Com Law Tuazon 2011

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Commercial Law

Bar 2011 Notes

Roland Glenn T. Tuazon

Ateneo de Manila University

TABLE OF CONTENTS:

1. NEGOTIABLE INSTRUMENTS LAW

2. MERCANTILE INSTRUMENTS:

A. LETTERS OF CREDIT

B. TRUST RECEIPTS LAW

C. WAREHOUSE RECEIPTS LAW

D. CHATTEL MORTGAGE LAW

E. REAL ESTATE MORTGAGE /FORECLOSURE

F. SECURITIES REGULATION CODE

G. FOREIGN INVESTMENTS ACT

3. INSURANCE

4. INTELLECTUAL PROPERTY LAW

5. BANKING LAWS

A. TRUTH IN LENDING ACT

B. ANTI-MONEY LAUNDERING ACT

C. PHIL. DEPOSIT INSURANCE LAW

D. CONFIDENTIALITY OF DEPOSITS

E. GENERAL BANKING LAW

F. CENTRAL BANK ACT

6. CORPORATION LAW

7. TRANSPORTATION LAW

ANNEX 1: IN-DEPTH DISCUSSION ON LATTER PART OF NIL

Negotiable Instruments Law

• HISTORY: contrast a negotiable instrument with a non-negotiable PN:

o First objection: a person stepping into the shoes of the seller is

exposed otherwise to the defenses that the buyer may launch

against the seller

Law’s solution – exempt from personal defenses

o

Second objection: “I don’t know the maker, I just know the onenegotiating it to me. How will I know he’s solvent?”

Law’s solution – will make the indorser liable

regardless (Accumulation of secondary contracts

)

The more indorsers, the more you can sue

• Two general parts in the law:

o 1 – what makes an instrument negotiable

o 2 – rights and obligations of parties

• Two basic forms:

o Promise to pay (PN)

o Order to pay (bill of exchange)

• What If it does not comply with requisites of negotiability?

o If it does not comply with the requisites of negotiability, it is still

a contract, but not covered by the NIL.

• Either:

o Payable to order – negotiated by indorsement, and delivery

o Payable to bearer – delivery is sufficient

o N.B. If payable to a specific person, it is not negotiable

• What are the four basic contracts involved?

o 1. Making

o 2. Drawing

o 3. Negotiatingo 4. Accepting

To show consent

o N.B. But for all, there must be delivery

• What are the basic principles of the NIL?

o 1. Bad faith

If a person is in BF, he cannot invoke defenses.

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Ex. Issued a negotiable instrument to pay for a car

that is defective. The indorsee knows that the car is

defective, he is in bad faith.

o 2. Estoppel

Ex. A father allowing a son to steal a check and forgehis signature is estopped from denying it

o 3. Comparative fault

If a bank honors a check with a forged signature, the

bank is considered negligent too

But if the negligence of the drawer outweighs the

negligence of the bank, the law shifts the fault to the

drawer

o 4. The law will only protect you from personal defenses if you

are a holder in due course (Sec. 52)

Good faith

With value

Before overdue (see below)

With no notice of defenses

o 5. General rule: there must be demand , before an instrument

becomes overdue. Exception: If time is of the essence.

Ex. Reserve requirements of banks must be kept

afloat, so overnight, banks sometimes transact with

each other

“An overdue instrument is shouting to the high

heavens – I have been dishonored!”

Requisites and kinds of negotiable instruments

• What are the requirements for a negotiable instrument?

o 1a. It must be in writing

o 1b. It must be signed – symbol of consent

If one signed another name or a symbol, it will bind

him if he intended for it to bind him

Location is immaterial

o 2a. Must contain a promise or order to pay

Need not use exact words, even equivalent words are

fine

Creates a NEW obligation to pay, not a mere

acknowledgement of an old debt• Exception 1: date of payment is mentioned,

or at least, a date of maturity

• Exception 2: insertion of “or order” (words of

negotiability) in the old terms

Authorization to pay or a mere request does not

create a binding obligation to pay.

o 2b. The promise to pay or order must be unconditional

Do not look into evidence aliunde. You must confine

yourself within the four corners of the instrument to

deem whether it is absolute. Distinguish between uncertain events and certain

events, although indeterminate (ex. Moment of death)

o 2c. Sum certain, and payable in money

Because it is meant to be a substitute for money

Specify the denomination; cannot just be a number.

o 3. Payable on demand or on a determinable future time

o 4. Payable to order or bearer

Need not use exact words, but there must be

reasonable certainty so people know from whom they

could demand payment

Ex. instead of “order” pay to X or his indorsees;

pay to X or his assigns

Ex. instead of “bearer” pay to X or holder; pay to X

or possessor

o 5. Where the instrument is addressed to a drawee, he must be

named or otherwise indicated with reasonable certainty

If name of the drawee is left blank, it is an incomplete

instrument which can be filled up as a remedy

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• One view: non-negotiable –date of maturity

becomes uncertain because holder can

accelerate payment, and there is an

additional undertaking other than payment of

money.• Other view: negotiable –the undertaking to

put up a security is merely an accessory

obligation. The date of maturity is not

uncertain because acceleration is within

control of the maker; he can prevent it by

giving the additional security. (better view)

2nd situation: “same… if the holder feels unsecure, he

can declare the entire balance due and demandable.”

• It is not negotiable, because here, the holder

has the absolute option to make the

obligation due and demandable.

o Differentiate:

When the maker may choose to pay before a certain

date, it is still negotiable (ex. “on or before June 15”)

• Why?

o It benefits everyone because all

other secondary contracts are

discharged.

When the holder may absolutely choose to have the

obligation due, it is not negotiable.

• Why?

o Everybody becomes secondarily

liable by ripening their obligation.

o What if it’s hinged upon a contingency?

Non-negotiable even if the condition occurs.

o Philippine Education v. Soriano:A money order is not

negotiable, because although it says “pay to the order of,”

under Postal Regulations, obligation to pay is conditional,

depending on different grounds where the post office can

refuse to pay. Also, it can only be indorsed once.

o Does an extension clause affect negotiability?

No, if the extension is for a definite time too.

• Ex. Payable within 2 years from date, subject

to one year extension

Option to extend belongs to holder or maker/acceptor.

• What additional provisions do not affect negotiability:

o What is the general rule?

Other obligation or undertaking aside from payment of

money makes it non-negotiable (“secured by CM over

my car, which I will keep in good condition”)

o What are the exceptions?

1. Authority for holder to foreclose pledge, CM, or

collateral securities

2. Authorizes confession of judgment if instrument not

paid upon maturity

• N.B.the SC said, however, this is a void

stipulation

3. Waiver of benefit of law

4. Waiver of notice of dishonor

5. Waiver of venue

6. Waiver of exemption from execution

o What if the holder has the option to require something

other than payment of money?

It is valid, as long as the other option is money.

• Ex. If option is upon holder to demand either

cash or rice, it is still negotiable because the

holder can ALWAYS demand money

If the maker has the option, not valid.

