceiving the public. Passing off (or
palming off) takes place where the defendant, by imitative
devices on the general appearance of the goods, misleads
prospective purchasers into buying his merchandise
under the impression that they are buying that of his
competitors. Thus, the defendant gives his goods the
general appearance of the goods of his competitor with
the intention of deceiving the public that the goods are
those of his competitor (Republic Gas Corporation v.
Petron Corporation, G. R. No. 194062, June 17, 2013).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Infringement of trademark vs. Unfair competition
(2015 Bar)
INFRINGEMENT OF UNFAIR
TRADEMARK COMPETITION
Unauthorized use of a The passing off of one’s
trademark. goods as those of another.
Fraudulent intent is Fraudulent intent is
unnecessary. essential.
GR: Prior registration of
Registration is not
the trademark is a
necessary. (Del Monte
prerequisite to the action.
Corp. v. CA, G.R. No. 78325,
January 23, 1990)
XPN: Well-known marks
Q: In what way is an infringement of a trademark
similar to that which pertains to unfair competition?
(2003 Bar)
A: The similarity lies in both their ability to disrupt fair
competition amongst business enterprises and other
businesses. They can also create confusion, mistake, and
deception as to the minds of the consumers with regard
to the source or identity of their products or services due
to its similarity in appearance or packaging.
Right protected under unfair competition
A person who has identified in the mind of the public the
goods he manufactures or deals in, his business or
services from those of others, whether or not a registered
mark is employed, has a property right in the goodwill of
the said goods, business or services so identified, which
will be protected in the same manner as other property
rights (IPC, Sec. 168.1).
Persons guilty of unfair competition
1. Any person, who is selling his goods and gives them
the general appearance of goods of another
manufacturer or dealer, either as to the goods
themselves or in the wrapping of the packages in
which they are contained, or the devices or words
thereon, or in any other feature of their appearance,
which would be likely to influence purchasers to
believe that the goods offered are those of a
manufacturer or dealer, other than the actual
manufacturer or dealer, or who otherwise clothes the
goods with such appearance as shall deceive the public
and defraud another of his legitimate trade, or any
subsequent vendor of such goods or any agent of any
vendor engaged in selling such goods with a like
purpose;
2. Any person who by any artifice, or device, or who
employs any other means calculated to induce the false
belief that such person is offering the services of
another who has identified such services in the mind
of the public;
3. Any person who shall make any false statement in the
course of trade or who shall commit any other act
contrary to good faith of a nature calculated to
discredit the goods, business or services of another.
(IPC, Sec. 168.3)
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
350
Trademark infringement is more limited but it recognizes
a more exclusive right derived from the trademark
adoption and registration by the person whose goods or
business is first associated with it. Hence, even if one fails
to establish his exclusive property right to a trademark,
he may still obtain relief on the ground of his competitor’s
unfairness or fraud. Conduct constitutes unfair
competition if the effect is to pass off on the public the
goods of one man as the goods of another (Mighty
Corporation v. E. & J. Gallo Winery, G.R. No. 154342, July 14,
2004).
An action for unfair competition is based on the
proposition that no dealer in merchandise should be
allowed to dress his goods in simulation of the goods of
another dealer, so that purchasers desiring to buy the
goods of the latter would be induced to buy the goods of
the former. The most usual devices employed in
committing this crime are the simulation of labels and the
reproduction of form, color and general appearance of the
package used by the pioneer manufacturer or dealer
(Caterpillar, Inc. vs. Samson, G.R. No. 164605, October 27,
2006).
Jurisprudence also formulated the following “true test” of
unfair competition: whether the acts of the defendant
have the intent of deceiving or are calculated to deceive
the ordinary buyer making his purchases under the
ordinary conditions of the particular trade to which the
controversy relates. One of the essential requisites in an
action to restrain unfair competition is proof of fraud; the
intent to deceive, actual or probable must be shown
before the right to recover can exist (Superior Enterprises,
Inc. vs. Kunnan Enterprises Ltd., supra).
Essential Elements of an action for unfair competition
a. confusing similarity in the general appearance of the
goods, and
b. intent to deceive the public and defraud a
competitor.
The confusing similarity may or may not result from
similarity in the marks, but may result from other external
factors in the packaging or presentation of the goods. The
intent to deceive and defraud may be inferred from the
similarity of the appearance of the goods as offered for
sale to the public (McDonalds Corporation vs. L. C. Big Mak
Burger, Inc., G.R. No. 143993, August 18, 2004).
The element of passing off
In order to prove a case of unfair competition, it is
sufficient to show that such deception will be the natural
and probable cause of defendants acts.
Q: The NBI found that SG Inc. is engaged in the
reproduction and distribution of counterfeit
"playstation games" and thus applied with the Manila
RTC warrants to search respondent's premises in
Cavite. RTC granted such warrants and thus, the NBI
served the search warrants on the subject premises.
SG Inc. questioned the validity of the warrants due to
wrong venue since the RTC of Manila had no
 INTELLECTUAL PROPERTY CODE
jurisdiction to issue a search warrant enforceable in probable cause. The pendency of a similar action for
Cavite. Is the contention of SG Inc. correct? infringement of trademark and unfair competition against
the very person who applied for search warrant does not
A: No, unfair competition is a transitory or continuing bar the issuance of the warrant if it is based on probable
offense under Section 168 of Republic Act No. 8293. As cause (Century Chinese Medicine Co., et.al. v. People of the
such, petitioner may apply for a search warrant in any Philippines and Ling Na Lau. G.R. No. 188526, November 11,
court where any element of the alleged offense was 2013, in Divina, 2014).
committed, including any of the courts within Metro
Manila and may be validly enforced in Cavite (Sony TRADE NAME OR BUSINESS NAME
Computer Entertainment Inc. v. Supergreen Inc. G.R. No.
161823, Mar. 22, 2007). Any individual name or surname, firm name, device nor
word used by manufacturers, industrialists, merchants,
NOTE: Section 2, Rule 10 of the Rules of Procedure on IP and others to identify their businesses, vocations or
Cases (A.M. No. 10-3-10 SC, October 18, 2011) provides occupants (Converse Rubber Corp. vs. Universal Rubber
that Special Commercial Courts in Quezon City, Manila, Products, GR No. L-27425, L-30505, April 28, 1980).
Makati, and Pasig shall have authority to act on
applications for the issuance of search warrants involving Limitations on use of trade name or business name
violations of the Intellectual Property Code, which search
warrants shall be enforceable nationwide. Within their A person may NOT:
respective territorial jurisdictions, the Special
1. Use a name if the word is generic (Lyceum of the
Commercial Courts in the judicial regions where the
violation of intellectual property rights occurred shall Philippines v. CA, G.R. No. 101897, March 5, 1993).
2. Use any name indicating a geographical locations
have concurrent jurisdiction to issue search warrants.
(Ang Si Heng vs. Wellington Department Store, supra).
3. Use any name or designation contrary to public order
The "true test" of unfair competition has thus been
or morals.
"whether the acts of the defendant have the intent of
4. Use a name if it is liable to deceive trade circles or the
deceiving or are calculated to deceive the ordinary buyer
public as to the nature of the enterprise identified by
making his purchases under the ordinary conditions of
that name (IPC, Sec. 165.1).
the particular trade to which the controversy relates." It
5. Subsequently use a trade name likely to mislead the
is therefore essential to prove the existence of fraud, or
public as a third party (IPC, Sec. 165.2 [b]).
the intent to deceive, actual or probable, determined
6. Copy or simulate the name of any domestic product
through a judicious scrutiny of the factual circumstances
(for imported products).
attendant to a particular case (Shang Properties Realty
7. Copy or simulate a mark registered in accordance
Corporation (formerly The Shang Grand Tower
with the provisions of IPC (for imported products).
Corporation) and Shang Properties, Inc. (formerly EDSA
Properties Holdings, Inc.) v. St. Francis Development 8. Use mark or trade name calculated to induce the
public to believe that the article is manufactured in
Corporation, G.R. No. 190706, July 21, 2014).
the Philippines, or that it is manufactured in any
foreign country or locality other than the country or
A distinction should be made between suits for trademark
locality where it is in fact manufactured.
infringement and unfair competition: (a) the former is the
unauthorized use of a trademark, whereas the latter is the
NOTE: Items 4, 5 and 6 only applies to imported products
passing off of one’s goods as those of another; (b)
and those imported articles shall not be admitted to entry
fraudulent intent is unnecessary in the former, while it is
at any customhouse of the Philippines (IPC, Sec. 166).
essential in the latter; and (c) in the former, prior
registration of the trademark is a pre-requisite to the
Change in the ownership of a trade name is made with the
action, while it is not necessary in the latter (Roberto Co v.
transfer of the enterprise or part thereof identified by that
Keng Huan Jerry Yeung and Emma Yeung, G.R. No. 212705,
name (IPC, Sec. 165.4).
September 10, 2014).
COLLECTIVE MARK
Applicability of Rules on the Issuance of the Search
and Seizure Order in Civil Actions for Infringement
A "collective mark" or “collective trade-name" is a mark
or trade-name used by the members of a cooperative, an
The Rules on the Issuance of the Search and Seizure in
association or other collective group or organization (RA
Civil Actions for Infringement of Intellectual Property
166, Sec. 40).
Rights are not applicable in this case as the search
warrants were not applied based thereon, but in
Contents of an application for registration of a
anticipation of criminal actions for violation of intellectual
collective mark
property rights under RA 8293. It was established that
respondent had asked the NBI for assistance to conduct
1. The application shall designate the mark as a
investigation and search warrant implementation for
collective mark;
possible apprehension of several drugstore owners
2. Accompanied by a copy of the agreement, if any,
selling imitation or counterfeit TOP GEL T.G. & DEVICE OF
governing the use of the collective mark (IPC, Sec.
A LEAF papaya whitening soap. What is applicable is Rule
167.2)
126 of the Rules of Criminal Procedure. A core requisite
before a warrant shall validly issue is the existence of

UNIVERSITY OF SANTO TOMAS

351 FACULTY OF CIVIL LAW
 MERCANTILE LAW
Grounds for the cancellation of collective marks
The Court shall cancel the registration of a collective mark
if the person requesting the cancellation proves that:
1. only the registered owner uses the mark,
2. he uses or permits its use in contravention of the
agreements referred to in Subsection 166.2,
3. he uses or permits its use in a manner liable to
deceive trade circles or the public as to the origin or
any other common characteristics of the goods or
services concerned (IPC, Sec 167.3).
The registration of a collective mark, or an application
therefore shall not be the subject of a license contract.
Criminal penalties under the Intellectual Property
Code for unfair competition, infringement, false
designation of origin and false representations
A criminal penalty of imprisonment from two (2) years to
five (5) years and a fine ranging from Fifty thousand pesos
(P50,000) to Two hundred thousand pesos (P200,000),
shall be imposed on any person who is found guilty of
committing any of the acts. The penalty shall be
independent of the civil and administrative sanctions
imposed by law (IPC, Sec 170).
Transliteration vs. Translation of mark
Transliteration Translation
is an act, process or is an act, process or
instances of representing instance of translating as
or spelling of words, letters rendering from one
or characters of one language or
language in the letters and representational system
characters of another into another.
language or alphabet
COPYRIGHT
Copyright
A right over literary and artistic works which are original
intellectual creations in the literary and artistic domain
protected from the moment of creation (IPC, Sec. 171.1).
BASIC PRINCIPLES
Elements of copyrightability
1. Originality – Must have been created by the author’s
own skill, labor, and judgment without directly
copying or evasively imitating the work of another
(Ching Kian Chuan v. CA, G.R. No. 130360, Aug. 15,
2001).
2. Expression – Must be embodied in a medium
sufficiently permanent or stable to permit it to be
perceived, reproduced or communicated for a period
more than a transitory duration.
Principle of automatic protection: Works are protected
by the sole fact of their creation irrespective of their
content, quality or purpose. Such rights are conferred
from the moment of creation.
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
352
Copyright, in the strict sense of the term, is purely a
statutory right. Being a mere statutory grant, the rights
are limited to what the statute confers. It may be obtained
and enjoyed only with respect to the subjects and by the
persons, and on terms and conditions specified in the
statute. Accordingly, it can only cover the works falling
within the statutory enumeration or description. Only the
expression of an idea is protected by copyright, not the
idea itself (Pearl & Dean (Phil.), Incorporated vs. Shoemart,
Incorporated, G.R. No. 148222, August 15, 2003; Joaquin, Jr.
vs. Drilon, G.R. No. 108946, January 28, 1999; Ching vs.
Salinas, G.R. No. 161295, June 29, 2005).
A person, to be entitled to a copyright, must be the original
creator of the work. He must have created it by his own
skill, labor and judgment without directly copying or
evasively imitating the work of another (Kian Chuan v.
Hon. Court of Appeals, G.R. No. 130360, August 15, 2001;
Sambar v. Levi Strauss & Co., G.R. No. 132604, March 6,
2002).
Functional components of useful articles, no matter how
artistically designed, have generally been denied
copyright protection unless they are separable from the
useful article (Ching v. Salinas, G.R. No. 161295, June 29,
2005).
While works of applied art, original intellectual, literary
and artistic works are copyrightable, useful articles and
works of industrial design are not. A useful article may be
copyrightable only if and only to the extent that such
design incorporates pictorial, graphic, and sculptural
features that can be identified separately from and are
capable of existing independently of the utilitarian
aspects of the article (Ching v. Salinas, G.R. No. 161295,
June 29, 2005).
Elements of originality
1. Independently created by the author; and
2. Possesses some minimal degree of creativity
Time when copyright vests
Works are protected from the time of their creation,
irrespective of their mode or form of expression, as well
as of their content, quality and purpose (IPC, Sec. 172.2).
P.D. 49, as amended, does not require registration and
deposit for a creator to be able to file an action for
infringement of his rights. These conditions are merely
pre-requisites to an action for damages. So, as long as the
proscribed acts are shown to exist, an action for
infringement may be initiated (Columbia Pictures, Inc. v.
CA, G.R. No. 110318, August 28, 1996).
The certificates of registration and deposit issued by the
National Library and the Supreme Court Library serve
merely as a notice of recording and registration of the
work but do not confer any right or title upon the
registered copyright owner or automatically put his work
under the protective mantle of the copyright law. It is not
a conclusive proof of copyright ownership. As it is, non-
registration and deposit of the work within the prescribed
 INTELLECTUAL PROPERTY CODE
period only makes the copyright owner liable to pay a fine
(Manly Sportswear Manufacturing Inc. v. Dadodette
Enterprises and/or Hermes Sports Center, G.R. No. 165306,
September 20, 2005).
Copyright and Material Object
The copyright is distinct from the property in the material
object subject to it. Consequently, the transfer,
assignment or licensing of the copyright shall not itself
constitute a transfer of the material object. Nor shall a
transfer or assignment of the sole copy or of one or
several copies of the work imply transfer, assignment or
licensing of the copyright (IPC, as amended by R.A. 10372,
Sec. 181).
COPYRIGHTABLE WORKS
1. Literary and Artistic Works
a. Books, pamphlets, articles and other writings
b. Lectures, sermons, addresses, dissertations
prepared for Oral delivery, whether or not
reduced in writing or other material form
c. Letters
d. Dramatic, choreographic works
e. Musical compositions
f. Works of Art
g. Periodicals and Newspapers
h. Works relative to Geography, topography,
architecture or science
i. Works of Applied art
j. Works of a Scientific or technical character
k. Photographic works
l. Audiovisual works and cinematographic works
m. Pictorial illustrations and advertisements
n. Computer programs; and
o. Other literary, scholarly, scientific and artistic
works (IPC, Sec. 172.1).
2. Derivative Works
a. Dramatizations, translations, adaptations,
abridgements, arrangements, and other
alterations of literary or artistic works;
b. Collections of literary, scholarly, or artistic
works and compilations of data and other
materials which are original by reason of the
selection or coordination or arrangement of
their contents (IPC, Sec. 173).
Derivative works shall be protected as new works,
provided that such new work shall not affect the force of
any subsisting copyright upon the original works
employed or any part thereof, or be construed to imply
any right to such use of the original works, or to secure or
extend copyright in such original works (IPC, Sec. 173.2).
Q: P&D was granted a copyright on the technical
drawings of light boxes as "advertising display units".
SMI, however, manufactured similar or identical to
the light box illustrated in the technical drawings
copyrighted by P&D for leasing out to different
advertisers. Was this an infringement of P&D’s
copyright over the technical drawings?
353
A: No. P&D’s copyright protection extended only to the
technical drawings and not to the light box itself. The light
box was not a literary or artistic piece which could be
copyrighted under the copyright law. If SMI reprinted
P&D’s technical drawings for sale to the public without
license from P&D, then no doubt they would have been
guilty of copyright infringement. Only the expression of an
idea is protected by copyright, not the idea itself. If what
P&D sought was exclusivity over the light boxes, it should
have instead procured a patent over the light boxes itself
(Pearl and Dean Inc. v. Shoe Mart Inc., GR No. 148222,
August 15, 2003).
Q: Juan Xavier wrote and published a story similar to
an unpublished copyrighted story of Manoling
Santiago. It was, however, conclusively proven that
Juan Xavier was not aware that the story of Manoling
Santiago was protected by copyright. Manoling
Santiago sued Juan Xavier for infringement of
copyright. Is Juan Xavier liable? (1998 Bar)
A: Yes. Juan Xavier is liable for infringement of copyright.
It is not necessary that Juan Xavier is aware that the story
of Manoling Santiago was protected by copyright. The
work of Manoling Santiago is protected from the time of
its creation (Habana v. Robles, G.R. No. 131522, July 19,
1999).
There will still be originality sufficient to warrant
copyright protection if “the author, through his skill and
effort, has contributed a distinguishable variation from
the older works.” In such a case, of course, only those
parts which are new are protected by the new copyright.
Hence, in such a case, there is no case of infringement.
Juan Xavier is no less an “author” because others have
preceded him.
NON-COPYRIGHTABLE WORKS
Non-copyrightable works
1. Idea, procedure, system, method or operation,
concept, principle, discovery or mere data as such
2. News of the day and other items of press information
3. Any official text of a legislative, administrative or
legal nature, as well as any official translation thereof
4. Pleadings
5. Decisions of courts and tribunals – this refers to
original decisions and not to annotated decisions
such as the SCRA or SCAD as these already fall under
the classification of derivative works, hence
copyrightable
6. Any work of the government of the Philippines
GR: Conditions imposed prior the approval of the
government agency or office wherein the work is
created shall be necessary for exploitation of such
work for profit. Such agency or office, may, among
other things, impose as condition the payment of
royalties.
XPN: No prior approval or conditions shall be
required for the use of any purpose of statutes, rules
and regulations, and speeches, lectures, sermons,
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
addresses, and dissertations, pronounced, read, or XPN: Work of Architecture - Copyright in a work of
rendered in courts of justice, before administration architecture shall include the right to control the erection
agencies, in deliberative assemblies and in meetings of any building which reproduces the whole or a
of public character (IPC, Sec. 176). substantial part of the work either in its original form or
in any form recognizably derived from the original:
7. TV programs, format of TV programs (Joaquin v.
Provided, That the copyright in any such work shall not
Drilon, G.R. No. 108946, Jan. 28, 1999)
include the right to control the reconstruction or
8. Systems of bookkeeping; and rehabilitation in the same style as the original of a
9. Statutes.
building to which that copyright relates (IPC, Sec. 186).
Q: X, an amateur astronomer, stumbled upon what
An object of utility is not copyrightable
appeared to be a massive volcanic eruption in Jupiter
while peering at the planet through his telescope. The
A copyrightable work refers to literary and artistic works
following week, X, without notes, presented a lecture
defined as original intellectual creations in the literary
on his findings before the Association of Astronomers
and artistic domain. A hatch door, by its nature is an object
of the Philippines. To his dismay, he later read an
of utility. It is defined as a small door, small gate or an
article in a science journal written by Y, a professional
opening that resembles a window equipped with an
astronomer, repeating exactly what X discovered
escape for use in case of fire or emergency. It is thus by
without any attribution to him. Has Y infringed on X's
nature, functional and utilitarian serving as egress access
copyright, if any? (2011 Bar)
during emergency. It is not primarily an artistic creation
but rather an object of utility designed to have aesthetic
A: No, since no protection extends to any discovery, even
appeal. It is intrinsically a useful article, which, as a whole,
if expressed, explained, illustrated, or embodied in a
is not eligible for copyright.
work.
The only instance when a useful article may be the subject
Q: Rural is a certified public utility providing
of copyright protection is when it incorporates a design
telephone service to several communities in Manila.
element that is physically or conceptually separable from
It obtains data for the directory from subscribers,
the underlying product. This means that the utilitarian
who must provide their names and addresses to
article can function without the design element. In such
obtain telephone service. Feist Publications, Inc., is a
an instance, the design element is eligible for copyright
publishing company that specializes in area-wide
protection (Sison Olano, et al v. Lim Eng Co, G.R. No.
telephone directories covering a much larger
195835, March 14, 2016).
geographic range than directories such as Rural's.
Feist extracted the listings it needed from Rurals’s
RIGHTS OF A COPYRIGHT OWNER
directory without its consent. Are directories
copyrightable?
Presumption of authorship
A: No. Directories are not copyrightable and therefore the
The natural person whose name is indicated on a work in
use of them does not constitute infringement. The
the usual manner as the author shall, in the absence of
Intellectual Property Code mandates originality as a
proof to the contrary, presumed to be the author of the
prerequisite for copyright protection. This requirement
work. This is applicable even if the name is a pseudonym,
necessitates independent creation plus a modicum of
where the pseudonym leaves no doubt as to identity of the
creativity. Since facts do not owe their origin to an act of
author (IPC, Sec. 219.1).
authorship, they are not original, and thus are not
copyrightable. A compilation is not copyrightable per se,
The person or body corporate, whose name appears on
but is copyrightable only if its facts have been "selected,
the audio-visual work in the usual manner shall, in the
coordinated, or arranged in such a way that the resulting
absence of proof to the contrary, be presumed to be the
work as a whole constitutes an original work of
maker of said work (IPC, Sec. 219.2).
authorship." Thus, the statute envisions that some ways
of selecting, coordinating, and arranging data are not
Rights of an author (1995 Bar)
sufficiently original to trigger copyright protection. Even
a compilation that is copyrightable receives only limited
1. Economic rights – The right to carry out, authorize
protection, for the copyright does not extend to facts
contained in the compilation (Feist Publications, Inc. v. or prevent the following acts:
Rural Telephone Service Co., 499 U.S. 340).
a. Reproduction of the work or substantial portion
Copyright as distinct from material object thereof
b. Carry-out derivative work (dramatization,
GR: The copyright is distinct from the property in the translation, adaptation, abridgement,
material object subject to it. Consequently, the transfer or arrangement or other transformation of the
assignment of the copyright shall not itself constitute a work)
transfer of the material object. Nor shall a transfer or c. First distribution of the original and each copy
assignment of the sole copy or of one or several copies of of the work by sale or other forms of transfer of
the work imply transfer or assignment of the copyright. ownership
d. Rental right
e. Public display

UNIVERSITY OF SANTO TOMAS

2016 GOLDEN NOTES
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 INTELLECTUAL PROPERTY CODE
f. Public performance
g. Other communications to the public.
2. Moral rights – For reasons of professionalism and
propriety, the author has the right:
a. To require that the authorship of the works be
attributed to him (attribution right)
b. To make any alterations of his work prior to, or
to withhold it from publication
c. To preserve integrity of work, object to any
distortion, mutilation or other modification
which would be prejudicial to his honor or
reputation; and
d. To restrain the use of his name with respect to
any work not of his own creation or in a
distorted version of his work (IPC, Sec.193).
3. Droit de suite or “art proceeds right” is the artist’s
resale right, which requires that a percentage of the
resale price of an artistic work is paid to the author.
The right is exercisable even after the author’s death,
provided the work is still in copyright (David
Bainbridge, Intellectual Property, 3rd Ed., p. 220 1996,
also cited in Copyright Law of the Philippines by D.
Funa).
In every sale or lease of an original work of painting
or sculpture or of the original manuscript of a writer
or composer, subsequent to the first disposition
thereof by the author, the author or his heirs shall
have an inalienable right to participate in the gross
proceeds of the sale or lease to the extent of five
percent (5%) (Sec. 200, IPC).
Rights which are not covered under a Droit de suite
a. Prints
b. Etchings
c. Engravings
d. Works of applied art
e. Similar works wherein the author primarily
derives gain from the proceeds of reproductions
(IPC, Sec. 201).
Q: ABC is the owner of certain musical compositions
among which are the songs entitled: "Dahil Sa Iyo",
"Sapagkat Ikaw Ay Akin," "Sapagkat Kami Ay Tao
Lamang" and "The Nearness Of You.” Soda Fountain
Restaurant hired a combo with professional singers
to play and sing musical compositions to entertain
and amuse customers. They performed the above-
mentioned compositions without any license or
permission from ABC to play or sing the same.
Accordingly, ABC demanded from Soda Fountain
payment of the necessary license fee for the playing
and singing of aforesaid compositions but the
demand was ignored. ABC filed an infringement case
against Soda Fountain. Does the playing and singing
of musical compositions inside an establishment
constitute public performance for profit?
A: Yes. The patrons of the Soda Fountain pay only for the
food and drinks and apparently not for listening to the
music, but the music provided is for the purpose of
entertaining and amusing the customers in order to make
355
the establishment more attractive and desirable. For the
playing and singing the musical compositions involved,
the combo was paid as independent contractors by Soda
Fountain. It is therefore obvious that the expenses
entailed thereby are added to the overhead of the
restaurant which are either eventually charged in the
price of the food and drinks or to the overall total of
additional income produced by the bigger volume of
business which the entertainment was programmed to
attract. Consequently, it is beyond question that the
playing and singing of the combo in defendant-appellee's
restaurant constituted performance for profit (FILSCAP v.
Tan, G.R., No. L-36402, Mar. 16, 1987).
Performance of a contract
An author cannot be compelled to perform his contract to
create a work or for the publication of his work already in
existence. However, he may be held liable for damages for
breach of such contract (IPC, Sec. 195).
Nature of moral rights
These are personal rights independent from the economic
rights. Being a personal right, it can only be given to a
natural person. Hence, even if he has licensed or assigned
his economic rights, he continues to enjoy the above-
mentioned moral rights (Amador, 2007).
Term of moral rights
The rights of an author shall last during the lifetime of the
author and IN PERPETUITY after his death While the
rights under sections 193.2, 193.3 and 193.4 shall be
coterminous with the economic rights, the moral rights
shall not be assignable or subject to license. The person or
persons to be charged with the posthumous enforcement
of these rights shall be named in a written instrument
which shall be filed with the National Library. In default
of such person or persons, such enforcement shall
devolve upon either the author’s heirs, and in default of
the heirs, the Director of the National Library (IPC, Sec.
198).
Exceptions to moral rights
1. Absent any special contract at the time creator
licenses/permits another to use his work, the
following are deemed not to contravene creator’s
moral rights, provided they are done in accordance
with reasonable customary standards or requisites
of the medium:
a. Editing
b. Arranging
c. Adaptation
d. Dramatization
e. Mechanical and electric reproduction
2. Complete destruction of work unconditionally
transferred by creators (IPC, Sec. 197).
Waiver of moral rights
GR: Moral rights can be waived in writing, expressly so
stating such waiver.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
XPN: Even in writing, waiver is not valid if:
1. Use the name of the author, title of his work, or his
reputation with respect to any version/adaptation of
his work, which because of alterations, substantially
tend to injure literary/artistic reputation of another
author
2. Use name of author in a work that he did not create
Neighboring rights
1. Performers rights
2. Producers of sound recordings
3. Broadcasting organizations
Performer’s rights
Performers shall enjoy the following exclusive rights:
1. As regards their performances, the right of
authorizing the:
a. Broadcasting and other communication to the
public of their performance; and
b. Fixation of their unfixed performance.
2. The right of authorizing the direct or indirect
reproduction of their performances fixed in sound
recordings or audiovisual works or fixations in any
manner or form;
3. The right of authorizing the first public distribution of
the original and copies of their performance fixed in
sound recordings or audiovisual works or fixations
through sale or rental of other forms of transfer of
ownership;
4. The right of authorizing the commercial rental to the
public of the original and copies of their
performances fixed in sound recordings or
audiovisual works or fixations, even after
distribution of them by, or pursuant to the
authorization by the performer; and
5. The right of authorizing the making available to the
public of their performances fixed in sound
recordings or audiovisual works or fixations, by wire
or wireless means, in such a way that members of the
public may access them from a place and time
individually chosen by them. (IPC as amended by R.A.
No. 10372, Sec. 203).
Moral rights of performers
The performer, shall, as regards his live aural
performances or performances fixed in sound recordings,
have the right to claim to be identified as the performer of
his performances, except where the omission is dictated
by the manner of the use of the performance, and to object
to any distortion, mutilation or other modification of his
performances that would be prejudicial to his reputation
(IPC, Sec. 204).
Loss of performer’s rights
Once the performer has authorized the broadcasting or
fixation of his performance, his performer’s rights
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
356
provided for in Section 203 shall have no further
application (IPC, Sec 205).
Fair use and limitations to copyrights shall apply mutatis
mutandis to performers (Ibid.).
Additional remuneration for subsequent
communications or broadcasts
The performer shall be entitled to an additional
remuneration equivalent to at least 5% of the original
compensation he received for the first communication or
broadcast in every communication to the public or
broadcast of a performance subsequent to the first
communication or broadcast, unless otherwise provided
in the contract (IPC, Sec. 206).
Producers on sound recordings
Producers of sound recordings shall have exclusive right
to authorize the:
1. Direct or indirect reproduction of their sound
recordings, in any manner or form; the placing of
these reproductions in the market and the right of
rental or lending
2. First public distribution of the original and copies of
their sound recordings through sale or rental or
other forms of transferring ownership;
3. Commercial rental to the public of the original and
copies of their sound recordings, even after
distribution by them by or pursuant to authorization
by the producer; and
4. Making available to the public of their sound
recordings in such a way that members of the public
may access the sound recording from a place and at a
time individually chosen or selected by them, as well
as other transmissions of a sound recording with like
effect (IPC, Sec. 208, IPC, as amended by R.A. No.
10372).
Broadcasting organization rights
Broadcasting organizations shall enjoy the exclusive right
to carry out, authorize or prevent any of the following
acts:
1. Rebroadcasting of their broadcasts;
2. Recording in any manner, including the making of
films or the use of video tape, of their broadcasts for
the purpose of communication to the public of
television broadcasts of the same;
3. Use of such records for fresh transmissions or for
fresh recording (IPC, Sec. 211).
Broadcasting is the transmission by wireless means for
the public reception of sounds or of images or of
representations thereof; such transmission by satellite is
also broadcasting where the means for decrypting are
provided to the public by the broadcasting organization
or with its consent. Rebroadcasting under the 1961 Rome
Convention is the simultaneous broadcasting by one
broadcasting organization of the broadcast of another
broadcasting organization. While the Rome Convention
gives broadcasting organizations the right to authorize or
 INTELLECTUAL PROPERTY CODE
prohibit the rebroadcasting of its broadcast, however, this b. Audio-visual works the producer of which has
protection does not extend to cable retransmission (ABS- his headquarters or habitual residence in the
CBN Broadcasting Corporation vs. Philippine Multimedia Philippines;
System, Inc., G.R. Nos. 175769-70, January 19, 2009). c. Works of architecture erected in the Philippines
or other artistic works incorporated in a
Must carry rule building or other structure located in the
Philippines;
It is limitation on copyright which obligates operators to d. Works first published in the Philippines; and
carry the signals of local channels within their respective e. Works first published in another country but
systems. This is to give the people wider access to more also published in the Philippines within thirty
sources of news, information, education, sports event and days, irrespective of the nationality or residence
entertainment programs other than those provided for by of the authors (IPC, Sec. 221).
mass media and afforded television programs to attain a
well informed, well-versed and culturally refined 2. For performers
citizenry and enhance their socio-economic growth (ABS- a. Performers who are nationals of the Philippines;
CBN Broadcasting Corporation v. Philippine Multimedia b. Performers who are not nationals of the
System, G.R. No. 175769-70, Jan. 19, 2009). Philippines but whose performances:
i. Take place in the Philippines; or
It rule mandates that the local television (TV) broadcast ii. Are incorporated in sound recordings
signals of an authorized TV broadcast station, such as the that are protected under IPC; or
GMA Network, Inc., should be carried in full by the cable iii. Which has not been fixed in sound
antenna television (CATV) operator, without alteration or recording but are carried by broadcast
deletion. In this case, the Central CATV, Inc. was found not qualifying for protection under IPC (IPC,
to have violated the must-carry rule when it solicited and Sec. 222)
showed advertisements in its cable television (CATV)
system. Such solicitation and showing of advertisements 3. Of sound recordings
did not constitute an infringement of the “television and a. Sound recordings the producers of which are
broadcast markets” under Section 2 of E.O. No. 205 (GMA nationals of the Philippines; and
Network, Inc. v. Central CATV, Inc., G.R No. 176694, July 18, b. Sound recordings that were first published in
2014). the Philippines (IPC, Sec. 223).

Applicability of rights 4. For broadcasts

a. Broadcasts of broadcasting organizations the
The provisions of Chapter VIII shall apply mutatis headquarters of which are situated in the
mutandis to the rights of performers, producers of sound Philippines; and
recordings and broadcasting organizations: b. Broadcasts transmitted from transmitters
situated in the Philippines (IPC, Sec. 224)
1. Exclusive use of a natural person for own personal
purposes; NOTE: The provisions of IPC shall also apply to works,
2. Short excerpts for reporting current events; performers, producers of sound recordings and
3. Sole use for the purpose of teaching or for scientific broadcasting organizations that are to be protected by
research; virtue of and in accordance with any international
4. Fair use of the broadcast (IPC, as amended by R.A. No. convention or other international agreement to which the
10372, Sec. 212). Philippines is a party (IPC, Sec. 221.2 and 224.2).

Term of protection

1. For performances not incorporated in recordings, 50

years from the end of the year in which the
performance took place; and
2. For sound or image and sound recordings and for
performances incorporated therein, 50 years from
the end of the year in which the recording took place.
3. In case of broadcasts, the term shall be 20 years from
the date the broadcast took place. The extended term
shall be applied only to old works with subsisting
protection under the prior law (IPC, Sec. 215).

Persons whom the rights are granted (copyrightable

works applicable)

1. For works
a. Works of authors who are nationals of, or have
their habitual residence in, the Philippines;

UNIVERSITY OF SANTO TOMAS

357 FACULTY OF CIVIL LAW
 MERCANTILE LAW
RULES ON OWNERSHIP OF COPYRIGHT

TYPE OF WORK OWNER

ORIGINAL LITERARY AND Author (IIPC, Sec. 178.1).
ARTISTIC WORKS
JOINT AUTHORSHIP Co-authors – in case of works of joint authorship; in the absence of agreement,
their rights shall be governed by the rules on co-ownership.

NOTE: If work of joint authorship consists of parts that can be used separately,
then the author of each part shall be the original owner of the copyright in the
part that he has created (IPC, Sec. 178.2).

AUDIOVISUAL WORK GR: Producer, the author of the scenario, the composer of the music, the film
director, and the author of the work so adapted

XPN: Unless otherwise provided in an agreement, the producers shall exercise

the copyright to an extent required for the exhibition of the work in any manner,
except for the right to collect performing license fees for the performance of
musical compositions, with or without words, which are incorporated into the
work (IPC, Sec. 178.5).

ANONYMOUS AND The publishers shall be deemed to represent the authors of articles and other
PSEUDONYMOUS WORKS writings published without the names of the authors or under pseudonyms,
unless the contrary appears, or the pseudonyms or adopted name leaves no doubt
as to the author's identity, or if the author of the anonymous works discloses his
identity (IPC, Sec. 179).
COMMISSIONED WORK The person who commissioned the work shall own the work but the copyright
thereto shall remain with the creator, unless there is a written stipulation to the
contrary (IPC, Sec. 178.4).

COLLECTIVE WORKS When an author contributes to a collective work, his right to have his contribution
attributed to him is deemed waived unless he expressly reserves it. (IPC, Sec. 196).

IN THE COURSE OF The employee, if not a part of his regular duties even if the employee uses the
EMPLOYMENT time, facilities and materials of the employer.