• What omissions do not affect negotiability?

o 1. Not dated

o 2. Failure to mention consideration

It is presumed in this contract

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o 3. Does not specify place where it is drawn or payable

o 4. Bears a seal

o 5. Designates currency in which payment will be made

• When it is payable on demand?

o 1. Upon sight or presentation

o 2. Instrument is silent on when payment is made

o 3. When it is overdue

As to the maker, he is discharged

BUT as to the indorser, it is upon demand

• Upon whose order may an order instrument be paid?

o 1. Payee (who is not maker, drawer, or drawee)

o 2. Drawer

Ex. Jose Cruz writing a check saying “Pay to the order

of Jose Cruz” (better than making a check paid to

cash)

In this example, it is not complete until Jose indorses

it, because there has to be delivery (at least two

parties to a contract)

o 3. Drawee

o 4. Two or more payees jointly

Ex. Pay to the order of Jose CruzAND Manuel

Santos

o 5. One or some of several payees

Ex. Pay to the order of Jose Cruz OR Manuel Santos

Contra: For drawees, it CANNOT be alternative or

successive, but it can be jointly.• Ex. drawee can be drawn against “A and B”

but not “A or B”

o 6. Holder of an office for the time being

Ex. Treasurer of the city of Makati

o What if the drawee is not indicated with reasonable

certainty?

It is not negotiable.

• When it is payable to bearer?

o 1. To bearer

Caltex: “The Certificates of Time Deposit [in this

case] are negotiable instruments. The documents

provide that the amounts deposited shall be repayable

to the depositor. And who, according to the document,is the depositor? It is the ‘bearer’.”

o 2. To person or bearer

o 3. Order of fictitious person

What is the general rule?

• There must be intent by the maker or drawer

of the NI that the instrument be issued to a

fictitious person (knowledge is paramount)

Weller and Martin: Either partner can sign or issue

checks. X wanted to steal money from the

partnership. He drew a check payable to acorporation where he was just the corporate secretary.

He was just the corp. sec., and was not authorized to

indorse; but he indorsed the check to himself

nonetheless. Y, his partner, sued the bank for

restoration of the amount.HELD: it is payable to

bearer. The Drawer did not intend the payee (the

Corporation) to get the proceeds of the check, EVEN

IF the payee actually existed or not. It fell under this

provision.

• If, however, the company required two

signatories to all checks, and X signed it with

intent to steal, and Y signed it not knowing

X’s intent, then it does not become payable

to bearer. For the payee to be fictitious, both

must have same intent.

American Sash: Had a payroll clerk, who prepares

checks payable to employees. He then makes the

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officers sign the checks. Clerk padded payroll with

ghost employees, had the officers sign the checks

(the officers did not know that the employees didn’t

exist), and the clerk collected money. Issue: is this

payable to fictitious persons. These ghost employeesdid not actually exist.HELD: It was not a bearer

instrument. The DRAWERS were the officers who

signed the checks. Their intent controls. So the

checks DID NOT become payable to bearer because

they DID NOT KNOW that the ghost employees were

not part of the payroll.

Rodriguez v. PNB: Employees of PNB formed a

savings and loan association (SLA). Rodriguez

spouses meanwhile, had current accounts with PNB.

Whenever the SLA lends to members, it issues post-

dated checks. But most of the time, the SLA does not

have enough money. The borrowers thus endorse the

checks to Rodriguez; in turn, Rodriguez rediscounts

the checks (issuing checks lower than face value).

The SLA has a policy: when a member has an

outstanding loan, they cannot get another loan. So

the officers who wanted to borrow more, to circumvent

this, they made it appear that it is the other members

who are borrowing. The SLA, in accordance with the

usual procedure, issued post-dated checks to the

“supposed borrowers” (but really for the officers). The

officers indorsed the checks to Rodriguez. Rodriguez

issued discounted checks. PNB found out about this

and closed the SLA account. Meanwhile, the checks

issued to Rodriguez, which bounced because the SLA

account was shut down – since the checks they

issued were cleared, and the checks issued to them

were from a closed account. Contention of spouses:

How can PNB accept the indorsement of those

checks, when the ones who indorsed were the

officers and not the supposed borrowers. Contentionof PNB: it is intended for fictitious persons, since there

was no intent that they actually get the money (even if

the supposed borrowers really exist). HELD:

Rodriguez spouses won. For the checks to be

considered as payable to fictitious persons, the fact

must be known to the person issuing the negotiable

instrument. Here, the Rodriguez spouses did not

know that the supposed payees were not the real

borrowers (when it fact it was the officers). PNB must

reinstate the amounts to the Rodriguez spouses.

o 4. Payee is not name of existing person

Classic example: payable to cash

o 5. Last indorsement is in blank

Completion and delivery

• What is the effect of ante-dating or post-dating?

o Does not affect negotiability

• When can the holder insert a date in the instrument?

o

When the date of acceptance is not inserted by the drawee, theholder may insertdate of issue or date of acceptance

o What if he places the wrong date?

If negotiated to a holder in due course, that is the

correct date as far as the holder in due course is

concerned – even if it is not

Purpose: the law protects a holder in due course, who

is relying on that date in good faith

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o But what if the one who put the wrong date presented it for

payment to the acceptor/drawee?

Not valid. Cannot claim because he was not in GF.

o A check drawn by X says “Pay to the order of Y P10000 thirty

days after sight.” It was accepted by E on Sept. 15, but did notdate the instrument. Y negotiated it to Z, telling the latter that

the instrument was accepted November 1. Z placed in the

instrument this date.

Can he collect from E?

• Yes, even if it is more than 30 days from

acceptance. Z is a HIDC and the Nov 1 date

is true as to him.

If Y inserted the wrong date instead and did not

indorse it to Z, can he collect from E?

•

No. He is not a HIDC.• What is the rule for incomplete but delivered instruments?

o When it is wanting of a material particular – the person

possessing it has prima facie authority to fill up the blanks

CONTROLLING FACTOR: The blank or incomplete

instrument must have been delivered with intent that

the holder turn it into a negotiable instrument

o In a case, a person signed an instrument in blank and left

it with the bank. The bank filled it up with an amount.

What happens?

The amount inserted by the bank controls.o What are the two requirements for this instrument to be

enforceable?

1. It must be filled up in accordance with the authority

given to him

2. It must be filled up within reasonable time

o X gave a check with a blank amount to Y, telling Y that he

should fill it up according to what X ultimately owes Y, but not

over P50000. X owes Y P30000, but Y put P60000.

Can Y collect P60000 from X?

• No. It was beyond the authority given him.

Y indorsed the check to Z, a HIDC. Can Z collect

P60000 from X?

• Yes. The defense does not apply to him.

o X asked Y to sign a piece of paper claiming that it was a

“witness” signature that the Z will pay X what Z owes. But X

actually made it appear that it was a PN where Y promised to

pay money to her. HELD: The court believed the contention

that Y never intended for the signature to be for a PN. There

must be intent to leave a signature to make a PN.

• What about incomplete and undelivered instruments?

o Will not be a valid contract in the hands ofany holder, as

against the person whose signature was placed on the

instrument prior to delivery (realdefense) BUT indorsers are liable

o Ex. X left signed checks, and an employee took them and

filled up amounts. This is an incomplete and undelivered

instrument.

o Ex. X went abroad and left signed checks for payment of

debts. Abusive employees put their own names and signed

their own names. HELD: By pre-signing checks and leaving

them with employees, it became possible for them to do this.

The officers were negligent and shared in the loss (60-40).

• What about complete but undelivered instruments?o The NI is incomplete until delivered, but this does not prejudice

a HIDC

o Ex.You cannot sue if you hold checks that were not delivered

to you. You never acquired a right over them.