The employer, if the work is the result of the performance of his regularly-
assigned duties, unless there is an agreement, express or implied, to the contrary.
(IPC, Sec. 178.3).

LETTERS In respect of letters, the copyright shall belong to the writer subject to the
provisions of Article 723 of the Civil Code. (IPC, Sec. 178.6).

Civil Code of the Philippines

Article 723. Letters and other private communications in writing are owned by
the person to whom they are addressed and delivered, but they cannot be
published or disseminated without the consent of the writer or his heirs.
However, the court may authorize their publication or dissemination if the public
good or the interest of justice so requires.

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 INTELLECTUAL PROPERTY CODE
Collective work vs. Joint work. name with the National Library as provided in the
Intellectual Property Code.
COLLECTIVE WORK JOINT WORK
Separate elements Who owns the copyright to the painting? Explain. (Bar
Elements remain unintegrated 2013)
merge into a unified
and disparate.
whole.
Work created by 2 or more Work prepared by 2 or A: Rudy owns the copyright to the painting because he
persons at the initiative and more authors with the was one who actually created it (Section 178.1 of the
under the direction of another intention that their Intellectual Property Code). His rights existed from the
with the understanding that it contributions be moment of its creation (Section 172 of the Intellectual
will be disclosed by the latter merged into Property Code; Unilever Philippines (PRC) v. Court of
under his own name and that inseparable or Appeals, G.R. No. 119280, August 10, 2006). The
of the contributions of natural independent parts of registration of the painting by Bernie with the National
persons will NOT be identified the unitary whole. Library did not confer copyright upon him. The
Each author shall enjoy Joint authors shall be registration is merely for the purpose of completing the
copyright to his own co-owners. Co- records of the National Library (IPC, Sec. 191).
contribution ownership shall apply.
The work will be attributed to Q: BR and CT are noted artists whose paintings are
Joint authors shall be highly prized by collectors. Dr. DL commissioned
the person under whose
both entitled to the them to paint a mural at the main lobby of his new
initiative and direction it was
acknowledgment as hospital for children. Both agreed to collaborate on
created unless the contributor
authors of the work. the project for a total fee of 2 million pesos to be
expressly reserves his right.
equally divided between them. It was also agreed that
Q: T, an associate attorney in XYZ Law Office, wrote a Dr. DL had to provide all the materials for the painting
newspaper publisher a letter disputing a columnist’s and pay for the wages of technicians and laborers
claim about an incident in the attorney’s family. T needed for the work on the project.
used the law firm’s letterhead and its computer in
preparing the letter. T also requested the firm’s Assume that the project is completed and both BR and
messenger to deliver the letter to the publisher. Who CT are fully paid the amount of P2M as artists' fee by
owns the copyright to the letter? (2011 Bar) DL. Under the law on intellectual property, who will
own the mural? Who will own the copyright in the
A: T, since he is the original creator of the contents of the mural? Why? Explain. (2004 Bar)
letter.
A: DL owns the mural, while both BR and CT jointly own
Q: Solid Investment House commissioned Mon Blanco the copyright thereto. This is so because the mural was
and his son Steve, both noted artists, to paint a mural commissioned by DL and a consideration was paid to BR
for the Main Lobby of the new building of Solid for a and CT in exchange thereof. According to Section 178.4 of
contract price of P2M. the IPC, when the work is commissioned by a person
other than an employer of the author, the owner of the
a. Who owns the mural? Explain. work shall be the one who commissioned the work, but
b. Who owns the copyright of the mural? Explain. the copyright of the work shall be owned by the person
(1995 Bar) who is responsible for its creation, unless there is a
written stipulation to the contrary.
A:
a. The mural is owned by Solid. It commissioned the Q: Eloise, an accomplished writer, was hired by
work and paid Mon and Steve Blanco P2M for the Petong to write a bimonthly newspaper column for
mural. Diario de Manila, a newly-established newspaper of
b. Even though Solid owns the mural, the copyright of which Petong was the Editor-in-chief. Eloise was to be
the mural is jointly owned by Mon and Steve, unless paid P1,000.00 for each column that was published. In
there is a written stipulation to the contrary (IPC, Sec. the course of two months, Eloise submitted three
178.4). columns which, after some slight editing, were
printed in the newspaper. However, Diario de Manila
Q: Rudy is a fine arts student in a university. He stays proved unprofitable and closed only after two
in a boarding house with Bernie as his roommate. months. Due to the minimal amounts involved, Eloise
During his free time, Rudy would paint and leave his chose not to pursue any claim for payment from the
finished works lying around the boarding house. One newspaper, which was owned by New Media
day, Rudy saw one of his works -an abstract painting Enterprises,
entitled Manila Traffic Jam - on display at the
university cafeteria. The cafeteria operator said he Three years later, Eloise was planning to publish an
purchased the painting from Bernie who represented anthology of her works, and wanted to include the
himself as its painter and owner. three columns that appeared in the Diario de Manila
Rudy and the cafeteria operator immediately in her anthology. She asks for your legal advice:
confronted Bernie. While admitting that he did not do
the painting, Bernie claimed ownership of its a. Does Eloise have to secure authorization from
copyright since he had already registered it in his New Media Enterprises to be able to publish

UNIVERSITY OF SANTO TOMAS

359 FACULTY OF CIVIL LAW
 MERCANTILE LAW
Diario de Manila columns in her own anthology.
Explain fully.
b. Assume that New Media Enterprises plans to
publish Eloise’s columns in its own anthology
entitled, “The best of Diario de Manila.”Eloise
wants to prevent the publication of her columns
in that anthology since she was never paid by the
newspaper. Name one irrefutable legal argument
Eloise could cite to enjoin New Media Enterprises
from including her columns in its anthology.
(2008 Bar)
A:
a. No. In the case of a work commissioned by a person
other than an employer of the author and who pays
for it and the work is made in pursuance of the
commission, the person who so commissioned the
work shall have ownership of work, but the copyright
thereto shall remain with the creator, unless there is
a written statement to the contrary (IPL, Sec 178.4)
Thus, though Diario de Manila commissioned the
work, it cannot be considered as its owner because it
did not pay Eloise. Ownership and copyright still
belong to Eloise. Authorization is no longer needed to
publish Diario de Manila in her anthology because
Eloise has moral and economic rights over her works.
b. The fact that Eloise was not paid, ownership over her
work, published in the newspaper, did not vest upon
the latter. She retains full moral and economic rights
over it.
LIMITATIONS ON COPYRIGHT
General limitations on copyright
The following acts shall not constitute infringement of
copyright:
1. Recitation or Performance of a work, once it has been
lawfully made accessible to the public, if done
privately and free of charge or if made strictly for a
charitable or religious institution or society;
2. Making of quotations from a published work if they
are compatible with fair use and only to the extent
justified for the purpose, including quotations from
newspaper articles and periodicals in the form of
press summaries: Provided, That the source and the
name of the author, if appearing on the work, are
mentioned;
3. Communication to the public by mass media of
articles on current political, social, economic,
scientific or religious topic, lectures, addresses and
other works of the same nature, which are delivered
in public if such use is for information purposes and
has not been expressly reserved: Provided, That the
source is clearly indicated;
4. Reproduction and communication to the public of
literary, scientific or artistic works as Part of reports
of current events (e.g. music played or tunes on the
occasion of a sporting event and such tunes were
picked up during a new coverage of the event) by
means of photography, cinematography or
broadcasting to the extent necessary for the purpose;
5. Inclusion of a work in a publication, broadcast, or
other communication to the public, sound recording
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
360
or film, if such inclusion is made by way of
illustration for Teaching purposes and is compatible
with fair use: Provided, That the source and of the
name of the author, if appearing in the work, are
mentioned;
6. Recording made in Educational institutions of a work
included in a broadcast for the use of such
educational institutions, provided that such
recording must be deleted within a reasonable
period after they were first broadcast.
7. Making of Ephemeral recordings by a broadcasting
organization by means of its own facilities and for use
in its own broadcast.
8. Use made of a work by or under the direction or
control of the government, by the National Library or
by educational, scientific or professional institutions
where such use is in the public interest and is
compatible with fair use;
9. Public performance or the communication to the
public of a work, in a place where no admission fee is
charged in respect of such public performance or
communication, by a club or institution for charitable
or educational purpose only, whose aim is not profit
making, subject to such other limitations as may be
provided in the Regulations;
10. Public Display of the original or a copy of the work
not made by means of a film, slide, television image
or otherwise on screen or by means of any other
device or process (e.g. Public display using posters
mounted on walls and display boards), Provided,
That either the work has been published, or, that
original or the copy displayed has been sold, given
away or otherwise transferred to another person by
the author or his successor in title;
11. Any use made of a work for the purpose of any
Judicial proceedings or for the giving of professional
advice by a legal practitioner.
12. Reproduction or distribution of published articles or
materials in a specialized format exclusively for the
use of the Blind, visually- and reading-impaired
persons: Provided, That such copies and distribution
shall be made on a nonprofit basis and shall indicate
the copyright owner and the date of the original
publication (IPC, Sec. 184, as amended by R.A. No.
10372).
Other limitations on copyright
1. Copyright in a work of architecture shall include the
right to control the erection of any building which
reproduces the whole or a substantial part of the
work either in its original form or in any form
recognizably derived from the original, provided,
that the copyright in any such work shall not include
the right to control the reconstruction or
rehabilitation in the same style as the original of a
building to which that copyright relates (IPC, Sec.
186).
2. The private reproduction of a published work in a
single copy, where the reproduction is made by a
natural person exclusively for research and private
study, shall be permitted, without the authorization
of the owner of copyright in the work but shall not
extend to the reproduction of:
 INTELLECTUAL PROPERTY CODE
a. A work of architecture in the form of building or on an industrial
other construction; scale
b. An entire book, or a substantial part thereof, or Fifty (50) years from publication
of a musical work in graphic form by photographic
of the work and, if unpublished,
reprographic means; works
fifty (50) years from the making
c. A compilation of data and other materials;
d. A computer program except as provided in Audio-visual works
Section 189; and including those
e. Any work in cases where reproduction would produced by
unreasonably conflict with a normal 50 years from date of publication
process analogous
exploitation of the work or would otherwise and, if unpublished, from the date
to photography or
unreasonably prejudice the legitimate interests of making
any process for
of the author (IPC, Sec. 187). making audio-
visual recordings
3. The reproduction in one back-up copy or adaptation
of a computer program shall be permitted, without The term of protection subsequent to the death of the
the authorization of the author of, or other owner of author shall run from the date of his death or of
copyright in, a computer program, by the lawful publication, but such terms shall always be deemed to
owner of that computer program, provided, the copy begin on the first day of January of the year following the
or adaptation is necessary for: event which gave rise to them (IPC, Sec. 214).
a. The use of the computer program in conjunction
with a computer for the purpose, and to the DOCTRINE OF FAIR USE
extent, for which the computer program has
been obtained; and “Fair use” permits a secondary use that “serves the
b. Archival purposes, and, for the replacement of copyright objective of stimulating productive thought and
the lawfully owned copy of the computer public instruction without excessively diminishing the
program in the event that the lawfully obtained incentives for creativity”.
copy of the computer program is lost, destroyed
or rendered unusable (IPC, Sec. 187). The fair use of a copyrighted work for criticism, comment,
news reporting, teaching including limited number of
Term of protection of copyright copies for classroom use, scholarship, research, and
similar purposes is not an infringement of copyright.
TYPE OF WORK Term of Protection
Decompilation may be considered fair use
Original and
During the life of the author and
derivative works, as Decompilation, which is the reproduction of the code and
for fifty (50) years after his death
well as posthumous translation of the forms of the computer program to
works. achieve the inter-operability of an independently created
Economic rights shall be computer program with other programs, may also
Works of joint protected during the life of the constitute fair use under the criteria established Sec. 185,
authorship last surviving author and for fifty to the extent that such decompilation is done for the
(50) years after his death purpose of obtaining the information necessary to
Fifty (50) years from the date on achieve such interoperability (IPC, Sec. 185).
which the work was first lawfully
published Factors that should be considered in order to
Published
Anonymous or determine fair use
If the author's identity is revealed
pseudonymous
or is no longer in doubt before the 1. Purpose and character of the use, including whether
works
50-year period, the provisions on such use is of a commercial nature or is for non-profit
original and derivative works, as educational purpose;
well as works of joint authorship, 2. Nature of the copyrighted work;
shall apply. 3. Amount and substantiality of the portion used in
Unpublished relation to the copyrighted work as a whole; and
Fifty (50) years counted from the
Anonymous or 4. Effect of the use upon the potential market for or
making of the work
pseudonymous value of the copyrighted work.
works
Work of an applied NOTE: The fact that a work is unpublished shall not by
art of an artistic itself bar a finding of fair use if such finding is made upon
creation with consideration of all the above factors (IPC, Sec. 182.2). If
utilitarian you copy to the extent that you reduce the marketability
25 years from the time of the
functions or of the book, it is no longer fair use.
making.
incorporated in a
useful article Published works
whether made by
hand or produced

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361 FACULTY OF CIVIL LAW
 MERCANTILE LAW
Those works which, with the consent of the authors, are
made available to the public by wire or wireless means in
such a way that members of the public may access these
works from a place and time individually chosen by them:
provided, that availability of such copies has been such, as
to satisfy the reasonable requirement of the public, having
regard to the nature of the work (IPC, Sec. 171.7).
Reprographic Reproduction by Libraries
remedies which the assignor or licensor had with respect
to the copyright (IPC, Sec. 180.1).
Requisites for a transfer of copyright to take effect
1. If inter vivos, there must be a written indication of
such intention; and
2. Filed in National Library upon payment of prescribed
fees (IPC, Sec. 182).

Any library or archive whose activities are not for profit The filing of the assignment or license of copyright is
may, without the authorization of the author or copyright NOT a mandatory requirement. Section 182 uses the
owner, make a limited number of copies of the work, as permissive word “may” in reference to the filing of the
may be necessary for such institutions to fulfill their deed of assignment or transfer of copyright, this filing
mandate, by reprographic reproduction: should not be understood as mandatory for validity and
enforceability. The filing is entirely optional for the
a. Where the work by reason of its fragile character or parties and may be useful only for evidentiary and
rarity cannot be lent to user in its original form; notification purposes (Amador, 2007).
b. Where the works are isolated articles contained in
composite works or brief portions of other published Limitation regarding submission of a literary,
works and the reproduction is necessary to supply photographic or artistic work to a newspaper,
them, when this is considered expedient, to persons magazine or periodical for publication
requesting their loan for purposes of research or
study instead of lending the volumes or booklets Unless a greater right is expressly granted, such
which contain them; and submission shall constitute only a license to make a single
c. Where the making of such limited copies is in order publication (IPC, Sec. 180.3).
to preserve and, if necessary in the event that it is
lost, destroyed or rendered unusable, replace a copy, If two or more persons jointly own a copyright or any part
or to replace, in the permanent collection of another thereof, neither of the owners shall be entitled to grant
similar library or archive, a copy which has been lost, licenses without the prior written consent of the other
destroyed or rendered unusable and copies are not owner or owners (Ibid.).
available with the publisher.
COPYRIGHT INFRINGEMENT
But it shall not be permissible to produce a volume of a
work published in several volumes or to produce missing It is the doing by any person, without the consent of the
tomes or pages of magazines or similar works, unless the owner of the copyright, of anything the sole right to do
volume, tome or part is out of stock (IPC, Sec. 188, as which is conferred by statute on the owner of the
amended by R.A. No. 10372). copyright. The act of lifting from another’s book
substantial portions of discussions and examples and the
Public performance vs. Communication to the public failure to acknowledge the same is an infringement of
of a performance copyright (Habana v. Robles, G.R. No. 131522, July 19,
1999).
COMMUNICATIONS TO THE
PUBLIC The gravamen of copyright infringement is not merely the
PUBLIC OF A
PERFORMANCE unauthorized "manufacturing" of intellectual works but
PERFORMANCE
rather the unauthorized performance of any of the rights
Performance at a place The transmission to the exclusively granted to the copyright owner. Hence, any
or at places where public, by any medium, person who performs any of such acts under without
persons outside the otherwise than by obtaining the copyright owner’s prior consent renders
normal circle of a family broadcasting, of sounds of a himself civilly and criminally liable for copyright
and that family’s closest performance or the infringement (NBI-Microsoft Corp. v. Hwang, G.R. No.
social acquaintances are representations of sounds 147043, June 21, 2005).
or can be present. fixed in a sound recording.
The communication can be Infringement
It is performed at a accessed through wired or
specific time and place. wireless means at a time and A person infringes a right protected under this Act when
(e.g. The Pacquiao- place convenient to the one:
Clottey Match in Dallas viewer (e.g. The Pacquiao-
Texas Stadium) Clottey Match watched via a. Directly commits an infringement;
YouTube) b. Benefits from the infringing activity of another
person who commits an infringement if the person
Transfer or assignment of copyright benefiting has been given notice of the infringing
activity and has the right and ability to control the
The copyright may be assigned or licensed in whole or in activities of the other person;
part. Within the scope of the assignment or license, the
assignee or licensee is entitled to all the rights and

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2016 GOLDEN NOTES
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 INTELLECTUAL PROPERTY CODE
c. With knowledge of infringing activity, induces,
causes or materially contributes to the infringing
conduct of another (IPC, Sec. 216, as amended by R.A.
No. 10372).
Q: Diana and Piolo are famous personalities in
showbusiness who kept their love affair secret. They
use a special instant messaging service which allows
them to see one another’s typing on their own screen
as each letter key is pressed. When Greg, the
controller of the service facility, found out their
identities, he kept a copy of all the messages Diana
and Piolo sent each other and published them. Is Greg
liable for copyright infringement? Reason briefly.
(2007 Bar)
A: Yes. The messages which Diana and Pablo sent each
other fall under the category of letters as provided in Sec.
172.1.d which provides that literary and artistic works,
hereinafter referred to as “works,” are original
intellectual creations in the literary and artistic domain
protected from the moment of their creation and shall
include in particular, among others , letters. Infringement
of such consist in the doing by any person, without the
consent of the owner of the copyright, of anything the sole
right to do which is conferred by statute on the owner of
the copyright . Reproduction and first public distribution
of the work are economic rights of the authors of the
work. Such cannot be done by the person not the author
of the work. In this instance, Greg is not the owner of the
messages. He merely copied it without the consent of the
authors thereof and subsequently published the same in
violation of the latter’s economic rights.
Q: In a written legal opinion for a client on the
difference between apprenticeship and learnership,
Liza quoted without permission a labor law expert's
comment appearing in his book entitled "Annotations
on the Labor Code." Can the labor law expert hold Liza
liable for infringement of copyright for quoting a
portion of his book without his permission? (2006
Bar)
A: No. One of the limitations on copyright is the making of
quotations from a published work if they are compatible
with fair use, provided that the source and the name of the
author, if appearing on the work, are mentioned. The legal
opinion made by Liza is consistent with fair use since the
quoted part is merely used to explain a concept of law for
the benefit of the client and not to defeat the rights of the
author over his copyright (IPC, Sec. 184.1 (b)).
Q: The Victoria Hotel chain reproduces videotapes,
distributes the copies thereof to its hotels and makes
them available to hotel guests for viewing in the hotel
guest rooms. It charges a separate nominal fee for the
use of the videotape player.
a. Can the Victoria Hotel be enjoined for infringing
copyrights and held liable for damages?
b. Would it make any difference if Victoria Hotel
does not charge any fee for the use of the
videotape? (1994 Bar)
A:
363
a. Yes. Victoria Hotel may be held liable for infringing
copyrights of the said videotapes because the
reproduction and distribution thereof are not merely
for private viewing. Instead, it was used as a means
to gain extra profit by making it as an extra amenity
for its hotel services. However, if such performances
contained in the videotapes became available to the
public even prior to its registration, then there is no
copyright infringement because the videotapes are
already considered as public property.
b. No. Notwithstanding the non-charging of fee for the
use of the videotapes, Victoria Hotel still uses the
videotapes for business purposes, serving as an
attraction to prospective and current guests, unless
the performances in the videotapes had been long
before available to the public prior to registration;
hence, it is already public property (Filipino Society
of Composers, Authors, Publishers, Inc. v. Benjamin
Tan, G.R. No. L-36402, March 16, 1987).
Q: In an action for damages on account of an
infringement of a copyright, the defendant (the
alleged pirate) raised the defense that he was
unaware that what he had copied was a copyright
material. Would this defense be valid? (1997 Bar)
A: No. In copyright infringement, intent is irrelevant. A
person may consciously or unconsciously copy or infringe
a copyrighted material and still be held liable for such act.
Q: Juan Xavier wrote and published a story similar to
an unpublished copyrighted story of Manoling
Santiago. It was, however, conclusively proven that
Juan Xavier was not aware that the story of Manoling
Santiago was protected by copyright. Manoling
Santiago sued Juan Xavier for infringement of
copyright. Is Juan Xavier liable? (1998 Bar)
A: No. Although intent is irrelevant in cases of copyright
infringement, Juan had no access to Manoling’s
copyrighted story because it is unpublished. Hence, he can
put up independent creation as a defense being that he
has no reasonable access to the unpublished copyrighted
story of Manoling.
Q: KK is from Bangkok, Thailand. She studies
medicine in the Pontifical University of Santo Tomas
(UST). She learned that the same foreign books
prescribed in UST are 40-50% cheaper in
Bangkok. So she ordered 50 copies of each book for
herself and her classmates and sold the books at 20%
less than the price in the Philippines. XX, the
exclusive licensed publisher of the books in the
Philippines, sued KK for copyright
infringement. Decide. (2014 Bar)
A: KK did not commit copyright infringement. Under
the “first sale” doctrine, the owner of a particular copy or
phonorecord lawfully made is entitled, without the
authority of the copyright owner, to sell or otherwise
dispose of the possession of that copy or phonorecord.
Hence, there is no infringement by KK since the said
doctrine permitted importation and resale without the
publisher’s further permission.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Substantial reproduction or to make
derivative works
It is not necessarily required that the entire copyrighted that build upon it.
work, or even a large portion of it, be copied. If so much is Copyright Plagiarism is
taken that the value of the original work is substantially infringement is a specific as it
diminished, there is an infringement of copyright and to very broad term refers only to
an injurious extent, the work is appropriated. It is no that describes a using someone
defense that the pirate did not know whether or not he variety of acts. It else’s work
was infringing any copyright; he at least knew that what may be duplication without proper
he was copying was not his, and he copied at his peril. In of a work, acknowledgeme
cases of infringement, copying alone is not what is rewriting a piece, nt.
prohibited. The copying must produce an “injurious Coverage
performing a
effect” (Habana v. Robles, G.R. No. 131522, July 19, 1999). written work or
doing anything
Copying is demonstrated by: that is normally
considered to be
1. Direct Evidence the exclusive right
2. By circumstantial evidence of access and substantial of the copyright
inquiry (most common test) (Amador, 2007) holder.
There is no Public
Access means having reasonable opportunity to view or copyright documents can
hear the plaintiff’s work. Threshold inquiry means Public
infringement on be plagiarized so
whether there is reasonable opportunity to copy. Document
public documents. long as it is not
acknowledged.
Q: May a person have photocopies of some pages of In copyright In plagiarism the
the book of Professor Rosario made without violating Manner of infringement, the copying need
the copyright law? (1998 Bar) copying copying must be not be
substantial substantial
A: Yes, a person may photocopy some of pages of Plagiarism, may
Professor Rosario’s book for as long as it is not for public In copyright
exist even if
use or distribution and it does not copy the substantial infringement, the
none of the same
text or “heart” of the book. It is considered as fair use of Expression copying must refer
words are used
the copyrighted work. to the expression
to express an
of an idea.
idea.
Plagiarism
Remedies in case of copyright infringement
Plagiarism means the theft of another person’s language,
thoughts, or ideas. To plagiarize, is to take (ideas, 1. Injunction
writings, etc.) from (another) and pass them off as one’s 2. Damages, including legal costs and other expenses, as
own. The passing off of the work of another as one’s own he may have incurred due to the infringement as well
is thus an indispensable element of plagiarism. (In the as the profits the infringer may have made due to
matter of the charges of plagiarism against Associate such infringement
Justice Mariano C. Del Castillo, A.M. No. 10-7-17-SC, October 3. Impounding during the pendency of the action sales
12, 2010) invoices and other documents evidencing sales
4. Destruction without any compensation all infringing
Plagiarism presupposes intent and a deliberate, conscious copies
effort to steal another’s work and pass it off as one’s own 5. Moral and Exemplary damages (IPC, Sec. 216.1); or
(In the matter of the charges of plagiarism against 6. Seizure and impounding of any article, which may
Associate Justice Mariano C. Del Castillo, supra). serve as evidence in the court proceedings. (IPC, Sec.
216.2)
Copyright Infringement vs. Plagiarism
The copyright owner may elect, at any time before final
COPYRIGHT judgment is rendered, to recover instead of actual
PLAGIARISM
INFRINGEMENT damages and profits, an award of statutory damages for
The unauthorized The use of all infringements involved in an action in a sum equivalent
use of copyrighted another’s to the filing fee of the infringement action but not less than
material in a information, Fifty thousand pesos (P 50,000.00) (IPC, as amended by
manner that language, or R.A. No. 10372, Sec. 216.1).
violates one of the writing, when
Definition copyright owner’s done without Factors to be considered by the court in awarding
exclusive rights, proper statutory damages
such as the right to acknowledgmen
reproduce or t of the original 1. Nature and purpose of the infringing act;
perform the source. 2. Flagrancy of the infringement;
copyrighted work, 3. Whether the defendant acted in bad faith;