BUT a HIDC will not be subject to this defense – it is a

personal defense

o BPI Family Savings: BPI issued a check payable to City

Treasurer of Iloilo to pay for local taxes. They did not deliver it

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to the treasurer, and just gave it to the employee. The

employee used it to pay for somebody else’s local taxes.

HELD: There was no payment because BPI never delivered it

to the city treasurer, so BPI cannot claim to have paid.

o

Associated Bank: Somebody was selling RTW clothes, andshopping malls (buyers) issued crossed checks. Somehow,

the checks fell into the hands of someone else, who indorsed it

to someone else, and were deposited to Associated Bank. The

seller was wondering why she wasn’t being paid. [If you are

legalistic, the RTW seller must sue the shopping malls, etc.,

because the checks were not delivered to her. In turn, the

shopping malls, etc. must sue the drawee banks, and then the

drawee banks sue Associated Bank why it cleared the checks.

HELD: The SC allowed the RTW seller to sue Associated

Bank directly because it cleared the checks.

o It may be shown that delivery between immediate parties is

conditional, or for a special purpose.

o Ex. A godson is taking the CPA test, but X is not in the

Philippines. He gave P10,000 check on the condition that he

pass the test. The godson cannot enforce payment on the

check. BUT if the godson negotiates the check to a holder in

due course, the law will protect the HDC.

Rules of interpretation

• 1. Words prevail over figures

o Romero: Amount indicated in words is One Million Two

Hundred Pesos. Amount in figures: 1,200,000. Balance in the

account is 1,100,000. The check bounced. The words

prevailed.

• 2. Payment of interest

o Runs from date from instrument

o Or if none, date of issue

• 3. If not dated, assumed to be dated from time of issue

• 4. Written > printed provisions

• 5. If ambiguous whether a bill or note, the holder has the option to treat

it as either

• 6. Ambiguous role of signature deemed an indorser

o Because the indorser has the least liability among all

characters in a NI

• 7. If “I promise to pay” note is signed by two or more persons deemed

solidarily liable

Signature

• What is the general rule as to signatures?

o A person whose signature does not appear on the instrument

is not liable

• What are the exceptions?o 1. Duly authorized agent signing for principal

o 2. Forger liable for signature he forges

o 3. Signature in separate paper (“allonge”) because the

instrument has no more space

o 4. Estoppel

o 5. Signing under trade/assumed name

o 6. Instrument can be negotiated by mere delivery

• What must an agent write to avoid personal liability?

o 1. Agent must disclose he is an agent

o 2. Disclose his principal

3. He has authority

• What if the party is a minor or a corporation without capacity?

o Maker of a PN cannot refuse to pay to a holder on the ground

that the indorser is a minor. Neither can he raise the defense

that the prior indorsee is a minor.

o ONLY the minor can raise the defense of minority, no one else.

o Can apply this principle by analogy to other incapacitated

persons (Ex. corporation action ultra vires)

o Exceptions:

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1. The minor actively misrepresented his age and it

appears that he is physically of such age

2. Minor kept fruits/benefits

3. Minor spent the money in good faith

Forgery

• What if a person’s signature is forged?

o Did not give consent to the contract

o Except when he is estopped

• What are the kinds of forgery?

o 1. Signature is copied

o 2. Fraud inesse contractus (fraud in factum)

Misled to signing instrument, not knowing it was a

negotiable instrument

o 3. Duress amounting to forgery It must be duress in theexecution(ex. Grab the hand

of the intimidated), NOT duress in inducement

o 4. Fraudulent impersonation

In general, it is NOT a forgery

The person to whom the note was given is presumed

to be intended to receive the note (because he knew

the intended payee)

• Four general rules for forgeries:

o 1. A party whose signature is forged is not liable unless he’s

estoppedo 2. An acceptor who pays on a BOE cannot recover the money

because he admits the genuineness of the signature of the

drawer

o 3. A Holder in Due Course acquires good title if forged

indorsement is not necessary for his title

Ex. in a bearer instrument

o 4. A person negotiating an instrument after forgery is liable

(due to warranties)

• Forgery of promissory note:

o A. Order instrument: A (signature forged by B)-B-C-D-E

E cannot collect from A (not bound)

E can collect from B (forger)

E can collect from C, D as indorsers (warranted the

instrument)

o B. Bearer instrument: A (signature forged by B)-B-C-D-E

Indorsing an instrument that need not be indorsed

leads to a warrant of such

o C. Order instrument: A-B-C (signature forged by D)-D-E

E cannot collect from A or B (since it is an order

instrument, there is a cut-off to A and B, since C’s

signature is forged)

E cannot collect from C (no consent)

E can collect from D as indorser/forger

o D. Bearer instrument: A -B or bearer-C (signature forged by D)-

D-E

N.B. This is an instrument payable to bearer; delivery

is sufficient, no need for indorsement.

Can E collect from A?

• Depends. If E is not a holder in due course,

A will claim that there was no delivery of

complete instrument by B since C stole it

from him

• If E is a holder in due course, he may collect

from A since it is payable to bearer

Can E run after C?

• No, C’s indorsement was forged

• Neither can he run after B, because he

cannot trace his right to him [cut off by the

forgery].

• He can run after D, because by indorsing the

instrument (even if bearer), he warranted it.

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o N.B. if a bearer instrument is indorsed even

if it is not needed, the indorser warrants the

instrument as what it purports to be.

• Forgery of Bill of Exchange:

o A. Order instrument: A (signature forged by B) and then

indorsed to C-D-E. X accepted as drawee.

Can E collect from A?

• No. No consent.

Can E run after X?

• Yes. By accepting, X admits the instrument

is genuine.

• What is X’s remedy?

o Sue B, the forger.

Can E run after B?

o Yes (forger)

Can E run after C and D?

• Yes. Warranted by indorsement

o B. Same, but X did not accept.

How does the answer change?

• Same for everyone, except E cannot run

after X because he did not accept.

o C. Same as A, but bearer instrument.

How does the answer change?

• Same rules on indorsement of a bearer

instrument if there was indorsement even

if there is no need to do so, there is warrantof the genuineness of the instrument by the

indorsers.

o D. Bearer instrument, but an indorser’s signature was forged

• Even if C’s indorsement to D is forged, the

payee can still collect from A (because he

just promised to pay the bearer). Remedy of

the acceptor is to just run after the thief.

o E. BOE issued by A payable to B or order –C (signature forged

by D)-D-E. X accepted and paid.

Can X debit A’s account?

• No, because it went against A’s order to pay

B or order, which was cut off by the forgery of

C’s signature.

Can X get money back from E?

• Yes, because X only admits A’s signature as

genuine (it was) and not the indorsers’

signatures.

Can E run after A, B, or C?

• No. They were all cut off by the forgery.

Can E run after D?

• Yes, he forged.

o F. BOE issued by A payable to B or bearer – C (signature

forged by D)-D-E. X accepted and paid.

Can X debit A’s account?

• Yes, because A promised to pay the bearer.

Can X get money back from E?

• No. E is the bearer.

What is the remedy?

• C can run after D, the forger.

o G. BOE issued by A payable to B or bearer – C (signature

forged by D)-D-E. X did not accept.

Can E run after X?

• No, X did not accept. Can E run after C?

• No, did not consent.

Can E run after D?

• Yes (warranted and forged)

Can E run after B?

• No, cut off by the forgery.

Can E run after A?

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• Yes, can go after A if E is a HDC. BUT

cannot go after A if E is not HDC.N.B.

(reason: complete but undelivered instrument

is a personal defense)

•

What are the exceptions to these general rules?o 1. When there is estoppel (ex. father saying that his son’s

forgery of his signature was genuine)

o 2. When there is unreasonable delay by the drawer in informing

the drawee about the forgery

Drawer can check the statements sent by the bank to

him

Test: If the drawer had acted quickly, would the

drawee have been able to stop or freeze payment?

• X left a check book with his friend, who was in the car. The friend

forged his signature in a check book left lying there.o HELD: Not negligent; no reason to suspect friend of bad faith.

• An external auditor was hired to reconcile records. He managed to

forge the signatures of the officers of Casa Montessori over a long time.

Sued bank, which refused to reinstate the amounts. Bank argued Casa

was negligent.

o HELD: An external auditor is not an employee. It is an

independent contractor, so you cannot blame Casa for

negligence in hiring an employee.

o Estoppel does not apply, because Casa had no way to know

the auditor was stealing money, because he was precisely theone tasked with safeguarding the school records and

comparing with bank records.

• Effect of comparative fault?

o Split accountability for the loss (usually 50-50 but can adjust

depending on level of negligence)

• Illustratecomparative fault principle:

o Robbers broke into Triumph Lumber. Check book was stolen,

but Triumph did not report it to the bank. Robbers were able to

cash checks.

HELD: Triumph was negligent for not reporting the

theft. The bank should also be held negligent forauthenticating the checks.

o MWSS did not have their checks printed by the central bank.

They had a private printing press print their checks. The

signatures of the officers of MWSS were forged. PNB paid.

HELD: MWSS must bear the loss for failing to

exercise caution – did not ask printing press to

surrender plates, account for spoilage, and MWSS did

not examine the signatures in the bank returns.

o Ilusorio was leaving for abroad and he left his checkbook with

his secretary, who he asked to reconcile bank statements.

Secretary forged his signature.

HELD: Ilusorio should bear the loss for his

negligence. He trusted his secretary.

o Gempesaw owes several groceries. She trusted a bookkeeper

blindly. When she ordered supplies, the bookkeeper prepared

the checks, and Gempesaw signed the checks without

verifying the statements. The bookkeeper was able to steal

more than P1M.

HELD: Negligent; did not confirm or examine the

invoices, receipts, etc. before signing the checks used

to pay the suppliers.

o Province of Tarlac had account with PNB. Province issues

checks to the physician/head of the clinic. The cashier already

retired, but he was still hanging around. Cashier was able to

forge when he picked up the checks.

HELD: Province was negligent, for allowing the

cashier to pick up the checks even when he was

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retired, so he was able to indorse the checks through

forgeries. Split accountability – 50-50.

• What is the general duty of the collecting bank when the

indorsement is forged?

o The collecting bank must return the money to the drawee bank,

because the payee did not indorse the check.

o N.B.This is NOT a case of negotiation, but presentment for

payment. So the collecting bank cannot claim there was

warranty.

• X, employee of Ford, was tasked to pay sales tax (P18M), made a check

payable to Insular Bank (for payee’s account only), the authorized

collecting agent of BIR. X showed a fake BIR receipt to Ford. Instead,

X deposited a worthless check with Insular Bank, which X substituted for

the check issued by Ford. In their internal records, X made it appear the

worthless check was deposited. X stole the real check, and Citibankhonored it. X collected from Bank of America. Ford had to pay BIR

again. They sued.

o HELD: Citibank must return the money to Ford, because Ford

ordered it to pay the BIR, which Citibank disobeyed. It says

“for payee’s account only” andthere was no indorsement from

BIR. Citibank was guilty only of negligence.

o Citibank manager (who was complicit) was criminally liable.

o JJ doesn’t agree with the court as regards Insular Bank’s

liability.

o Check: G.R. 121413 29 Jan. 2001 • Rules on clearing

o Checks are brought to a clearing house and are run through a

clearing house. They check the magnetic strips on the checks.

The amount will then be transferred to the collecting bank.

o Then the checks will be physically given to the drawee bank.

The drawee bank has 24 hours to honor/dishonor the check.

o If it dishonors it, the drawee bank returns the check to the

clearing house. The computer will return the amounts paid.

o Any return beyond 24 hours: time-barred.

Here, the doctrine applies to the forged signature of

the drawer.

This 24 hour rule SHOULD NOT apply when it is the

payee’s or indorsee’s signature that is forged,

because the drawee bank has no way to find out, until

the drawer informs them.

(But the SC has at times wrongly applied the 24 hour

rule to the payee’s forged signature.)

o New rules (to prevent ping-pong of checks):

If a check is dishonored, you can only present it one

more time. [Usual reason why one failure is allowed –

drawn against insufficient funds]

What is the effect when the drawee bank does not

return the check within 24 hours?• The drawee cannot ask the computer to

reverse the entries.

• BUT you are not precluded from suing to

collect after. But since the computer cannot

reverse, while you are litigating, you do not

have the amount.

Consideration and Holders for Value

• IMPT THINGS TO REMEMBER:

o 1. Failure of consideration is a personal defense. This usually

applies when X and Y have a transaction and X’s instrument

bounces, but Y’s prestation is only partially fulfilled.

o 2. But if you bring in a third party (HIDC), then failure of

consideration is not a defense anymore.

o 3. As discussed in the next section, an accommodation party is

liable to a Holder for Value.

• Under the law, consideration is presumed

12



o Travel Inc.: Travel agency sued on the basis of a bouncing

check issued by a guy bringing in passengers. The CA was

wrong for asking the agency to prove the value of the ticket

purchased. There is a presumption of valuable consideration,

and that the check was for such amount.o Ex. in BP 22, there is no need to prove the check was issued

for valuable consideration

• In civil law, generosity, love, affection, etc. are valid consideration.

o [N.B. Sundiang says love and affection, etc. cannot be

considered valuable consideration. But Jack says that a

donation is a “simple contract” and the law simply requires

consideration sufficient to support a simple contract. So love

and affection is valuable consideration.]

• Rule on holder for value vis-à-vis prior parties:

o Rule: Where value is given for the NI, the holder is a holder forvalue in respect to all parties who became such prior to [the

time consideration was given]

o A issued a PN to B, but there is no consideration. B

indorsed it to C for consideration. C, then to D. What is

D’s status as holder for value?

D is a holder for value with respect to A, B, and C

because C gave value. A and b are parties who

became bound prior to the value given.

• What is the rule on holder who has a lien on the instrument?

o He is a holder for value only to the extent of the lien.o Ex. Company appealing a lost case posts supersedeas bond

(ex. P500000). Surety Company asks for collateral. The

surety company is a holder for value to the extent of P500K,

even if the company issued a certificate of time deposit

negotiable for P1M.

• What is the nature of absence of consideration?

o 1. Defense against a person not a HIDC (personal defense)

o 2. Partial failure of consideration is a proportionate defense.

Ex. Somebody issued a check for P20000 for 10

sacks of rice. The check bounced. The seller

however only delivered 5 sacks of rice. HELD: He

can only sue for P10000

•

Want of consideration between drawer and payee cannot be invoked asdefense of drawee who accepted a BOE

o A drew a BOE for the amount of P10M in favor of B, the

payee, in exchange for 10 cars. B only delivered 5 cars. X,

the drawee, did not accept. Can A launch the defense of

partial failure of consideration against B?