UNIVERSITY OF SANTO TOMAS

2016 GOLDEN NOTES
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 INTELLECTUAL PROPERTY CODE
4. Need for deterrence;
5. Any loss that the plaintiff has suffered or is likely to
suffer by reason of the infringement; and
6. Any benefit shown to have accrued to the defendant
by reason of the infringement
Double damages
The amount of damages to be awarded shall be doubled
against any person who:
a. Circumvents effective technological measures; or
b. Having reasonable grounds to know that it will
induce, enable, facilitate or conceal the infringement,
remove or alter any electronic rights management
information from a copy of a work, sound recording,
or fixation of a performance, or distribute, import for
distribution, broadcast, or communicate to the public
works or copies of works without authority, knowing
that electronic rights management information has
been removed or altered without authority (IPC, as
amended by R.A. No. 10372, Sec. 216.1).
Technological Measure
It is any technology, device or component that, in the
normal course of its operation, restricts acts in respect of
a work, performance or sound recording, which are not
authorized by the authors, performers or producers of
sound recordings concerned or permitted by law (IPC,
Sec. 171.12, as amended).
Rights Management Information
It is information which identifies the work, sound
recording or performance; the author of the work,
producer of the sound recording or performer of the
performance; the owner of any right in the work, sound
recording or performance; or information about the
terms and conditions of the use of the work, sound
recording or performance; and any number or code that
represent such information, when any of these items is
attached to a copy of the work, sound recording or fixation
of performance or appears in conjunction with the
communication to the public of a work, sound recording
or performance (IPC, Sec. 171.13).
Criminal penalties in case of copyright infringement
1. Imprisonment of one (1) year to three (3) years plus
a fine ranging from Fifty thousand pesos (P50,000)
to One hundred fifty thousand pesos (P150,000) for
the first offense.
2. Imprisonment of three (3) years and one (1) day to
six (6) years plus a fine ranging from One hundred
fifty thousand pesos to Five hundred thousand
(P500,000) for the second offense.
3. Imprisonment of six (6) years and one day to nine (9)
years plus a fine ranging from Five hundred
thousand pesos (P500,000) to P1,500,000 for the
third offense.
4. In all cases, subsidiary imprisonment in cases of
insolvency (IPC, See Sec. 217).
Determination of penalty
365
The court shall consider the value of the infringing
materials that the defendant has produced or
manufactured and the damage that the copyright owner
has suffered by reason of the infringement: Provided, that
the respective maximum penalty stated in Section 217.1.
(a), (b) and (c) herein for the first, second, third and
subsequent offense, shall be imposed when the
infringement is committed by:
a. Circumvention of effective technological measures;
b. Removal or alteration of any electronic rights
management information from a copy of a work,
sound recording, or fixation of a performance, by a
person, knowingly and without authority; or
c. Distribution, importation for distribution, broadcast,
or communication to the public of works or copies of
works, by a person without authority, knowing that
electronic rights management information has been
removed or altered without authority (IPC, Sec. 217.2,
as amended by R.A. No. 10372).
Affidavit evidence
It is an affidavit made before the notary public in actions
for infringement, reciting the facts required to be stated
under the (IPC, Sec. 216.1).
As a prima facie proof, the affidavit shifts the burden of
proof to the defendant, to prove the ownership of the
copyrighted work.
Q: Due to the amendment of the IP Code under RA
10372 APPROVED ON FEBRUARY 28, 2013, deleting
the provision entitling importation in the Philippines
of up to three (3) copies of copyrighted works in a
personal baggage, can one still be allowed to import
books, DVDs, and CDs from abroad?
A: Yes. In fact, the amendments to the Intellectual
Property Code have removed the original limitation of
three copies when bringing legitimately acquired copies
of copyrighted material into the country. Only the
importation of pirated or infringed material is illegal. As
long as they were legally purchased, you can bring as
many copies you want, subject to Customs regulations
(pcdspo.gov.ph).
Reproduction of copyrighted material for personal
purposes is not punishable by RA 10372
Infringement in this context refers to the economic rights
of the copyright owner. Transferring music from a
lawfully acquired CD into a computer, then downloading
it to a portable device for personal use, is not
infringement. But if, multiple copies of the CD were
reproduced for sale, then infringement occurs (Ibid).
Possession of a music file procured through an
infringing activity is a violation of the law
The possession of a music file procured through an
infringing activity is a violation of the law only if it can be
proven that the person benefitting from the music file has
knowledge of the infringement, and the power and ability
to control the person committing the infringement (Ibid).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Liability of mall owners for the infringement
activities of their tenants
Mall owners are not automatically penalized for the
infringing acts of their tenants. When a mall owner or
lessor finds out about an infringement activity, he or she
must give notice to the tenant, then he or she will be
afforded time to act upon this knowledge. The law
requires that one must have both proven knowledge of
the infringement, and the ability to control the activities
of the infringing person, to be held liable. The mall owner
must also have benefitted from the infringement (Ibid).
Other beneficial provisions brought by RA 10372
1. Grant of enforcement powers to IPOPHL (Sec. 2)
The law grants visitorial powers to IPOPHL and allows it
to undertake enforcement functions with the support of
concerned agencies such as PNP, NBI, BOC, OMB and
LGUs. IPOPHL itself will not be conducting raids or
seizures but will be coordinating with the said agencies.
However, as IP rights remain to be private rights, there
must be a complaint from the IP right owner. So, if an
author sees pirated copies of his book in a certain store,
he may notify IPOPHL. IPOPHL can now initiate together
with any of the said agencies to address the problem.
2. Establishment of the Bureau of Copyright and
other related rights (Secs. 1 and 3)
At present there is no entity performing the more
substantial function of policy formulation, rule making,
adjudication, research and education, which is envisioned
to be handled by the Bureau of Copyright. Although a
Copyright Division exists in the National Library, the
function of such office is merely to accept deposits of
copyrighted works. The Copyright Bureau is dedicated to
serving the needs of the copyright-based industries and
stakeholders could give more focus and rally more
resources and support for the creative industry, which is
very important for protection of works by Filipinos both
here and abroad.
3. Accreditation of collective management
organizations or CMOs (Sec. 10)
CMOs are organizations that enforce the copyright of the
copyright holders. Through this mandate, IPOPHL will be
able to monitor and promote good corporate governance
among CMOs, benefitting not only the rights holders
themselves but also the users of copyrighted works.
Members of the Philippine Retailers Association (PRA),
mall owners, restaurants, and other heavy users of music
in their establishments will greatly benefit from this
provision, as they are ensured that only legitimate
collecting agencies can collect royalties from them on
behalf of copyright owners.
4. Clarification of the concept of copyright
infringement, including secondary liability (Secs.
22 and 23)
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
366
The provisions on copyright infringement have been
refined to include contributory infringement (secondary
liability), circumvention of technological measures and
rights management information as aggravating
circumstances, and the option to collect statutory
damages instead of actual damages. However, under Sec.
22 of the amendments, to be secondarily liable, a landlord
or mall must: (1) benefit from the infringing activity; (2)
must have been given notice of the infringing activity and
a grace period to act on the same; and (3) has the right
and ability to control the activities of the person who is
doing the infringement. The complainant has the burden
of proof to provide evidence that all 3 elements are
present. If a landlord or mall owner is not aware of the
infringement, he cannot be liable for infringement, even if
he benefits from it (from rental payments) or has control
over the premises.
5. Fair use for the blind, visually- and reading-
impaired (Sec. 11)
This provision would give a special fair use exemption for
the non-commercial reproduction of works for use by
visually-impaired persons. Before this amendment,
hundreds of thousands of blind Filipinos could not buy
Braille works at cheap prices because copyright
protection operates. Now with this amendment, blind and
visually impaired Filipinos can have easier access to
copyrighted works in Braille.
6. Formulation of IP Policies within universities
and colleges (Sec. 27)
This will ensure that the rights of the academic
community (professors, researchers, students) over their
literary, scholarly and artistic works are clearly
delineated and respected. With an IP Policy in existence,
these sectors within the academe will have a clear
delineation of their respective rights and benefits, thus,
avoiding disputes and costly litigation within their ranks
which would be detrimental to education, research and
development (http://www.ipophil.gov.ph/index.php/20-
what-s-new/135-fact-sheet-on-ip-code-amendments).
RULES OF PROCEDURE FOR INTELLECTUAL
PROPERTY RIGHTS CASES (A.M. NO. 10-3-10-SC)
In what courts applicable
Regional Trial Courts designated by the Supreme Court as
Special Commercial Courts
TRO/Preliminary Injunctions
A.M. No. 10-3-10-SC does not provide a provision on
provisional remedies. However, under Rule 1, Section 33
of the same Rules, it explicitly states that, where
applicable, the Rules of Court shall apply suppletorily to
proceedings under A.M. No. 10-3-10-SC. Thus, the existing
provisions on TRO/Preliminary Injunctions and other
remedies under the Rules of Court shall be applied in
intellectual property cases.
Before an injunctive writ is issued, it is essential that the
following requisites are present: (1) the existence of a
 INTELLECTUAL PROPERTY CODE
right to be protected and (2) the acts against which the
injunction is directed are violative of the right. In this case,
it is not evident whether San Miguel has the right to
prevent other business entities from using the word
"Ginebra." The right to the exclusive use of the word
"Ginebra" has yet to be determined in the main case. San
Miguel's claim to the exclusive use of the word "Ginebra"
is clearly still in dispute because of Tanduay's claim that
it has, as others have, also registered the word "Ginebra"
for its gin products (Tanduay Distillers, Inc. v. GInebra San
Miguel, Inc, G.R. No. 164324, August 14, 2009).
CIVIL PROCEDURE
When the court determines that the civil or criminal
action involves complex issues, it shall issue a special
order that the regular procedure prescribed in the Rules
of Court shall apply, stating the reason therefor. Where
applicable, the Rules of Court shall apply suppletorily to
proceedings under these Rules (Rule 1, Sec. 3).
Any order issued by the court under these Rules is
immediately executory unless restrained by a superior
court. (Rule 1, Sec. 4).
Any pleading, motion, opposition, defense or claim filed
by any interested party shall be supported by verified
statements that the affiant has read the same and that the
factual allegations therein are true and correct of his
personal knowledge or based on authentic records, and
shall contain as annexes such documents as may be
deemed by the party submitting the same as supportive of
the allegations in the affidavits (Rule 1, Sec. 5).
Nature of Proceedings
Special Commercial Courts in the National Capital
Judicial Region with authority to issue writs of search
and seizure enforceable nationwide.
Special Commercial Courts in Quezon City, Manila,
Makati, and Pasig shall have authority to act on
applications for the issuance of writs of search and
seizure in civil actions for violations of the Intellectual
Property Code, which writs shall be enforceable
nationwide. The issuance of these writs shall be governed
by the rules prescribed in Re: Proposed Rule on Search
and Seizure in Civil Actions for Infringement of
Intellectual Property Rights (A.M. No. 02-1-06-SC, which
took effect on February 15, 2002). Within their respective
territorial jurisdictions, the Special Commercial Courts in
the judicial regions where the violation of intellectual
property rights occurred shall have concurrent
jurisdiction to issue writs of search and seizure (Rule 2,
Sec. 2).
Commencement of Action
The only pleadings allowed to be filed are the complaints,
compulsory counterclaims and cross-claims pleaded in
the answer, and the answers thereto. All pleadings shall
be verified (Rule 3, Sec. 1).
Any intellectual property right owner, or anyone
possessing any right, title or interest under claim of
367
ownership in any intellectual property right, whose right
may have been violated, may file an action under these
Rules.
Any person who is a national or who is domiciled or has a
real and effective industrial establishment in a country
which is a party to any convention, treaty or agreement
relating to intellectual property rights or the repression
of unfair competition, to which the Philippines is also a
party, or extends reciprocal rights to nationals of the
Philippines by law, shall be entitled to file an action under
these Rules.
Any foreign national or juridical person who meets the
requirements of the immediately preceding paragraph,
and does not engage in business in the Philippines, may
also file an action under these Rules (Rule 3, Sec. 2).
The complaint shall be verified and shall state the full
names of the parties to the case. Facts showing the
capacity of a party to sue or be sued, or the authority of a
party to sue or be sued in a representative capacity, or the
legal existence of an organized association of persons that
is made a party, must be averred. In case of juridical
persons, proof of capacity to sue must be attached to the
complaint.
The complaint shall contain a concise statement of the
ultimate facts constituting the complainant’s cause or
causes of action. It shall specify the relief(s) sought, but it
may add a general prayer for such further or other
relief(s) as may be deemed just or equitable.
The affidavits in question-and-answer format referred to
in Sec. 5 hereof and the relevant evidence shall be made
part of the complaint.
The complaint shall include a certification that the party
commencing the action has not filed any other action or
proceeding involving the same issue or issues before any
tribunal or agency nor is such action or proceeding
pending in other quasi-judicial bodies; Provided, however,
that if any such action is pending, the status of the same
must be stated, and should knowledge thereof be
acquired after the filing of the complaint, the party
concerned shall undertake to notify the court within five
(5) days from such knowledge.
When the party-litigant is a corporation, the
verification/certification of non-forum shopping required
should be executed by a natural person duly authorized
by the corporation, through a special power of attorney or
a board resolution for the purpose, attached to the
complaint.
The complaint shall further be accompanied by proof of
payment of docket and other lawful fees.
Failure to comply with the foregoing requirements shall
not be remedied by mere amendment of the complaint.
The court, motu proprio, shall dismiss the case without
prejudice.
The submission of a false certification or non-compliance
with any of the undertakings therein shall constitute
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
indirect contempt, without prejudice to the
corresponding administrative, civil and criminal
liabilities. If the acts of a party or his counsel clearly
constitute willful and deliberate forum shopping, the
same shall be a ground for summary dismissal with
prejudice and shall constitute direct contempt (Rule 3, Sec.
3).
A foreign corporation not doing business in the
Philippines has capacity to sue for unfair competition
under Article 189 of the Revised Penal Code (Sasot v.
People, G.R. No. 143193, June 29, 2005).
Prohibited pleadings
1. Motion to dismiss;
2. Motion for a bill of particulars;
3. Motion for reconsideration of a final order or
judgment, except with regard to an order of
destruction issued under Rule 20 hereof;
4. Reply;
5. Petition for relief from judgment;
6. Motion for extension of time to file pleadings or other
written submissions, except for the answer for
meritorious reasons;
7. Motion for postponement intended for delay;
8. Third-party complaint;
9. Intervention;
10. Motion to hear affirmative defenses; and
11. Any pleading or motion which is similar to or of like
effect as any of the foregoing. (Rule 3, Sec. 4)
Failure to file complaint where a writ of search and
seizure is issued
Upon motion of the party whose goods have been seized,
with notice to the applicant, the issuing court may lift its
writ and order the return of the seized goods if no case is
filed with the appropriate court and/or appropriate
quasi-judicial agency, including the Intellectual Property
Office of the Philippines, within thirty-one (31) calendar
days from the date of issuance of the writ.
If no motion for the return of the seized goods is filed
within sixty (60) days from the issuance of the writ under
the preceding paragraph, the court shall order the
disposal of the goods, as may be warranted, after hearing
with notice to the parties. (Rule 3, Sec. 6)
Service of Summons, Orders and Other Court
Processes
Summons, orders and other court processes may be
served by the sheriff, his deputy or other proper court
officer or for justifiable reasons, by the counsel or
representative of the plaintiff or any suitable person
authorized by the court issuing the summons.
Any private person who is authorized by the court to
serve summons, orders and other court processes shall,
for that purpose, be considered an officer of the court.
When the defendant is a foreign private juridical entity,
service may be made on its resident agent designated in
accordance with law for that purpose, or, if there be no
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
368
such agent, on the government official designated by law
to that effect, or on any of its officers or agents within the
Philippines.
If the foreign private juridical entity is not registered in
the Philippines or has no resident agent, service may, with
leave of court, be effected out of the Philippines through
any of the following means:
a. By personal service coursed through the appropriate
court in the foreign country with the assistance of the
Department of Foreign Affairs;
b. By publication once in a newspaper of general
circulation in the country where the defendant may
be found and by serving a copy of the summons and
the court order by registered mail at the last known
address of the defendant;
c. By facsimile or any recognized electronic means that
could generate proof of service; or
d. By such other means as the court may, in its
discretion, direct.
Should either personal or substituted service fail,
summons by publication shall be allowed. In the case of
juridical entities, summons by publication shall be done
by indicating the names of the officers or their duly
authorized representative. (Rule 4, Sec. 2)
Modes of Discovery
Any mode of discovery, such as interrogatories, request
for admission, production or inspection of documents or
things, may be objected to within ten (10) days from
receipt of the request for discovery and only on the
ground that the matter requested is manifestly
incompetent, immaterial, or irrelevant or is undisclosed
information or privileged in nature, or the request is for
harassment. The requesting party may comment in
writing within three (3) days from receipt of the
objection. Thereafter, the court shall rule on the objection
not later than ten (10) days from receipt of the comment
or the expiration of the three-day period. (Rule 5, Sec. 2)
Effect of failure to appear in the pre-trial proceedings
The failure of the plaintiff to submit a pre-trial brief
within the specified period or to appear in the pre-trial
shall be a cause for the dismissal of the complaint with
prejudice, unless otherwise ordered by the court. The
defendant who submits a pre-trial brief and who appears
during the pre-trial shall be entitled to a judgment on the
counterclaim unless the court requires evidence ex parte
for a judgment. Any cross-claim shall be dismissed.
The failure of the defendant to submit a pre-trial brief
within the specified period or to appear in the pre-trial
shall be a cause for the 16 dismissal of the counterclaim.
The plaintiff who submits a pre-trial brief and who
appears during the pre-trial shall be entitled to a
judgment on the complaint unless the court requires
evidence ex parte for a judgment (Rule 6, Sec. 3).
Applicability of Rules on the Issuance of the Search
and Seizure Order in Civil Actions for Infringement
 INTELLECTUAL PROPERTY CODE
The Rules on the Issuance of the Search and Seizure in
Civil Actions for Infringement of Intellectual Property
Rights are not applicable in this case as the search
warrants were not applied based thereon, but in
anticipation of criminal actions for violation of intellectual
property rights under RA 8293. It was established that
respondent had asked the NBI for assistance to conduct
investigation and search warrant implementation for
possible apprehension of several drugstore owners
selling imitation or counterfeit TOP GEL T.G. & DEVICE OF
A LEAF papaya whitening soap. What is applicable is Rule
126 of the Rules of Criminal Procedure. A core requisite
before a warrant shall validly issue is the existence of
probable cause. The pendency of a similar action for
infringement of trademark and unfair competition against
the very person who applied for search warrant does not
bar the issuance of the warrant if it is based on probable
cause (Century Chinese Medicine Co., et.al. v. People of the
Philippines And Ling Na Lau. G.R. No. 188526, November
11, 2013, in Divina, 2014).
CRIMINAL PROCEDURE
Special Commercial Courts with authority to issue
search warrants
Special Commercial Courts in Quezon City, Manila,
Makati, and Pasig shall have authority to act on
applications for the issuance of search warrants involving
violations of the Intellectual Property Code, which search
warrants shall be enforceable nationwide. Within their
respective territorial jurisdictions, the Special
Commercial Courts in the judicial regions where the
violation of intellectual property rights occurred shall
have concurrent jurisdiction to issue search warrants.
Accordingly, the Executive Judges are hereby relieved of
the duty to issue search warrants involving violations of
the Intellectual Property Code in criminal cases as stated
in Sec. 12, Chapter V of A.M. No. 03-8-02-SC (Guidelines on
the Selection and Appointment of Executive Judges and
Defining their Powers, Prerogatives and Duties, Rule 10,
Sec. 2)
Disposition of goods seized pursuant to search
warrant
If a criminal action has been instituted, only the trial court
shall rule on a motion to quash a search warrant or to
suppress evidence obtained thereby or to release seized
goods.
It shall be the duty of the applicant or private complainant
to file a motion for the immediate transfer of the seized
goods to the trial court, which motion shall be
immediately acted upon by the issuing court.
If no criminal action has been instituted, the motion to
quash a search warrant or to suppress evidence obtained
thereby or to release seized goods may be filed in and
resolved by the issuing court. If pending resolution of the
motion, a criminal case is meanwhile filed in another
court, the incident shall be transferred to and resolved by
the latter court.
369
Upon motion of the party whose goods have been seized,
with notice to the applicant, the issuing court may quash
the search warrant and order the return of the seized
goods if no criminal complaint is filed within sixty (60)
days from the issuance of the search warrant.
If no criminal action is filed before the office of the
prosecutor and no motion for the return of the seized
goods is filed within sixty (60) days from the issuance of
the search warrant, the issuing court shall require the
parties, including the private complainant, if any, to show
cause why the search warrant should not be quashed
(Rule 11, Sec.4).
Prohibited motions
a. Motion to quash the information, except on the
ground of lack of jurisdiction;
b. Motion for extension of time to file affidavits or any
other papers; and
c. Motion for postponement intended for delay (Rule
11, Sec. 5).
Arraignment
It shall be conducted in accordance with Rule 116 of the
Rules of Court. If the accused is in custody for the crime
charged, he shall be immediately arraigned. If the accused
enters a plea of guilty, he shall forthwith be sentenced.
After arraignment, the court shall immediately schedule
the case for pre-trial (Rule 13, Sec. 1).
Referral to mediation
Before conducting the trial, the court shall call the parties
to a pre-trial. Upon appearance of the parties during pre-
trial, the judge shall order the parties to appear before the
Philippine Mediation Center for court-annexed mediation
on the civil aspect of the criminal action. The pre-trial
judge shall suspend the court proceedings while the case
is undergoing mediation. Upon termination of the
mediation proceedings, the court shall continue with the
pre-trial (Rule 13, Sec. 2).
Non-appearance at the pre-trial
If the counsel for the accused or the prosecutor does not
appear at the pre-trial and does not offer an acceptable
excuse for his lack of cooperation, the court may impose
proper sanctions or penalties (Rule 13, Sec. 4).
COMMON RULES ON ADMISSIBILITY AND
WEIGHT OF EVIDENCE
Evidence of good faith
In cases of patent infringement, trademark infringement,
and copyright infringement, fraudulent intent on the part
of the defendant or the accused need not be established.
Good faith is not a defense unless the defendant or the
accused claims to be a prior user under Sections 73 and
159 of the Intellectual Property Code or when damages
may be recovered under Sections 76, 156, and 216 of the
Code. (Rule 16, Sec. 1)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
EVIDENCE IN PATENT CASES
Burden of proof in patent infringement
1. The burden of proof to substantiate a charge for
patent infringement rests on the party alleging the
same, subject, however, to sub-Section 2) below, and
other applicable laws.
2. If the subject matter of a patent is a process for
obtaining a product, any identical product is
presumed to have been obtained through the use of
the patented process if:
a. the product is new; or
b. there is substantial likelihood that the identical
product was made by the process and the owner
of the patent has been unable, despite
reasonable efforts, to determine the process
actually used. In such cases, the court shall then
order the defendant or alleged infringer to
prove that the process to obtain the identical
product is different from the patented process,
subject to the court’s adoption of measures to
protect, as far as practicable, said defendant or
alleged infringer’s manufacturing and business
secrets (Rule 17, Sec. 1).
Patents issued presumed valid
a. In all cases, letters patent issued by the Intellectual
Property Office – Bureau of Patents, or its
predecessor or successor-agencies, is prima facie
evidence of its existence and validity during the term
specified therein against all persons, unless the same
has already been cancelled or voided by a final and
executory judgment or order.
b. Moreover, letters patents issued by the Intellectual
Property Office – Bureau of Patents, or its
predecessor or successor-agencies, are presumed to
have been validly issued by said government agency
in accordance with applicable laws, unless otherwise
contradicted or overcome by other admissible
evidence showing that the same was irregularly
issued (Rule 17, Sec. 2).
For purposes of awarding damages in patent
infringement cases, it is presumed that the defendant or
alleged infringer knew of the existence of a patent over a
protected invention or process, if: (a) on the patented
invention or product manufactured using the patented
process; (b) on the container or package in which said
article is supplied to the public; or (c) on the advertising
material relating to the patented product or process, are
placed the words "Philippine Patent" with the number of
the patent (Rule 17, Sec. 3).
EVIDENCE IN TRADEMARK INFRINGEMENT AND
UNFAIR COMPETITION CASES
A certificate of registration of a mark shall be prima facie
evidence of:
1. Validity of the registration;
2. Registrant’s ownership of the mark; and
3. Registrant’s exclusive right to use the same in
connection with the goods or services and those that
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
370
are related thereto specified in the certificate (Rule
18, Sec. 1).
A registered mark shall not be deemed to be the generic
name of goods or services solely because such mark is also
used as a name of or to identify a unique product or
service.
The test for determining whether the mark is or has
become the generic name of goods or services on or in
connection with which it has been used shall be the
primary significance of the mark to the relevant public
rather than purchaser motivation (Rule 18, Sec. 7).
Q: Coca-Cola applied for a search warrant against
Pepsi for hoarding Coke empty bottles in Pepsi's yard
in Concepcion Grande, Naga City, an act allegedly
penalized as unfair competition under the IP Code.
Coca-Cola claimed that the bottles must be
confiscated to preclude their illegal use, destruction
or concealment by the respondents. Does the act of
hoarding bottles constitute an offense of unfair
competition?
A: No. Hoarding does not fall within the coverage of the IP
Code and of Section 168 in particular. It does not relate to
any patent, trademark, trade name or service mark that
the respondents have invaded, intruded into or used
without proper authority from the petitioner (Coca-Cola
Bottlers, Phils. v. Gomez, G.R. No. 154491, November 14,
2008).
EVIDENCE IN COPYRIGHT CASES
In copyright infringement cases, copyright shall be
presumed to subsist in the work or other subject matter
to which the action relates, and ownership thereof shall
be presumed to belong to complainant if he so claims
through affidavit evidence under Section 218 of the
Intellectual Property Code, as amended, unless defendant
disputes it and shows or attaches proof to the contrary in
his answer to the complaint. A mere denial of the
subsistence of copyright and/or ownership of copyright
based on lack of knowledge shall not be sufficient to rebut
the presumption (Rule 19, Sec. 1).
Registration and deposit of a work with the National
Library or the Intellectual Property Office shall not carry
with it the presumption of ownership of the copyright by
the registrant or depositor, nor shall it be considered a
condition sine qua non to a claim of copyright
infringement (Rule 19, Sec. 2).
The natural person whose name is indicated on a work in
the usual manner as the author shall, in the absence of
proof to the contrary, be presumed to be the author of the
work. This presumption applies even if the name is a
pseudonym, provided the pseudonym leaves no doubt as
to the identity of the author.
The person or body corporate whose name appears on an
audio-visual work in the usual manner shall, in the
absence of proof to the contrary, be presumed to be the
maker of said work (Rule 19, Sec. 3).
 INTELLECTUAL PROPERTY CODE
ORDER OF DESTRUCTION
At any time after the filing of the complaint or
information, the court, upon motion and after due notice
and hearing where the violation of the intellectual
property rights of the owner is established, may order the
destruction of the seized infringing goods, objects and
devices, including but not limited to, sales invoices, other
documents evidencing sales, labels, signs, prints,
packages, wrappers, receptacles, and advertisements and
the like used in the infringing act.
Philip Morris sought assistance from the NBI for the
apprehension and criminal prosecution of those
reportedly appropriating its trademark and selling fake
Marlboro cigarettes. In turn, the NBI instituted a police
action that included applying for a search and seizure
warrant under Sections 3, 4, 5 and 6 of Rule 126 of the
Rules of Criminal Procedure (not under the provisions of
A.M. 02-1-06-SC) against the Del Rosarios upon the belief
that they were storing and selling fake Marlboro
cigarettes in violation of the penal provisions of the
intellectual property law.

Such hearing shall be summary in nature with notice of The proceeding under Rule 126, a limited criminal one,
hearing to the defendant or accused to his last known does not provide for the filing of counterclaims for
address to afford the defendant or accused the damages against those who may have improperly sought
opportunity to oppose the motion (Rule 20, Sec. 1). the issuance of the search warrant. Consequently, the Del
Rosarios had the right to seek damages, if the
RULE ON SEARCH AND SEIZURE IN CIVIL circumstances warranted, by separate civil action for the
ACTIONS FOR INFRINGEMENT OF INTELLECTUAL wrong inflicted on them by an improperly obtained or
PROPERTY RIGHTS enforced search warrant (Del Rosario, et al. v. Doanto, Jr.
et al., G.R. No. 180595, March 4, 2010, in Divina, 2014).
Where any delay is likely to cause irreparable harm to the
intellectual property right holder or where there is INTELLECTUAL PROPERTY AND
demonstrable risk of evidence being destroyed, the ANTI-MONEY LAUNDERING
intellectual property right holder or his duly authorized
representative in a pending civil action for infringement IP violations are now considered a predicate crime
or who intends to commence such an action may apply ex for anti-money laundering offenses
parte for the issuance of a writ of search and seizure
directing the alleged infringing defendant or expected "(i) ‘Unlawful activity’ refers to any act or omission or
adverse party to admit into his premises the persons series or combination thereof involving or having direct
named in the order and to allow the search, inspection, relation to the following:
copying, photographing, audio and audiovisual recording
or seizure of any document and article specified in the xxx
order (Sec. 2).
"(29) Violation of Republic Act No. 8293, otherwise
The premises may not be searched except in the presence known as the Intellectual Property Code of the Philippines
of the alleged infringing defendant, expected adverse (RA 9160, as amended by RA 10365, Sec. 3 (i)).
party or his representative or the person in charge or in
control of the premises or residing or working m therein
who shall be given the opportunity to read the writ before
its enforcement and seek its interpretation from the
Commissioner. In the absence of the latter, two persons of
sufficient age and discretion residing in the same locality
shall be allowed to witness the search or in the absence of
the latter, two persons of sufficient age and discretion
residing in the nearest locality (Sec. 13).