Yes. Want of consideration is a defense against the

payee.

o [Same facts] X accepted. Can X refuse to pay on account

of partial failure of consideration?

No. The acceptor cannot use want of considerationas defense. By accepting, he admits authority of the

drawer to draw the instrument, and that he will pay.

Accommodation party

• Who is an accommodation party?

o Signs as party but does not received consideration or value

therefore, from the underlying contract. Only lends his credit.

• What is the accommodation party’s liability?

o Liable to a holder for value, even if the holder for value knew

him as merely an accommodation party at the time that holder

took the instrument.

Ex. Some banks try to get borrowers to get surety

companies to sign borrowing agreements. Surety

companies charge premiums for signing as co-

makers. The surety company, not receiving any part

of the proceeds, is deemed an accommodation party.

• Must there be independent consideration for the accommodation?

13



o No, it is not an absolute prerequisite. The consideration that

supports the surety is the same consideration for the original

obligation.

• May a corporation be an accommodation party?

o As a general rule: a corporation cannot be an accommodation

party to an instrument, because there is no business purpose

to such [unless that is the business of the corporation].

• Prudencio: Construction project. The constructor borrowed from PNB

working capital. The bank required two other signors. The firm got the

Prudencio spouses who issued checks. The project was failing. PNB

agreed to release part of the security money to help the project. But the

project died anyway. PNB sued Prudencio spouses.HELD: Prudencio

spouses are accommodation parties. The court held that PNB is not a

holder in due course, because it knew that the spouses did not receive

consideration. When PNB released a portion of the money, it was in

BF.

o JJ’s comment: the law says “Holder for value” not “HIDC.” You

cannot claim PNB was in bad faith when it released the money

because the project was already failing. PNB took a risk,

rather than ensure the certain failure of the project, the

released funds could have improved the project.

o Sec. 52: definition of HIDC – point in which a person must be is

in GF is when hetook the instrument. The release of the funds

happened long after.

o SO IF YOU FOLLOW THE IMPORT OF SEC 29, which

makes accommodation parties liable to holders for value,

then the Prudencio Spouses should pay PNB because PNB is

a holder for value!

• X was exchanging a post-dated check for cash to the disbursing officer

of AFP. AFP asked Y, X’s sister, to sign as accommodation indorser.

The check bounced. Y was acquitted for conspiracy charges, but was

held civilly liable. Correct?

o HELD: Yes. That’s what an accommodation party is tasked to

do – when the check bounces, she pays.

Negotiation

• Can bearer instruments be negotiated?

o Yes. When a bearer instrument is indorsed although

unnecessary, it is still ultimately negotiated.

o SeeCaltex case. When pledging a NI, there are no specific

provisions. Fall back on the NCC. Must comply with

requirements of putting it in a public instrument and

indorsement.

• Where must the indorsement appear?

o On the instrument itself or to a paper attached to it

• What must be indorsed?

o The entire instrument. Indorsing only part of the amount will

make it cumbersome.

o 1. Prohibited to indorse to 2 or more indorsees severally.

Ex: A check for P100K is negotiated to Jose Cruz for

50K and Manuel Santos for P50K.

Ratio: This in effect is two indorsements of 50K each

(two partial indorsements)

o 2. PARTIAL indorsement is treated under law as an

assignment. It is subject to personal defenses.

EXCEPTION: When it has been paid in part (ex. on

installments)• Types of indorsements:

o Special – specified person to whom it is being indorsed

o Blank – does not name any person

Indorsement of an order instrument in blank can

convert the indorsement into a special indorsement by

writing his name

This ensures that the order instrument does not

become a bearer instrument

14



Ex. A issued a PN to B or order for P10K. B

indorses it to C, but in blank. What can C do?

• C can insert “To C” over the signature to

keep it an order instrument.

• C CANNOT put “To C, waiving notice of

dishonor.” The contract must be consistent

with the tenor of the indorsement

• Types of restrictive indorsements:

Negotiabilit

y

Passing of

title

Consideration

presumed

Defense

available

Pay to Jose

Cruz only

X Yes Yes X, because

indorsee is

a HIDC,

defenses

againstindorser

cannot

apply to him

To Jose

Cruz, for

collection

only (as

agent only)

Yes, but

subject to

same

restriction

that he only

holds it for

collection

X, because

the

indorsee is

a mere

agent of the

indorser

X, because

there is no

transfer of title

Yes,

defenses

against

indorser can

be raised

against

indorsee

because he

is just an

agent

To Jose

Cruz, as

trustee for

Glenn

Tuazon

(indorsee

Yes, but

subject to

same trust

Yes Yes, because

there is

transfer of title

X, because

title

transfers

named as

trustee)

• Rights of indorsee in restrictive indorsement:

o A) collect payment

o B) bring action indorser could bring

o C) transfer rights, if allowed to do so

• What is a qualified indorsement?

o Done by writing ‘without recourse’ – although the instrument is

still negotiable

o This can be done if the instrument will fall due for a long time

(ex. 5 years), and the indorser does not want to be insecure for

such a long time.

o But qualified indorser still has some warranties under Sec. 65;

1. Genuine as to what it purports to be• (ex. not forged or materially altered)

2. Warrants his valid title

3. All prior parties have capacity to contract

4. That he is not aware of any fact that makes the

instrument valueless

• (ex. that the maker is insolvent)

o Ex. A issues a PN to B or order for P50K. B indorses to C,

then C to D. D indorses to E “without recourse.”

Can E collect from D?

• No. The indorsement is qualified.

If A’s signature turned out to be forged, can E

collect from D?

• Yes. Because he warranted that the

instrument is genuine as to what it purports

to be.

If D turned out to have forged C’s indorsement to

him, can E collect from D?

15



• Yes, more so. He warranted his valid title to

E.

• What is the effect of a conditional indorsement?

o 1. The maker (or acceptor) may disregard the condition

because the maker made an unconditional promise to pay.

The indorser cannot change the original obligation

o 2. The maker can also say “let’s wait and see if the condition is

fulfilled”

o 3. If the maker pays, but the conditioned turned out to be

unfulfilled after, the remedy of the conditional indorser is to run

after the indorsee to get back the money. The conditional

indorser cannot run after the maker/acceptor because the M/A

has every right to dispose of his obligation while he feels

solvent.

•

What is the effect of an indorser signing of an instrument payableto bearer?

o It can still be indorsed through mere delivery

o But the special indorser is only liable to those who can make

title through his indorsement

o Rule: a bearer instrument is always a bearer instrument

o Contra: a WHR can be converted from a bearer to an order

instrument by a special indorsement

• What if the instrument is payable to two or more payees?

o All must endorse

o But if they are partners, there is mutual agency

• What if the instrument payable to a cashier or fiscal officer?

o Assumed that the instrument is payable to the corporation he

represents

• What is the effect if the name is misspelled?

o Must indorse the instrument according to the misspelled name,

because other parties will not know that there was a mistake

made

o If he wants, after signing as the misspelled name, he can sign

his real name, so it will appear wrong name indorsed to real

name

• What if there is date attached to the negotiation?

o The date is presumed to be correct, but rebuttable.

o If there is no date, the negotiation is presumed to have been

done before it was overdue

Useful to establish HIDC

• What if it indicates a place?

o Law of that country will govern as to questions of indorsement

• N.B.Not every restrictive indorsement will destroy negotiability

o Only that in subsection A (“Pay to X only”) will destroy

o Crossed check is still negotiable

• Can strike out an indorsement not needed for his title:

o Ex. bearer instrument: can strike out indorsements B to E

o If it’s an order instrument, can E strike out B? No. Because it is payable to the order of B. You

cannot take him out, or else, E cannot draw title to the

instrument.

o ABCDE. E cancels the indorsement of C to D. He

loses the right to run after C. D is also discharged, because D

lost his chance to run after C.

o RULE: The indorser who is struck out and ALL indorsers after

him are eliminated

Ex. If there is indorsement from A to Z, and you

cancel C, persons C to Y are discharged.• What about Instruments transferred without indorsement?

o Transferee will only step into the shoes of the transferor

o So defenses against transferor apply to the transferee too

o But the transferee can compel the transferor to indorse it

o What is the time period to determine if he is a HIDC?

The reckoning point is that time of indorsement, not

the initial transfer

16



Ex. Did not know necklace was fake at time of

transfer; knew it was fake at time of indorsement = not

HIDC

• Indorsement to a prior indorser:

o Ex. A-B-C-D-E-B

o Can B run after C, D, and E?

No. Because they in turn can run after B too!

There is compensation under law. The law will not

allow them to run around in circles.

Rights of the Holder

• What are the rights of a holder?

o 1. Can sue in own name

o 2. Payment in due course discharges the instrument

Payment at or after maturity is in due course, andwithout notice his title is defective

• Holder in due course (Sec 52)

o Requisites:

1. Instrument is complete and regular on its face

2. Must have become a holder before it was overdue

and without notice of prior dishonor, if so

3. Took it in GF and for value

4. When he took, no notice of infirmity in instrument or

defect in title of the indorser

• This elaborates #3

When is there defect in the title of the indorser?

• If he took it through unlawful means (ex.

stole it), illegal consideration (ex. issued for

marijuana), or negotiated it in breach of faith,

fraud (ex. issued for fake ring), or duress (ex.

issued as ransom money)

o Rule on instruments payable on installments and HIDC:

Status on payment Knowledge Effect

An installment has not

been paid and there is

no acceleration clause

Holder is aware HDC as to installments

not due on the face of

the instrument

An installment is not

paid and there is an

acceleration clause

(automatic)

Holder is aware Not a HDC



acceleration clause

(automatic)

Holder is not aware HDC as to installments


the instrument



optional acceleration

clause

Holder not aware of the

exercise of this option

HDC as to installments


the instrument



optional acceleration

clause

Holder is aware of its

exercise

Not a HDC

• What is the test to know whether or not he is a HIDC?

o A holder must be aware that something is wrong, but chose not

to investigate further as to not be a HDC.

o Check: was it honest for him to take the instrument under these

circumstances?• X issued a crossed check to Y, in order to buy a car from Z. However, Y

took the check and paid it to ABC hospital, and the value of the check

was greater than his bill to ABC hospital (which gave change). X

stopped payment. ABC sued X. X launched defense of failure of

consideration.Issue: is ABC a HIDC?

o No. Since the check was crossed, it can only be deposited.

ABC should have inquired as to the title of Y, but it did not.

17



o If the checks are crossed, the taker must inquire as to the

nature of the indorser’s title

• X paid Y a check, drawn against ABC bank. Y altered the amounts. Y

deposited it in DEF (her bank). Y told DEF not to present the check for

payment right away, even if it was already due, and to let Y to draw theamount anyway. The alteration was discovered. ABC refused to pay.

DEF sued to recover.Is DEF a HDC?

o No. The circumstances show that the check was already due

but Y asked DEF not to present it for payment yet. And DEF

allowed Y to withdraw even if the check has not been cleared

yet.

• The claimant received a check that was not indorsed to it by the payee,

and the check had a notice of prior dishonor due to DAIF (drawn against

insufficient funds).

o HELD:Claimant is not a HIDC.• In two cases, there was lack or failure of consideration between the

maker/drawer and payee of the NI. In one case, it was merely issued as

security, and in the other, the car delivered had the wrong chassis

number. But in both cases, the payee already indorsed the check to

another person.

o HELD:Those persons are HIDCs and the defense of

failure/lack of consideration does not vest.

• May a payee be a HIDC?

o Yes, because the law simply provides “holder.” A payee is a

holder, too.• What about negotiation of an instrument payable on demand after

an unreasonable length of time?

o Holder is not a HIDC.

o Consider the nature of the instrument, customs, and particular

facts

• What about a transferee who receives notice of infirmity before he

has paid the full amount agreed upon as consideration for the

instrument?

o He is a HIDC only to the extent of the amount paid by him.

o Ex. X issued a post-dated check to Y with value of P100K, and

X told Y to just pay him P80K right away because X could not

wait for the maturity of the check. Y has only paid P40K so far.

Then Y found out that the check was issued for a fake ring.The check was presented but it was dishonored. Y sued Z, the

drawer. Can he collect?

HELD: Yes, but only to P50K, since that is half the

value of the check, and Y only paid half of the agreed

consideration. He is a HIDC only to the extent of half

the check.

• What are the rights of a HIDC?

o 1. Sue in own name and receive payment

o 2. Free from personal defenses

o

3. May enforce payment against all parties liable thereono Exception: when he cannot recover full payment –

37 – restrictive indorsement [GT: I don’t know why.]

• Maybe JJ meant qualified indorsement under

38?

54 – notice before full amount is paid

124 – when materially altered, a HDC may still

enforce against the maker/drawee according to the

original tenor of the instrument

• General rule: the instrument is avoided as to

those not party to the alteration or did not

indorse it

o But not everyone can invoke real defenses against a HDC. For

instance, an indorser warrants an instrument is genuine in all

respects it purports to be. Also, an acceptor warrants the

authority of the drawer to pay.

Personal defenses Real defenses

There’s a contract with some No contract because an element is

18



inequitable or iniquitous fact behind

it

missing; or void against public policy

Voidable contract Void contract

Ex: no consideration, undelivered

complete instrument, acquired by

force/illegal means, illegal

consideration, negotiation in breach

of faith, mistake, ultra vires act of

corporation

Ex; material alteration (so the

consent is not anymore to this

instrument); undelivered incomplete

instrument (no consent); forgery (no

consent); minority (lack of capacity)

Not applicable to HDC Applicable to HDC

• Personal defenses are available against a non-HDC. This does not

mean the non-HDC cannot collect. It just means that personal defenses

may be raised against him.

•

(58b) IMPT. Shelter Principle (GT)o What it simply says is that a holder who (1) derives title from a

HDC (2 ) and is not a party to the illegality or fraud has

the same rights as the HDCas to the prior parties to the

indorser, even if he is not.

o Ex. A was induced by B through fraud to issue a PN to B or

order. B C, who was NOT aware of the fraud (HDC). C

D who was aware of the fraud but not a party to it.What is the

effect?

D is a holder in due courseas to the parties prior to

the indorser (A and B) What if D indorses it to E, who is not an HDC?

• Since E derives title from D, who is not an

HDC, E does not have the rights of an HDC.

o There can be no “curing.” So D can’t indorse the instrument to

F, an HDC, and have it re-indorsed back to him to “cure” his

title. He resumes his position as not a HDC.