The writ shall also. Upon motion of the expected adverse

party, be set aside and the seized documents and articles
returned to the expected adverse party if no case is filed
with the appropriate court or authority within thirty-one
(31) calendar days from the date of issuance of the writ
(Sec. 20).

A.M. 02-1-06-SC governs the issuance of a writ of search

and seizure in a civil action for infringement filed by an
intellectual property right owner against the supposed
infringer of his trademark or name. Under this rule, the
claim for damages should be filed with the same court that
issued the writ of search and seizure.

However, Philip Morris, the manufacturer of Marlboro

cigarettes did not go by this route. Philip Morris did not
file a civil action for infringement of its trademark against
the Del Rosarios before the RTC of Angeles City. Instead,

UNIVERSITY OF SANTO TOMAS

371 FACULTY OF CIVIL LAW
 MERCANTILE LAW
DIFFERENCES BETWEEN COPYRIGHT, TRADEMARK, AND PATENTS
(2015 Bar)
PATENT
The right granted to an
inventor by a State, or by a
regional office acting for
several States, which allows
Definition the inventor to exclude anyone
else from commercially
exploiting his invention for a
limited period. (Understanding
Industrial Property, WIPO, p.5)
20 years from filing date of
Term of
application (RA 8293, Sec. 54)
protection
1. In general
a. GR: If put on the market in
the Philippines by the
owner of the product, or
with his express consent.
XPN: Drugs and medicines
- introduced in the
Philippines or anywhere
else in the world by the
patent owner, or by any
party authorized to use
the invention (Sec. 72.1, as
amended by R.A. 9502)
b. Where the act is done
privately and on a non-
commercial scale or for a
non-commercial purpose.
(IPC, Sec. 72.2)
c. Exclusively for
Limitations experimental use of the
on the use of invention for scientific
right purposes or educational
purposes (experimental
use provision). (IPC, Sec.
72.3)
d. Bolar Provision - In the
case of drugs and
medicines, where the act
includes testing, using,
making or selling the
invention including any
data related thereto, solely
for purposes reasonably
related to the
development and
submission of information
and issuance of approvals
by government regulatory
agencies required under
any law of the Philippines
or of another country that
regulates the
manufacture,
construction, use or sale of
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
TRADEMARK
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. (RA 8293,
Sec. 121.1)
10 years and renewable upon
expiration. (RA 8293, Secs. 145-
146)
A person may NOT:
1. Use a name if the word is
generic (Lyceum of the
Philippines v. CA, G.R. No.
101897, March 5, 1993).
2. Use any name indicating a
geographical location (Ang Si
Heng vs. Wellington
Department Store G.R. No. L-
4531, January 10, 1953).
3. Use any name or designation
contrary to public order or
morals
4. Use a name if it is liable to
deceive trade circles or the
public as to the nature of the
enterprise identified by that
name (IPC, Sec. 165.1).
5. Subsequently use a trade name
likely to mislead the public as a
third party (IPC, Sec. 165.2 [b]).
6. Copy or simulate the name of
any domestic product (for
imported products).
7. Copy or simulate a mark
registered in accordance with
the provisions of IPC (for
imported products).
8. Use mark or trade name
calculated to induce the public
to believe that the article is
manufactured in the
Philippines, or that it is
manufactured in any foreign
country or locality other than
the country or locality where it
is in fact manufactured.
NOTE: Items 4, 5 and 6 only
applies to imported products and
those imported articles shall not
be admitted to entry at any
customhouse of the Philippines
(IPC, Sec. 166).
372
COPYRIGHT
Literary and artistic works which
are original intellectual creations
in the literary and artistic
domain protected from the
moment of their creation. (Pearl
and Dean (Phil) Inc. v. Shoemart
Inc., G.R. No. 148222, August 15,
2003)
It depends on the type of work.
(Term of Protection , Golden
Notes Mercantile Law)
1. Performance of a work, once it
has been lawfully made
accessible to the public, if done
privately and free of charge or
for a charitable or religious
institution or society.
2. The Making of quotations from
a published work if they are
compatible with fair use and
only to the extent justified for
the purpose.
3. Communication to the public
by mass media of articles on
current political, social,
economic, scientific or
religious topic, lectures,
addresses and other works of
the same nature
4. As Part of reports of current
events (e.g. music played or
tunes on the occasion of a
sporting event and such tunes
were picked up during a new
coverage of the event).
5. For Teaching purposes,
provided that the source and
of the name of the author, if
appearing in the work, are
mentioned.
6. Recording made in
Educational institutions of a
work included in a broadcast
for the use of such educational
institutions, provided that
such recording must be
deleted within a reasonable
period after they were first
broadcast.
7. The making of Ephemeral
recordings by a broadcasting
organization by means of its
own facilities and for use in its
own broadcast.
8. The Use made of a work by or
under the direction or control
of the government, by the
National Library or by
educational, scientific or
professional institutions
 INTELLECTUAL PROPERTY CODE

any product. (IPC, Sec. where such use is in the public

72.4) interest and is compatible with
e. Where the act consists of fair use.
the preparation for 9. The Public performance of a
individual cases, in a work, in a place where no
pharmacy or by a medical admission fee is charged.
professional, of a medicine 10. Public Display of the original
in accordance with a or a copy of the work not made
medical prescription. (IPC, by means of a film, slide,
Sec. 72.5) television image or otherwise
f. Where the invention is on screen or by means of any
used in any ship, vessel, other device or process (e.g.
aircraft, or land vehicle of Public display using posters
any other country mounted on walls and display
entering the territory of boards.
the Philippines 11. Any use made of a work for the
temporarily or purpose of any Judicial
accidentally. (IPC, Sec. proceedings or for the giving
72.5) of professional advice by a
legal practitioner.
2. Prior user– Person other
than the applicant, who in
good faith, started using the
invention in the Philippines,
or undertaken serious
preparations to use the
same, before the filing date
or priority date of the
application shall have the
right to continue the use
thereof, but this right shall
only be transferred or
assigned further with his
enterprise or business. (IPC,
Sec. 73)

3. Use by Government– A
government agency or third
person authorized by the
government may exploit
invention even without
agreement of a patent owner
where:

a. Public interest, as
determined by the
appropriate agency of the
government, so requires;
or
b. A judicial or
administrative body has
determined that the
manner of exploitation by
owner of patent is anti-
competitive. (IPC, Sec. 74)

4. Reverse reciprocity of
foreign law– Any condition,
restriction, limitation,
diminution, requirement,
penalty or any similar
burden imposed by the law
of a foreign country on a
Philippine national seeking
protection of intellectual

UNIVERSITY OF SANTO TOMAS

373 FACULTY OF CIVIL LAW
 MERCANTILE LAW

property rights in that

country, shall reciprocally be
enforceable upon nationals
of said country, within
Philippine jurisdiction. (IPC,
Sec. 231)

Prescriptive 4 years from time of
period for commission of infringement
filing of an (IPC, Sec.79)
action for
damages due
to
infringement
1. Literal infringement Test –
Resort must be had, in the
first instance, to words of
the claim. If the accused
matter clearly falls within
the claim, infringement is
committed.
Minor modifications are
sufficient to put the item
beyond literal infringement
(Godines v. CA, G.R. No. L-
97343, Sept. 13, 1993).
2. Doctrine of Equivalents –
Tests or There is infringement where
elements a device appropriates a
which will prior invention by
establish the incorporating its innovative
presence of concept and, although with
infringement some modification and
change, performs
substantially the same
function in substantially the
same way to achieve
substantially the same result
(Ibid.).
3. Economic interest test –
when the process-
discoverer’s economic
interest are compromised,
i.e., when others can import
the products that result
from the process, such an
act is said to be prohibited.
1. Civil action for infringement
– (IPC, Sec 76.3).
2. Criminal action for
infringement
3. Administrative remedy
4. Destruction of infringing
material (IPC, Sec.76.5).
Remedies
against
infringers
4 years from the time the cause
of action arose.
1. That it is duly registered in
the Intellectual Property
Office
2. The validity of the mark
3. The plaintiff’s ownership of
the mark
4. The use of the mark or its
colorable imitation by the
alleged infringer results in
“likelihood of confusion”
(McDonald’s Corp v. L.C. Big
Mak Burger, Inc., G.R. No.
143993, Aug 18, 2004)
5. Used without the consent of
the owner (Prosource
International Inc.v. Horphag
Research Management SA G.R.
No. 180073, November 25,
2009)
1. Civil – i.e. preliminary
injunction with damages
2. Criminal — remedies
available shall also include the
seizure, forfeiture and
destruction of the infringing
goods and of any materials
and implements the
predominant use of which has
been in the commission of the
offense.
3. Administrative
4 years from the time the cause
of action arose. (IPC, Sec. 226)
A person infringes a right
protected under this Act when
one:
a. Directly commits an
infringement;
b. Benefits from the infringing
activity of another person
who commits an infringement
if the person benefiting has
been given notice of the
infringing activity and has the
right and ability to control the
activities of the other person;
c. With knowledge of infringing
activity, induces, causes or
materially contributes to the
infringing conduct of another
(IPC, as amended by R.A. No.
10372, Sec. 216).
1. Injunction
2. Damages, including legal
costs and other expenses, as
he may have incurred due to
the infringement as well as
the profits the infringer may
have made due to such
infringement
3. Impounding during the
pendency of the action sales
invoices and other
documents evidencing sales
4. Destruction without any
compensation all infringing
copies
5. Moral and Exemplary
damages (IPC, Sec. 216.1); or

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INTELLECTUAL PROPERTY CODE

6. Seizure and impounding of

any article, which may serve
as evidence in the court
proceedings. (IPC, Sec. 216.2)

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SPECIAL LAWS

ANTI-MONEY LAUNDERING ACT OF 2001

(R.A. 9160, AS AMENDED BY RA 9194,
10167, 10365)

POLICY OF THE LAW

Policy of the State

1. To protect and preserve the integrity and

confidentiality of bank accounts and to ensure that
the Philippines shall not be used as a money
laundering site for the proceeds of any unlawful
activity.
2. To pursue the State’s foreign policy to extend
cooperation in transnational investigation and
prosecutions of persons involved in money
laundering activities wherever committed. (RA 9160,
Sec. 1)

OVERVIEW OF THE RECENT AMENDMENTS AS INTRODUCED BY RA 10365 TO AMLA OF 2001 (RA 9160)

CATEGORY RA 9160, as amended by RA 9194 and

(Based on 10167
2016 BAR Syllabus)
COVERED Covered institution refers to:
INSTITUTION
1. banks, non-banks, quasi-banks, trust
entities, and all other institutions and their
subsidiaries and affiliates supervised or
regulated by the Bangko Sentral ng
Pilipinas (BSP);
2. Insurance companies and all other
institutions supervised or regulated by the
Insurance Commission; and
3. (i) securities dealers, brokers, salesmen,
investment houses and other similar
entities managing securities or rendering
services as investment agent, advisor, or
consultant,
(ii) mutual funds, close and investment
companies, common trust funds, pre-need
companies and other similar entities,
(iii) foreign exchange corporations, money
changers, money payment, remittance, and
transfer companies and other similar
entities, and
(iv) other entities administering or
otherwise dealing in currency,
commodities or financial derivatives based
thereon, valuable objects, cash substitutes
and other similar monetary instruments or
property supervised or regulated by
Securities and Exchange Commission
(SEC).
RA 10365, amending RA 9160
(Amendments and New Provisions)
NOTE: Covered “Institutions” was changed to
Covered “Persons”
Covered persons, natural or juridical, refer to:
1. banks, non-banks, quasi-banks, trust
entities, foreign exchange dealers,
pawnshops, money changers, remittance
and transfer companies and other similar
entities and all other persons and their
subsidiaries and affiliates supervised or
regulated by the Bangko Sentral ng
Pilipinas (BSP);
2. insurance companies, pre-need companies
and all other persons supervised or
regulated by the Insurance Commission
(IC);
3. (i) securities dealers, brokers, salesmen,
investment houses and other similar
persons managing securities or rendering
services as investment agent, advisor, or
consultant,
(ii) mutual funds, close-end investment
companies, common trust funds, and other
similar persons, and
(iii) other entities administering or
otherwise dealing in currency, commodities
or financial derivatives based thereon,
valuable objects, cash substitutes and other
similar monetary instruments or property
supervised or regulated by the Securities
and Exchange Commission (SEC);

4. jewelry dealers in precious metals, who, as

a business, trade in precious metals, for
transactions in excess of One million pesos
(P1,000,000.00);

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 SPECIAL LAWS

5. jewelry dealers in precious stones, who, as

a business, trade in precious stones, for
transactions 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:
7. acting as a formation agent of juridical
persons; acting as (or arranging for another
person to act as) a director or corporate
secretary of a company, a partner of a
partnership, or a similar position in relation
to other juridical persons; 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 acting as (or arranging
for another person to act as) a nominee
shareholder for another person; and

8. 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.

Exclusions: The term ‘covered persons’ shall

exclude lawyers and accountants

Requisites for exclusion

1. Acting as independent legal professionals
2. In relation to information concerning their
clients or
3. Where disclosure of information would
compromise client confidences or the
attorney-client relationship. (RA 10365, Sec.
1, amending RA 9160, Sec. 3[a]).
OBLIGATIONS OF 1. Customer Identification - Covered 1. (same; not amended)
COVERED institutions shall establish and record the
INSTITUTIONS true identity of its clients based on official 2. (same; not amended)
documents. They shall maintain a system of
verifying the true identity of their clients 3. Reporting of Covered and Suspicious
and, in case of corporate clients, require a Transactions. – Covered persons shall
system of verifying their legal existence and report to the AMLC all covered transactions
organizational structure, as well as the and suspicious transactions within five (5)
authority and identification of all persons working days from occurrence thereof,
purporting to act on their behalf. unless the AMLC prescribes a different
period not exceeding fifteen (15) working
The provisions of existing laws to the days.
contrary notwithstanding, anonymous
accounts, accounts under fictitious names, “Lawyers and accountants acting as
and all other similar accounts shall be independent legal professionals are not
absolutely prohibited. Peso and foreign required to report covered and suspicious
currency non-checking numbered accounts transactions if the relevant information was
shall be allowed. The BSP may conduct obtained in circumstances where they are

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annual testing solely limited to the subject to professional secrecy or legal

determination of the existence and true
identity of the owners of such accounts.
2. Record Keeping - All records of all
transactions of covered institutions shall be
maintained and safely stored for five (5)
years from the date of transactions. With
respect to closed accounts, the records on
customer identification, account files and
business correspondence, shall be
preserved and safety stored for at least five
(5) years from the dates when they were
closed.
3. Reporting of Covered and Suspicious
Transactions - Covered institutions shall
report to the AMLC all covered transactions
and suspicious transactions within five(5)
working days from occurrences thereof,
unless the Supervising Authority
prescribes a longer period not exceeding
ten (10) working days.
professional privilege.
“x x x
“x x x
“When reporting covered or suspicious
transactions to the AMLC, covered persons and
their officers and employees are prohibited
from communicating, directly or indirectly, in
any manner or by any means, to any person or
entity, the media, the fact that a covered or
suspicious transaction has been reported or is
about to be reported, the contents of the report,
or any other information in relation thereto.
Neither may such reporting be published or
aired in any manner or form by the mass media”,
electronic mail, or other similar devices. In case
of violation thereof, the concerned officer and
employee of the covered person and media shall
be held criminally liable.”(Sec. 7, RA 10365
amending Sec. 9, RA 9160).

"Should a transaction be determined to be both

a covered transaction and a suspicious
transaction, the covered institution shall be
required to report the same as a suspicious
transaction.

When reporting covered or suspicious

transactions to the AMLC, covered institutions
and their officers and employees shall not be
deemed to have violated Republic Act No. 1405,
as amended, Republic Act No. 6426, as
amended, Republic Act No. 8791 and other
similar laws, but are prohibited from
communicating, directly or indirectly, in any
manner or by an means, to any person, the fact
that a covered or suspicious transaction report
was made, the contents thereof, or any other
information in relation thereto. In case of
violation thereof, the concerned officer and
employee of the covered institution shall be
criminally liable. However, no administrative,
criminal or civil proceedings, shall lie against
any person for having made a covered or
suspicious transaction report in the regular
performance of his duties in good faith, whether
or not such reporting results in any criminal
prosecution under this Act of any other law.