• PRESUMPTION:

o General rule – every holder is a HDC

o Exception – if it is shown that the title of the negotiator is

defective, then the holder has to prove that either the holder or

the negotiator is a HDC

o Exception to the exception – the exception does not apply to a

party that has become bound to the instrument prior to the

acquisition of defective title

Ex. A – B – C – D – E. D swindled C, then indorsed

to E.

• When E runs after A, he is not required to

prove that he is a HDC because A was

bound to the instrument before the defective

title occurred.

• Fossum:

o X issued a check to Y, but there was failure of consideration. Y

negotiated to Z, who was not a HIDC (he was aware of thefailure of consideration between X and Y). Z sued X to collect.

X refused and raised personal defense of lack of consideration.

What is the implication?

The burden of proof shifts upon Z to prove that either

Z or Y is a HIDC. In this case, it failed to do so.

In this case, Z loses the presumption of being HDC

because Y’s title, as negotiating party, is defective. Y

has no benefit of the presumption because it is not a

holder anymore.

Liabilities of parties

Obligations Warranties

Maker Pay according to tenor 1. Existence of payee

2. Capacity of payee to

indorse

Drawer If dishonored, and

process of dishonor

1. Existence of payee

2. Capacity of payee to

19



completed:

1. He will pay the

amount to holder,

2. Or to a subsequent

indorser who pays for it

<But drawer may

express stipulation

limiting his liability>

indorse

3. On due presentment,

it will be accepted/paid

according to its tenor

Acceptor Pay according to tenor

of acceptance

1. Existence of drawer,

2. Genuineness of

drawer’s signature

3. Drawer’s capacity

and authority to draw

4. Existence of payee

and capacity to indorse

Qualified indorser or

indorser by delivery

1. Instrument is

genuine and is what it

purports to be

2. He has good title

3. All prior parties had

capacity to contract

4. Has no knowledge of

any fact that would

impair the instrument

<IF BY DELIVERY –warranties only extend

to immediate

transferee>

General indorser Either:

1. Upon due

presentment he will

accept/pay according to

tenor

2. Or if dishonored, he

1. Instrument is

genuine and is what it

purports to be

2. He has good title

3. All prior parties had


will pay the amount to

the holder, or to a

subsequent indorser

compelled to pay it

4. The instrument is

valid and subsisting at

the time of his

indorsement

• Liability of Maker:

o X issued a PN to Y. Y collected, by X failed to pay. He lodged

the defense that he used the money to pay for his sick

daughter’s expenses, and his daughter is a beneficiary of a

trust administered by Y.

HELD: X must pay. He made an unconditional

promise to pay. What he did with the money is none

of the court’s business.

• Liability of drawer:

o What is the nature of the drawer’s liability? Merely secondary – liable only if the instrument is

dishonored.

He can put “without recourse” to limit his liability.

o D issued a check to P, drawn against BPI. P presented for

payment, and BPI debited D’s account. However, P was

unable to receive the money because BPI withheld payment,

pending investigation of some anomalies. P ran after D.

HELD: D must pay, even if his account has already

been debited. He warranted that P will be paid, and if

not, he will make good the check.

• Liability of acceptor:

o X issued a check for P4000 to Y. Y indorsed it to Z. Z altered

the amount to P40000, and negotiated to H. H presented it for

acceptance to E. E accepted it. For how much can the

check be enforced against the acceptor?

View 1: P40000 because that is the tenor of the

acceptance.

20



View 2 (better view): Acceptance is assent to the

order of the drawer (132), which is just P4000. He did

not consent to P40000, since there must be

knowledge. (124) In fact, for a HDC, even if there is

alteration, he can enforce payment according to theoriginal tenor

o Acceptor admits existence of drawer because without the

drawer, the BOE cannot exist. He admits authority of the

drawer to draw.

o Acceptor admits existence and capacity of payee to indorse,

because the instrument is meant to circulate.

o N.B.Acceptor does not admit signature of indorser.

• What is an irregular indorser?

o He signs in blank before delivery. He is called such because

you would normally expect the payee as the first signaturethere. But here, the irregular indorser’s signature is found

there first.

o What is his liability?

He is actually an accommodation party

Must be an additional party (not a regular party –

signing again will not increase the credit value of the

check)

o A – (X irregular indorser) – B – C – D – E:

X is liable to B, C, D and E.

RULE: liable to all subsequent parties. (If payable to

the maker or drawer or bearer, he is liable to all

parties subsequent to the maker or drawer)

• What are the warranties where negotiation is by delivery?

o See the list of warranties in the law [see table]

o Person negotiating by delivery: only liable to the person to

whom he delivered the instrument. Not liable to subsequent

parties

o Unlike a general indorser, a qualified indorser does not warrant

that the instrument will be paid. He is liable only if the maker or

acceptor is insolvent and he is aware of that fact (since here,

there is a breach of warranty).

o N.B. In general, a qualified indorser or one negotiating by

delivery DOES NOT ANSWER FOR SOLVENCY. It only

warrants the four listed warranties and is liable for breach of

such. Examples:

Breach of W1 (genuine): the instrument is forged

Breach of W2 (good title): He stole the NI

Breach of W3 (prior parties had capacity to contract):

Prior party is a minor

Breach of W4 (no knowledge of fact that would impair

the instrument): Knew that M/D was insolvent; or that

there was failure of considerationo What is the underlying principle behind this?

Same as Statute of Frauds. An undertaking to

answer for the debt of another must be in writing to be

enforceable. He must be only liable to the person he

dealt with

• What is the liability of a general indorser?

o 1. Same as first 3 warranties of qualified indorser

o 2. Last warranty – he warrants that the instrument is valid and

subsisting

o

If maker is insolvent, even if the indorser was not aware, he isliable.

o X deposited (through indorsement) a check with ABC bank,

drawn against DEF bank. X was able to withdraw money

although not cleared. Eventually, the check bounced. ABC

asked for return of money.

HELD: X must pay. When he indorsed, he warranted.

If for any reason (whatever reason) the drawee does

not pay, he is liable.

21



o There is a 45-day holding period if the check deposited is

drawn abroad. But RCBC accommodates employees, allowing

them to withdraw right away. An employee X, received a

check, and deposited. Bank required X to indorse the check as

an irregular indorser. She was then allowed to withdraw.Some employee (Y) placed below the indorsement: “valid up

75,000 pesos only.” The drawee bank dishonored the check,

since the indorsement was irregular. RCBC asked X to return

the immediately withdrawn money.

HELD: RCBC cannot collect. The check was

dishonored because of the partial indorsement made

by Y. This is why the American bank dishonored.

o Signature of indorser was forged. Payee presented the check

for payment to the drawee. It was paid. Payee signed at the

back. Then the forgery was discovered. Must the payee

reimburse drawee?

No. It did not indorse the check. The signature is to

acknowledge payment, not to indorse.

o The law mentions that warranties of general indorser

apply only to HDC. Should we follow this?

JJ doesn’t think so.

• What if it is indorsed when not required?

o He incurs liabilities of an indorser, whether general or qualified

• What is the presumption?

o Indorsers are presumed to be liable in the manner in whichthey indorsed. But parole evidence however may be accepted

to prove otherwise.

o Ex. A B C, C can prove that while B’s signature appears

first, C indorsed it to him

• What if the rule for indorsement by agent?

o If he fails to disclose that he is just an agent, or fails to disclose

his principal, he will be liable as an indorser

Click here for longer discussion on presentment, acceptance, and dishonor

and some parts not included in the syllabus

How to enforce liability (presentment, dishonor)

• How do you enforce liability to those primarily liable?o 1. No need to do anything to hold a maker liable because he

already promised to pay.

o 2. A drawee is liable once he accepts the instrument.