"When reporting covered or suspicious

transactions to the AMLC, covered instituting
and their officers and employees are prohibited
from communicating directly or indirectly, in
any manner or by any means, to any person or
entity, the media, the fact that a covered or
suspicious transaction report was made, the
contents thereof, or any other information in
relation thereto. Neither may such reporting be
published or aired in any manner or form by the
mass media, electronic mail, or other similar
devices. In case of violation thereof, the

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 SPECIAL LAWS

concerned officer and employee of the covered

institution and media shall be held criminally
liable (Sec. 9, RA 9160 as amended by RA 9194).
COVERED 'Covered transaction' is a transaction in cash or
TRANSACTIONS other equivalent monetary instrument
involving a total amount in excess of Five Same; not amended
hundred thousand pesos (PhP 500,000.00)
within one (1) banking day. (RA 9160, Sec. 3 [b]).
SUSPICIOUS 'Suspicious transaction' are transactions with
TRANSACTIONS covered institutions, regardless of the amounts
involved, where any of the following
circumstances exist:
1. There is no underlying legal or trade
obligation, purpose or economic
justification;
2. The client is not properly identified;
3. The amount involved is not commensurate
with the business or financial capacity of
the client;
4. Taking into account all known
circumstances, it may be perceived that the
client's transaction is structured in order to
Same; not amended
avoid being the subject of reporting
requirements under the Act;
5. Any circumstances relating to the
transaction which is observed to deviate
from the profile of the client and/or the
client's past transactions with the covered
institution;
6. The transactions is in a way related to an
unlawful activity or offense under this Act
that is about to be, is being or has been
committed; or
7. Any transactions that is similar or
analogous to any of the foregoing." (RA
9160, Sec. 3[b-1]).
WHEN IS MONEY Money laundering is a crime whereby the Money laundering is committed by any person
LAUNDERING proceeds of an unlawful activity, as herein who, knowing that any monetary instrument or
COMMITTED defined, are transacted thereby making them property represents, involves, or relates to the
(DEFINITION OF appear to have originated from legitimate proceeds of any unlawful activity:
MONEY sources. It is committed by the following: a. transacts said monetary instrument or
LAUNDERING) a. Any person knowing that any monetary property;
instrument or property represents, b. converts, transfers, disposes of, moves,
involves, or relates to, the proceeds of any acquires, possesses or uses said monetary
unlawful activity, transacts or attempts to instrument or property;
transact said monetary instrument or c. conceals or disguises the true nature,
property. source, location, disposition, movement or
b. Any person knowing that any monetary ownership of or rights with respect to said
instrument or property involves the monetary instrument or property;
proceeds of any unlawful activity, performs d. attempts or conspires to commit money
or fails to perform any act as a result of laundering offenses referred to in
which he falicitates the offense of money paragraphs (a), (b) or (c);
laundering referred to in paragraph (a) e. aids, abets, assists in or counsels the
above. commission of the money laundering
c. Any person knowing that any monetary offenses referred to in paragraphs (a), (b)
instrument or property is required under or (c) above; and
this Act to be disclosed and filed with the f. performs or fails to perform any act as a
Anti-Money Laundering Council (AMLC), result of which he facilitates the offense of
fails to do so."( RA 9160, as amended by RA money laundering referred to in
9194, Sec. 4) 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 Laundering

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UNLAWFUL 'Unlawful activity' refers to any act or omission
ACTIVITIES OR or series or combination thereof involving or
PREDICATE CRIMES having direct relation to following:
1. Kidnapping for ransom under Article 267 of
Act No. 3815, otherwise known as the
Revised Penal Code, as amended;
2. Sections 4, 5, 6, 8, 9, 10, 12, 13, 14, 15, and
16 of Republic Act No. 9165, otherwise
known as the Comprehensive Dangerous
Act of 2002;
3. Section 3 paragraphs B, C, E, G, H and I of
republic Act No. 3019, as amended,
otherwise known as the Anti-Graft and
Corrupt Practices Act;
4. Plunder under Republic Act No. 7080, as
amended;
5. Robbery and extortion under Articles 294,
295, 296, 299, 300, 301 and 302 of the
Revised Penal Code, as amended;
6. Jueteng and Masiao punished as illegal
gambling under Presidential Decree No.
1602;
7. Piracy on the high seas under the Revised
Penal Code, as amended and Presidential
under the Revised Penal Code, as amended
and Presidential Decree No. 532;
8. Qualified theft under Article 310 of the
Revised penal Code, as amended;
9. Swindling under Article 315 of the Revised
Penal Code, as amended;
10. Smuggling under Republic Act Nos. 455 and
1937;
11. Violations under Republic Act No. 8792,
otherwise known as the Electrinic
Commerce Act of 2000;
12. Hijacking and other violations under
Republic Act No. 6235; destructive arson
and murder, as defined under the Revised
Penal Code, as amended, including those
perpetrated by terrorists against non-
combatant persons and similar targets;
13. Fraudulent practices and other violations
under Republic Act No. 8799, otherwise
known as the Securities Regulation Code of
2000;
14. Felonies or offenses of a similar nature that
is punishable under the penal laws of other
countries."
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
380
Council (AMLC), fails to do so.” (Sec. 4, RA 10365,
amending Sec. 4, RA 9160).
‘Unlawful activity’ refers to any act or omission
or series or combination thereof involving or
having direct relation to the following:
1. Kidnapping for ransom under Article 267 of
Act No. 3815, otherwise known as the
Revised Penal Code, as amended;
2. Sections 4, 5, 6, 8, 9, 10, 11, 12, 13, 14, 15
and 16 of Republic Act No. 9165, otherwise
known as the Comprehensive Dangerous
Drugs Act of 2002;
3. Section 3 paragraphs B, C, E, G, H and I of
Republic Act No. 3019, as amended,
otherwise known as the Anti-Graft and
Corrupt Practices Act;
4. Plunder under Republic Act No. 7080, as
amended;
5. Robbery and extortion under Articles 294,
295, 296, 299, 300, 301 and 302 of the
Revised Penal Code, as amended;
6. Jueteng and Masiao punished as illegal
gambling under Presidential Decree No.
1602;
7. Piracy on the high seas under the Revised
Penal Code, as amended and Presidential
Decree No. 532;
8. Qualified theft under Article 310 of the
Revised Penal Code, as amended;
9. Swindling under Article 315 and Other
Forms of Swindling under Article 316 of the
Revised Penal Code, as amended;
10. Smuggling under Republic Act Nos. 455 and
1937;
11. Violations of Republic Act No. 8792,
otherwise known as the Electronic
Commerce Act of 2000;
12. Hijacking and other violations under
Republic Act No. 6235; destructive arson
and murder, as defined under the Revised
Penal Code, as amended;
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;
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
Revised Penal Code, as amended;
 SPECIAL LAWS

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,
otherwise 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.
ANTI-MONEY The Anti-Money Laundering Council is hereby
LAUNDERING created and shall be composed of:
COUNCIL (AMLC) Same; not amended
1. The Governor of the Bangko Sentral ng
Pilipinas (BSP) as Chairman,

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381 FACULTY OF CIVIL LAW
 MERCANTILE LAW

2. The Commissioner of the Insurance

Commission and
3. The Chairman of the Securities and
Exchange Commission (SEC) as
members. (RA 9160, as amended by RA
9194, Sec. 7).
FUNCTIONS The AMLC shall act unanimously in the The AMLC shall act unanimously in the
discharge of its functions as defined hereunder: discharge of its functions as defined hereunder:
1. to require and receive covered or
suspicious transaction reports from 1. (Same; not amended)
covered institutions;
2. to issue orders addressed to the 2. (Same; not amended)
appropriate Supervising Authority or the
covered institutions to determine the true 3. (Same; not amended)
identity of the owner of any monetary
instrument or property subject of a covered 4. (Same; not amended)
transaction or suspicious transaction
report or request for assistance from a 5. (Same; not amended)
foreign State, or believed by the Council, on
the basis for substantial evidence, to be, in 6. to apply before the Court of Appeals, ex
whole or in part, wherever located, parte, for the freezing of any monetary
representing, involving, or related to instrument or property alleged to be
directly or indirectly, in any manner or by laundered, proceeds from, or
any means, the proceeds of an unlawful instrumentalities used in or intended for
activity. use in any unlawful activity as defined in
3. to institute civil forfeiture proceedings and Section 3(i) hereof;
all other remedial proceedings through the
Office of the Solicitor General; 7. (Same; not amended)
4. to cause the filing of complaints with the
Department of Justice or the Ombudsman 8. (Same; not amended)
for the prosecution of money laundering
offenses; 9. (Same; not amended)
5. to investigate suspicious transactions and
covered transactions deemed suspicious 10. (Same; not amended)
after an investigation by AMLC, money
laundering activities and other violations of 11. (Same; not amended)
this Act;
6. to apply before the Court of Appeals, ex 12. to require the Land Registration Authority
parte, for the freezing of any monetary and all its Registries of Deeds to submit to
instrument or property alleged to be the the AMLC, reports on all real estate
proceeds of any unlawful activity as defined transactions involving an amount in excess
in Section 3(i) hereof; of Five hundred thousand pesos
7. to implement such measures as may be (P500,000.00) within fifteen (15) days from
necessary and justified under this Act to the date of registration of the transaction, in
counteract money laundering; a form to be prescribed by the AMLC. The
8. to receive and take action in respect of, any AMLC may also require the Land
request from foreign states for assistance in Registration Authority and all its Registries
their own anti-money laundering of Deeds to submit copies of relevant
operations provided in this Act; documents of all real estate transactions
9. to develop educational programs on the (Sec. 6, RA 10365 amending Sec. 7, RA 9160).
pernicious effects of money laundering, the
methods and techniques used in the money
laundering, the viable means of preventing
money laundering and the effective ways of
prosecuting and punishing offenders;
10. to enlist the assistance of any branch,
department, bureau, office, agency, or
instrumentality of the government,
including government-owned and -
controlled corporations, in undertaking
any and all anti-money laundering
operations, which may include the use of its
personnel, facilities and resources for the
more resolute prevention, detection, and

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 SPECIAL LAWS
investigation of money laundering offenses
and prosecution of offenders; and
11. to impose administrative sanctions for the
violation of laws, rules, regulations, and
orders and resolutions issued pursuant
thereto. (Sec. 7, RA 9160 as amended by RA
9194.)
FREEZING OF Upon verified ex parte petition by the AMLC
MONEY and after determination that probable cause
INSTRUMENT OR exists that any monetary instrument or
PROPERTY property is in any way related to an unlawful
activity as defined in Section 3(i) hereof, the
Court of Appeals may issue a freeze order, which
shall be effective immediately. The freeze order
shall be for a period of twenty (20) days unless
extended by the court. In any case, the court
should act on the petition to freeze within
twenty-four (24) hours from filing of the
petition. If the application is filed a day before a
nonworking day, the computation of the
twenty-four (24)-hour period shall exclude the
nonworking days."
"A person whose account has been frozen may
file a motion to lift the freeze order and the court
must resolve this motion before the expiration
of the twenty (20)-day original freeze order."
"No court shall issue a temporary restraining
order or a writ of injunction against any freeze
order, except the Supreme Court. (RA 9160 as
amended by RA 10167, Sec. 10.)
AUTHORITY TO Notwithstanding the provisions of Republic Act
INQUIRE INTO No. 1405, as amended; Republic Act No. 6426, as
BANK DEPOSITS amended; Republic Act No. 8791; and other
laws, the AMLC may inquire into or examine any
particular deposit or investment, including
related accounts, with any banking institution
or non-bank financial institution upon order of
any competent court based on an ex
parte application in cases of violations of this
Act, when it has been established that there is
probable cause that the deposits or
investments, including related accounts
involved, are related to an unlawful activity as
defined in Section 3(i) hereof or a money
laundering offense under Section 4 hereof;
except that no court order shall be required in
cases involving activities defined in Section
3(i)(1), (2), and (12) hereof, and felonies or
offenses of a nature similar to those mentioned
in Section 3(i)(1), (2), and (12), which are
Punishable under the penal laws of other
countries, and terrorism and conspiracy to
commit terrorism as defined and penalized
under Republic Act No. 9372.
The Court of Appeals shall act on the
application to inquire into or examine any
383
Upon a verified ex parte petition by the AMLC
and after determination that probable cause
exists that any monetary instrument or property
is in any way related to an unlawful activity as
defined in Section 3(i) hereof, the Court of
Appeals may issue a freeze order which shall be
effective immediately, and which shall not
exceed six (6) months depending upon the
circumstances of the case: Provided, That if
there is no case filed against a person whose
account has been frozen within the period
determined by the court, the freeze order shall
be deemed ipso facto lifted: Provided,
further, That this new rule shall not apply to
pending cases in the courts. In any case, the
court should act on the petition to freeze within
twenty-four (24) hours from filing of the
petition. If the application is filed a day before a
nonworking day, the computation of the twenty-
four (24)-hour period shall exclude the
nonworking days.
A person whose account has been frozen may
file a motion to lift the freeze order and the court
must resolve this motion before the expiration
of the freeze order.
No court shall issue a temporary restraining
order or a writ of injunction against any freeze
order, except the Supreme Court. (Sec. 8, RA
10365, amending RA 9160.)
Same; but the following new provisions were
inserted:
Nothing contained in this Act nor in related
antecedent laws or existing agreements shall be
construed to allow the AMLC to participate in
any manner in the operations of the BIR. (Sec. 20,
RA 10365, amending RA 9160.)
The authority to inquire into or examine the
main account and the related accounts shall
comply with the requirements of Article III,
Sections 2 and 3 of the 1987 Constitution, which
are hereby incorporated by reference. Likewise,
the constitutional injunction against ex post
facto laws and bills of attainder shall be
respected in the implementation of this Act. (RA
10365 amending RA 9160, Sec. 21.)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW

deposit or investment with any banking

institution or non-bank financial institution
within twenty-four (24) hours from filing of the
application.

To ensure compliance with this Act, the Bangko

Sentral ng Pilipinas may, in the course of a
periodic or special examination, check the
compliance of a Covered institution with the
requirements of the AMLA and its implementing
rules and regulations.

For purposes of this section, ‘related accounts’

shall refer to accounts, the funds and sources of
which originated from and/or are materially
linked to the monetary instrument(s) or
property(ies) subject of the freeze order(s).

A court order ex parte must first be obtained

before the AMLC can inquire into these related
Accounts: Provided, That the procedure for
the ex parte application of the ex parte court
order for the principal account shall be the same
with that of the related accounts.

"The authority to inquire into or examine the

main account and the related accounts shall
comply with the requirements of Article III,
Sections 2 and 3 of the 1987 Constitution, which
are hereby incorporated by reference (RA 9160,
as amended by RA 10167, Sec. 11).

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 SPECIAL LAWS
Safe Harbor Provision
No administrative, criminal or civil proceedings, shall lie
against any person for having made a COVERED
transaction report or a SUSPICIOUS transaction report in
the regular performance of his duties and in good faith,
whether or not such reporting results in any criminal
prosecution under this Act or any other Philippine law.
The report to AMLC will not violate the law on Secrecy
of Bank Deposits, Foreign Currency Deposit Act and
General Banking Law
The report to AMLC will not violate the law on Secrecy of
Bank Deposits, Foreign Currency Deposit Act and General
Banking Law but it cannot otherwise communicate to any
person or media, fact of report of covered transaction or
contents of the said report nor can the fact of reporting be
published or aired in mass media, electronic mail or
similar devices (RA 9160 as amended by RA 10167, Sec.
11).
Q: Alvin is jobless but is reputed to be a jueteng
operator. He has never been charged or convicted of
any crime. He maintains several bank accounts
amounting to P100 Million. AMLC charged Alvin with
violation of the Anti-Money Laundering Law. Can
Alvin move to dismiss the case on the ground that he
has no criminal record?
A: No. The contention of Alvin is not tenable because
under AMLA, "money laundering crime" committed when
the proceeds of an "unlawful activity," like jueteng
operations, are made to appear as having originated from
legitimate sources. Money laundering crime is separate
from the unlawful activity of being a jueteng operator, and
requires no previous conviction for the unlawful activity
(RA 9160, as amended by RA 10365, Sec. 4).
Jurisdiction for violations of AMLA
1. RTC – all cases on money laundering
2. Sandiganbayan – Those committed by public officers
and private persons in conspiracy with them. (R.A.
9160, as amended by RA 10167, Sec. 5)
Party entitled to file freeze order
The AMLC, through the OSG, may file an ex-parte verified
petition for freeze order on any monetary instrument,
property or proceeds relating to or involving an unlawful
activity.
Jurisdiction to issue a freeze order
It is solely the CA which has the authority to issue a freeze
order upon application ex parte by the AMLC and after
determination that probable cause exists. It also has the
exclusive jurisdiction to extend existing freeze orders
previously issued by the AMLC vis-à-vis accounts and
deposits related to money-laundering activities. (Republic
v. Cabrini Green & Ramos, G.R. No. 154522, May 5, 2006)
Probable cause under AMLA
385
Probable cause includes such facts and circumstances
which would lead a reasonably discreet, prudent or
cautious man to believe that an unlawful activity and/or a
money laundering offense is about to be, is being or has
been committed and that the account or any monetary
instrument or property subject thereof sought to be
frozen is in any way related to said unlawful activity
and/or money laundering offense. (R.A. 9194, as amended,
Rule 10.2)
Period of effectivity of freeze orders
Freeze orders shall be effective for period not exceeding
6 months depending upon the circumstances (RA 9160 as
amended by RA 10365, Sec. 10).
Related accounts
Those accounts, funds and sources of which originated
from and/or are materially linked to the monetary
instrument or property subject of the freeze order.
Instances when the Anti-Money Laundering Council
(AMLC) may inquire into bank deposits
GR: Only upon order of any competent court in cases of
violation of R.A. 9160, as amended.
XPNs: No need of court order in cases of (KHDAM)
1. Kidnapping,
2. Hijacking,
3. Drugs- violation of Dangerous Drugs Act,
4. Arson,
5. Murder. (Sec. 11 R.A. 9160, as amended)
From his first term in 2007, Congressman Abner has
been endorsing his pork barrel allocations to Twin
Rivers in exchange for a commission of 40% of the
face value of the allocation. Twin Rivers is a non-
governmental organization whose supporting
papers, after audit, were found by the Commission on
Audit to be fictitious. Other than to prepare and
submit falsified papers to support the encashment of
the pork barrel checks, Twin Rivers does not appear
to have done anything on the endorsed projects and
Congressman Abner likewise does not appear to have
bothered to monitor the progress of the projects he
endorsed. The congressman converted most of the
commissions he generated into US dollars, and
deposited these in a foreign currency account with
Banco de Plata (BDP). Based on amply-supported tips
given by a congressman from another political party,
the Anti-Money Laundering Council sent BDP an
order:
(1) to confirm Cong. Abner's deposits with the bank
and to provide details of these deposits; and
(2) to hold all withdrawals and other transactions
involving the congressman's bank accounts.
As counsel for BDP, would you advise the bank to
comply with the order? (2013 Bar)
A: I shall advise Banco de Plata not to comply with the
order of the Anti-Money Laundering Council. It cannot
inquire into the deposits of Congressman Abner,
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
regardless of currency, without a bank inquiry order from of Rudy when it allowed the AMLC to look into said
a competent court, because crimes involved are not accounts without court order. (AMLA as amended,
kidnapping for ransom, violations of the Comprehensive Sec. 11)
Dangerous Drugs Act, hijacking and other violations of d. Yes. The properties are validly sold in favor of Rudy
Republic Act No. 6235, destructive arson, murder, and and as such Luansing Realty is under the obligation
terrorism and conspiracy to commit terrorism (AMLA as to deliver the titles to the buyer. This is without
amended, Section 11). prejudice to the application of freeze order by the
OSG on behalf of the AMLC.
The Anti-Money Laundering Council cannot order Banco
de Plata to hold all withdrawals and other transactions FOREIGN INVESTMENTS ACT
involving the accounts of Congressman Abner. It is the
Court of Appeals which has the power to issue a freeze POLICY OF THE LAW
order over the accounts upon petition of the Anti-Money
Laundering Council (AMLA; Republic v. Cabrini Green Ross, State policy of the law (NOSE Part)
G.R. No. 154522, May 5, 2006).
1. It is the policy of the State to attract, promote and
Q: Rudy is jobless but is reputed to be a jueteng welcome productive investments in activities which
operator. He has never been charged or convicted of significantly contribute to National industrialization
any crime. He maintains several bank accounts and and socio-economic development to the extent that
has purchased 5 houses and lots for his children from foreign investment is allowed in such activity by the
the Luansing Realty I Inc. Since he does not have any Constitution and relevant laws from:
visible job, the company reported his purchases to the a. Foreign individuals;
Anti-Money Laundering Council (AMLC). Thereafter, b. Partnerships;
AMLC charged him with violation of the Anti-Money c. Corporations;
Laundering Law. Upon request of the AMLC, the bank d. Governments, including their political
disclosed to it Rudy's bank deposits amounting to subdivisions.
P100 Million. Subsequently, he was charged in court
for violation of the Anti-Money Laundering Law. 2. Foreign investments shall be encouraged in the
enterprises that significantly expand livelihood and
a. Can Rudy move to dismiss the case on the ground
employment Opportunities for Filipinos by:
that he has no criminal record?
a. Enhancing economic value of farm products;
b. To raise funds for his defense, Rudy sold the
b. Promoting the welfare of Filipino consumers;
houses and lots to a friend. Can Luansing Realty,
c. Expanding the scope, quality and volume of
Inc. be compelled to transfer to the buyer
exports and their access to foreign markets;
ownership of the houses and lots?
d. And/or transferring relevant technologies in
c. In disclosing Rudy's bank accounts to the AMLC, agriculture, industry and support services.
did the bank violate any law?
d. Supposing the titles of the houses and lots are in
3. Foreign investments shall be welcome as a
possession of the Luansing Realty Inc., is it under
Supplement to Filipino capital and technology in
obligation to deliver the titles to Rudy? (2006
those enterprises serving mainly the domestic
Bar)
market.
A:
4. GR: There are no restrictions on extent of foreign
a. No. The contention of Rudy is not tenable because
ownership of Export enterprises. In domestic market
under AMLA, "money laundering crime" committed
enterprises, foreigners can invest as much as 100%
when the proceeds of an "unlawful activity," like
equity
jueteng operations, are made to appear as having
originated from legitimate sources. Money
XPN: In areas included in the negative list.
laundering crime is separate from the unlawful
activity of being a jueteng operator, and requires no 5. Foreign-owned firms catering mainly to the domestic
previous conviction for the unlawful activity. (AMLA,
market shall be encouraged to undertake measures
Sec. 3)
that will gradually increase Filipino PARTicipation in
b. Yes. Rudy is still the owner of the house and lot in
their businesses by
question and as such he may dispose the same as he
a. Taking in Filipino partners;
pleases. Absent any freeze order filed by the OSG on
b. Electing Filipinos to the board of director;
behalf of the AMLC, Rudy may dispose said
c. Implementing transfer of technology to
properties and compel Luansing Realty to transfer to
Filipinos;
the buyer ownership of the properties sold.
d. Generating more employment for the economy;
c. Yes. Under the Anti-money Laundering Law, as
and
amended, the AMLC may into bank accounts upon
e. Enhancing skills of Filipino workers (RA 7042,
order of any competent court based in ex parte
Sec. 2).
application when it has been established that said
accounts are related to an unlawful activity. In the
case at hand, the AMLC merely requested the
disclosure of said accounts without court order. The
bank therefore violated the secrecy of bank account

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 SPECIAL LAWS
DEFINITION OF TERMS
FOREIGN INVESTMENT
It is an equity investment made by non-Philippine
national in the form of foreign exchange and/or other
assets actually transferred to the Philippines and duly
registered with the Central Bank which shall assess and
appraise the value of such assets other than foreign
exchange.
“DOING BUSINESS” IN THE PHILIPPINES
“Doing Business” in the Philippines
Foreign corporations are considered “doing or
transacting business” in the Philippines if they are:
1. Soliciting orders, service contracts, and opening
offices whether called liason offices of branches;
2. Appointing representatives, distributors domiciled
in the Philippines or who stay for a period or periods
totaling 180 days or more;
3. Participating in the management, supervision or
control of any domestic business, firm, entity, or
corporation in the Philippines;
4. Doing any act or acts that imply a continuity of
commercial dealings or arrangements, and
contemplate to some extent the performance of acts
or works or the exercise of some functions normally
incident to and in progressive prosecution of, the
purpose and object of its organization.( R.A. 7042, Sec
3 [d])
Instances that are considered as “not doing or
transacting business” in the Philippines for foreign
corporations
1. Mere investment as shareholder and exercise of
rights as investor;
2. Having a nominee director or officer to represent its
interest in the corporation;
3. Appointing a representative or distributor which
transacts business in its own name and for its own
account;
4. Publication of a general advertisement through any
print or broadcast media;
5. Maintaining a stock of goods in the Philippines solely
for the purpose of having the same processed by
another entity in the Philippines;
6. Consignment by the foreign corporation of
equipment with a local company to be used in the
processing of products for export;
7. Collecting information in the Philippines;
8. Performing services auxiliary to an existing isolated
contract of sale which are not on a continuing basis
(RA 7042, Sec. 3 [d]).
EXPORT ENTERPRISE
It is an enterprise wherein a manufacturer, processor or
service [including tourism] enterprise exports sixty
percent (60%) or more of its output, or wherein a trader
purchases products domestically and exports sixty per
cent (60%) or more of such purchases (Sec 3 [e], RA 7042).
387
DOMESTIC MARKET ENTERPRISE
It is an enterprise which produces goods for sale, or
renders services to the domestic market entirely or if
exporting a portion of its output fails to consistency
export at least 60% thereof (R.A. 7042, Sec 3 [f]).
REGISTRATION OF INVESTMENTS OF NON-
PHILIPPINE NATIONALS
Philippine nationals
1. A citizen of the Philippines;
2. A domestic partnership or association wholly owned
by citizens of the Philippines;
3. Corporations organized under Philippine laws of
which 60% of the capital stock outstanding and
entitled to vote is owned and held by Filipino
citizens;
4. Corporations organized abroad and registered as
doing business in the Philippines under the
Corporation Code of which 100% of the capital stock
entitled to vote belong to Filipinos; and
5. Trustee of funds for pension or other employee
retirement or separation benefits, where the trustee
is a Philippine national and at least sixty (60%) of the
fund will accrue to the benefit of the Philippine
nationals.
Non-Philippine nationals
Those who do not belong to the definition of a Philippine
national.
A non-Philippine national may own fully a domestic
market enterprise
A non-Philippine national may own up to 100% of a
domestic market enterprise (RA 7042, Sec. 7).
Requirements for a non-Philippine national to own
up to 100% of a domestic market enterprise
1. A non-Philippine national must register with the SEC
or with the Bureau of Trade Regulation and
Consumer Protection (BTRCP) of DTI in the case of
single proprietorship for it to do business or invest in
a domestic enterprise up to 100% of its capital.
2. The participation of non-Philippine national in the
enterprise is must not be prohibited or limited to a
smaller percentage by existing law and/ or under
Foreign Investment Negative list (RA 7042, Sec. 5).
Imposition of additional limitation on the extent of
foreign ownership in an enterprise other than those
provided for under RA 7042 by the SEC or BTRCP
GR: The SEC or BTRCP, as the case may be, shall not
impose any limitations on the extent of foreign ownership
in an enterprise additional to those provided in R.A. 7042.
XPNs:
1. That any enterprise seeking to avail of incentives
under the Omnibus Investment Code of 1987 must
apply for registration with the Board of Investments
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
(BOI), which shall process such application for
registration in accordance with the criteria for
evaluation prescribed in said Code;
2. That a non-Philippine national intending to engage in
the same line of business as an existing joint venture,
in which he or his majority shareholder is a
substantial partner, must disclose the fact and the
names and addresses of the partners in the existing
joint venture in his application for registration with
the SEC.
FOREIGN INVESTMENT IN EXPORT ENTERPRISES
Rules regarding foreign registration in export
enterprises
1. Foreign investment in export enterprises whose
products and services do not fall within Lists A and B
of the Foreign Investment Negative List is allowed up
to 100% ownership.
2. Export enterprises which are non-Philippine
nationals shall register with BOI and submit the
reports that may be required to ensure continuing
compliance of the export enterprise with its export
requirement.
3. BOI shall advise SEC or BTRCP, as the case may be, of
any export enterprise that fails to meet the export
ratio requirement.
4. The SEC or BTRCP shall thereupon order the non-
complying export enterprise to reduce its sales to the
domestic market to not more than 40% of its total
production; failure to comply with such SEC or
BTRCP order, without justifiable reason, shall subject
the enterprise to cancellation of SEC or BTRCP
registration, and/or the penalties provided in this
law (RA 7042, Sec 6).
FOREIGN INVESTMENT DOMESTIC
MARKET ENTERPRISES
A domestic market enterprise may change its status to
export enterprise if the Domestic market enterprise
consistently exports in each year thereof sixty per cent
(60%) or more of its output over a three (3) year period
(RA 7042, Sec. 7).
FOREIGN INVESTMENT NEGATIVE LIST
Foreign Investment Negative List
It is a list of areas of economic activity whose foreign
ownership is limited to a maximum of 40% of the equity
capital of the enterprises engaged therein (RA 7042, Sec. 3
[g]).
List A of the Foreign Investment Negative List
Filipino Ownership must be: (CODES are as follows)
1. 100% - CoFi AMMaN Co.- ProMiSe -US$2.5M
2. 80% - Prc
3. 75% - LoRD
4. 70% - Ad
5. 60% - Go LEARN CUPID
6. 40% - FI (SEC)
UNIVERSITY OF SANTO TOMAS
2016 GOLDEN NOTES
388
100% Filipino Owned
(Zero percent (0%) foreign equity)
Code: CoFi AMMaN Co. – MiSe- US$2.5M
1. COoperatives(Art. 26, Ch. III, R.A. 6938);
2. Manufacture of FIrecrackers and other pyrotechnic
devices (Sec. 5, R.A. 7183).
3. Manufacture, repair, stockpiling and/or distribution
of biological, chemical and radiological weapons and
Anti-personnel mines (Various treaties to which the
Philippines is a signatory and conventions supported
by the Philippines).
4. Mass media except recording
5. Utilization of MArine resources (Sec. 2, Art. XII,
Constitution);
6. Manufacture, repair, stockpiling and/or distribution
of Nuclear weapons (Sec. 8, Art. II, Constitution);
7. COckpits (Sec. 5, P.D. 449);
8. Small-scale MIning (Sec. 3, R.A. 7076);
9. Private SEcurity agencies (Sec. 4, R.A. 5487);
10. Retail trade enterprises with paid-up capital of less
than US$2.5 M(Sec. 5, R.A. 8762);
80 % Filipino Owned
(Up to twenty percent (20%) foreign equity)
Code: Prc
1. Private Radio Communications network (R.A. 3846).
75 % Filipino Owned
(Up to twenty percent (25%) foreign equity)
Code: LoRD F
1. Contracts for the construction and repair of LOcally-
funded public works (Sec. 1, CA 541, LOI 630) except:
a. infrastructure/development projects covered in
R.A. 7718; and
b. projects which are foreign funded or assisted
and required to undergo international
competitive bidding (Sec. 2[a], R.A. 7718);
2. Private Recruitment, whether for local or overseas
employment (Art. 27, P.D. 442);
3. Contracts for the construction of Defense-related
structures (Sec. 1, CA 541).
4. Under the Flag Law, in the purchase of articles for the
Government, preference shall be given to materials
and supplies produced, made, or manufactured in the
Philippines, and to domestic entites. Domestic
entites means any citizen of the Philippines or
commercial company at least 75% of the capital of
which is owned by citizens of the Philippines (Sec. 1,
CA 138)
70 % Filipino Owned
(Up to twenty percent (30%) foreign equity)
Code: AdPawn
1. Advertising (Art. XVI, Constitution)
2. Corporations engaged in pawnshop business (Sec. 8,
P.D. 114)
60 % Filipino Owned
(Up to twenty percent (40%) foreign equity)
Code: Go LEARN CUPIDCo
 SPECIAL LAWS
1. Contracts for the supply of materials, goods and
commodities to GOCC, agency or municipal
corporation (Sec. 1, R.A. 5183);
2. Ownership of private Lands (Sec. 7, Art. XII,
Constitution; Sec. 22, Ch. 5, CA 141; Sec. 4, R.A. 9182);
3. Ownership/establishment and administration of
Educational institutions (Sec. 4, Art. XIV,
Constitution);
4. Adjustment Companies (Sec. 323, P.D. 613);
5. Culture, production, milling, processing, trading
excepting retailing, of rice and corn and acquiring, by
barter, purchase or otherwise, Rice and corn and the
by-products thereof (Sec. 5, P.D. 194);
6. Exploration, development and utilization of Natural
resources (Sec. 2, Art. XII, Constitution);
7. Ownership of Condominium units where the
common areas in the condominium project are co-
owned by the owners of the separate units or owned
by a corporation (Sec. 5, R.A. 4726).
8. Operation and management of public Utilities (Sec.
11, Art. XII, Constitution; Sec. 16, CA 146);
9. Project Proponent and Facility Operator of a BOT
project requiring a public utilities franchise (Sec. 11,
Art. XII, Constitution; Sec. 2a, R.A. 7718);
10. Manufacture, repair, storage and/ or distribution of
products/ Ingredients requiring PNP clearance (R.A.
7042 as amended by R.A. 8179);
11. Operation of Deep sea commercial fishing vessel (Sec.
27, R.A. 8550);
12. Corporations engaged in Coastwise shipping (Sec.
806, P.D. 1464)
40 % Filipino Owned
(Up to twenty percent (60%) foreign equity)
Code: FI [SEC]
1. Financing companies regulated by the SEC(Sec. 6, R.A.
5980 as amended by R.A. 8556);
2. Investment houses regulated by the SEC(Sec. 5, P.D.
129 as amended by R.A. 8366).
List B of the Foreign Investment Negative List
1. GR: Defense-related activities, requiring prior
clearance and authorization from the Department of
National Defense to engage in such activity, such as
the :
a. Manufacture
b. Repair
c. Storage
d. Distribution of, firearms, ammunition, lethal
weapons, military ordnance, explosives,
pyrotechnics, similar materials
XPN: Such manufacturing or repair activity is
specifically authorized, with a substantial export
component, to a non-Philippine national by the
Secretary of National Defense; or
2. Those that have implications on public health and
morals, such as the manufacture and distribution of:
a. Dangerous drugs
b. All forms of gambling
c. Nightclubs
d. Bars
e. Beer houses
389
f. Dance halls
g. Sauna and steam bathhouses
h. Massage clinics. (RA 7042, Sec. 8)
There is no significant difference between List A and List
B.
Rule regarding small and medium-sized domestic
market enterprises
GR: Small and medium-sized domestic market
enterprises with paid-in equity capital less than the
equivalent of US$200,000.00, are reserved to Philippine
nationals.
XPNs:
1. They involve advanced technology as determined by
the DOST;
2. They employ at 50 direct employees, then a
minimum paid-in capital of US$100,000.00 (RA 7042,
Sec. 8)
List C of the Foreign Investment Negative List
List C shall contain the areas of investment in which
existing enterprises already serve adequately the needs of
the economy and the consumer and do not require further
foreign investments, as determined by NEDA and
approved by the President and promulgated in a
Presidential Proclamation.
Q: The main feature of the Foreign Investment Act of
1991 is to introduce the concept of "Negative Lists".
Under the said law, what is a "Negative List"? (2012
Bar)
a. It is a list of business activities or enterprises in
the Philippines that foreigners are disqualified to
engage in.
b. It is a list of business activities or enterprises in
the Philippines that foreigners are qualified to
engage in.
c. It is a list of business activities or enterprises that
are open to foreign investments provided it is
with the approval of the Board of Investment.
d. It is a list of business activities or enterprises that
are open to foreign investments provided it is
with the approval of the Securities and Exchange
Commission.
A: a. It is a list of business activities or enterprises in the
Philippines that foreigners are disqualified to engage in.
Strategic industries
Industries that are characterized by all of the following:
1. Crucial to the accelerated industrialization of the
country.
2. Require massive capital investments to achieve
economies of scale for efficient operations.
3. Require highly specialized or advanced technology
which necessitates technology transfer and proven
production techniques in operations;
4. Characterized by strong backward and forward
linkages with most industries existing in the country,
and
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
5. Generate substantial foreign exchange savings
through import substitution and collateral foreign
exchange earnings through export of part of the
output that will result with the establishment,
expansion or development of the industry.

Penalties provided under R.A. 7042

1. A person who violates any provision of R.A. 7042 or

of the terms and conditions of registration or of the
rules and regulations issued pursuant thereto, or
aids or abets in any manner any violation shall be
subject to a fine not exceeding P100,000.
2. If the offense is committed by a juridical entity, it
shall be subject to a fine in an amount not exceeding
1/2 of 1% of total paid-in capital but not more than
P5,000,000.00 The president and/or officials
responsible therefor shall also be subject to a fine not
exceeding P200,000.00
3. In addition to the foregoing, any person, firm or
juridical entity involved shall be subject to forfeiture
of all benefits granted under R.A. 7042 (RA 7042, Sec
14

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