• How do you charge those secondarily liable?

o In a PN:

1. Presentment for payment made within required

period to the maker (and then dishonored by non-

payment)

2. Notice of dishonor is given to the secondarily liable

partyo In a BOE:

1. Presentment for acceptance to the drawee OR

negotiation within reasonable time after it was

acquired in the following instances:

• A. Bill payable after sight or acceptance

needed to fix maturity of instrument

• B. Bill expressly requires acceptance

• C. Bill is payable elsewhere than residence

or place of business of drawee

2. If dishonored by non-acceptance:• A. Give notice of dishonor to the indorsers

and drawer

• B. (If foreign bill, protest for dishonor by non-

acceptance)

3. If the bill is accepted:

• A. Presentment for payment to the acceptor

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o If dishonored by non-payment, give

notice of dishonor to those

secondarily liable

• B. (If foreign bill, protest for dishonor by non-

payment)

• When is presentment for payment necessary?

o For primary persons – never necessary

o For secondary persons, generally needed to make

presentment –except:

1. To drawer who has no right to expect that the

drawee or acceptor will pay

2. Indorser where the instrument was made or

accepted for his accommodation and he has no

reason to expect instrument will be paid if presented

3. Dispensed with under Sec. 82:

• A) after exercise of reasonable diligence,

presentment cannot be made

• B) drawee is fictitious person

• C) waiver or presentment

4. Instrument dishonored by non-acceptance

• What are the requisites for presentment for payment?

o 1. Presented by the holder or some person authorized by him

o 2. Made at reasonable hour on business day on proper date

o 3. At proper place

o 4. To person primarily liable, or if absent, to any person found

at the place where presentment is madeo 5. Person must exhibit the instrument and surrender it

• X drew a check in 1990. The holder, Y, presented the check to the

drawee bank only in 1994. It was dishonored by the bank. Y gave

notice of dishonor to X. What is the ruling?

o The dishonor was proper because it was presented beyond

reasonable time. Reasonable time is relative, depending on

circumstances. But for checks, they become stale in 6 months.

o X is no longer liable based on the check. But if there is an

underlying contract between X and Y, X is still liable

contractually – just not through that particular check.

• What is the implication of failure to make proper presentment for

payment? Does it discharge the person primarily liable?

o It discharges those secondarily liable on the instrument.

o It does not discharge the person primarily liable (maker or

drawee/acceptor) – because it’s their obligation. But the payee

or holder cannot demand interest subsequent to maturity and

costs of collection.

• When is a bill required to be presented for acceptance?

o [See enumeration above – payable after sight etc., expressly

required, payable elsewhere]

o Note that a check does not fall under this enumeration

• When is presentment for acceptance excused or dispensed with?

o 1. DELAY EXCUSED for bill payable elsewhere than place of

business or residence of drawee and the holder failed to

present for acceptance even after reasonable diligence

The delay that’s excused is the delay in presenting it

for payment due to the delay in presentment for

acceptance

o 2. Drawee is dead, has absconded, is fictitious, or has no


o 3. Presentment cannot be made even after exercise of

reasonable diligence

o 4. Although presentment has been irregular, acceptance

refused on some other ground

• Requisites for valid acceptance?

o 1. In writing

o 2. Signed by the drawee

o 3. Drawee must assent to the promise to pay a sum certain in

money and not any other means

o What is proof of acceptance?

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It must be written on the instrument itself

If there is acceptance and the holder requests that it

be written on the bill, but the drawee refuses – treat it

as dishonored by non-acceptance

o What if it is written on another paper?

It only binds the acceptor to persons to whom it is

shown to and on faith thereof, accepted the bill for

value

o What is the rule on future bills?

If there is an unconditional promise in writing to

accept a bill before it is drawn, and a person on faith

thereof took a bill for value

• When is a bill deemed accepted?

o 1. Bill delivered to the drawee and he destroys the same

o 2. Bill delivered to the drawee but he refuses within 24 hours or

within other period allowed by the holder to return the bill

• What are the kinds of acceptance?

o 1. Conditional – payment dependent on a condition

o 2. Partial – only for part of the amount

o 3. Local – only on a particular place

o 4. Qualified as to time

o 5. Acceptance of some of the drawees but not all

• What is the rule on qualified acceptances?

o The holder has a right to refuse a qualified acceptance and

deem it as dishonor by non-acceptance.

o If he accepts qualified acceptance, the drawer and indorsersare discharged from liability on the bill.

Unless they assent to the qualified acceptance

They must express dissent to the holder within

reasonable time from receipt of notice of the qualified

acceptance

• Who should give notice of dishonor?

o 1. The holder

o 2. His agent or representative

o 3. Any party who may be compelled to pay (e.g. indorsers)

o 4. Agent of #3

• Who benefits from the notice?

o If given by the holder, benefits all subsequent holders and all

prior parties who have a right of recourse against the party to

whom it was given

Ex. M P or order A B C D (holder). M

dishonors:

• D may notify C since C may be compelled to

pay D. C may then notify any person who

may be liable to him (P, A, or B). And so on.

• If D notified B straight up, C benefits

because he need not notify B.

o If given by indorser who may be compelled to pay, it benefits

the holder and all parties subsequent to the party to whom

notice was given

Same example:

• If D notified C, and C notified P, then D

benefits through the notice of C, an indorser.

• It also benefits A and B.

• What is the effect of valid notice of dishonor?

o Immediate right of recourse against the secondarily liable party

arises. He becomes primarily liable.

• How must notice be given?

o Parties reside in same place:

1. If at place of business, given before close of

business hours the next day

2. If at residence, given before usual hours of rest the

next day

3. If sent by mail, deposited in post office in time to

reach him in usual course the next day

o Parties reside in different places

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1. If sent by mail, deposited in post office in time to go

by mail the day follow day of dishonor. If there is no

mail then, on the next mail thereafter

2. If given through other means, within time that it

would be received in due course of mail in the same

time frame as above

• When is notice of dishonor not required in general?

o In general: when after exercise of reasonable diligence, it

cannot be given or it does not reach the parties

• When is notice of DH not needed to be given to drawer?

o 1. Drawer and drawee are the same person

o 2. Drawee is fictitious person or has no capacity to contract

o 3. Drawer is the person to whom instrument was presented for

payment

Ex. C went to the office of X, the drawee, but he was

not there. But R, the drawer, who was the office

manager, was there. And the drawer dishonored.

o 4. Drawer has no right to expect that drawee or acceptor will

honor

Ex.X withdrew her money from her bank account and

issued a check to cover for expected proceeds of

jewelry she had to sell. She failed to sell the jewelry.

The check was in the hands of Y who had ABC

investment house rediscount it. The check bounced.

HELD: X had no right to expect the bank will paybecause she withdrew all her funds.

o 5. Drawer countermanded payment

Meaning, drawer stopped payment.

o N.B. In all these cases, the drawer KNEW that there was or

would be dishonor.

• When is notice of DH not needed to be given to indorser?


and the indorser is aware of this fact upon indorsement

o 2. Indorser is the person to whom presentment for payment

was made

o 3. Instrument was made or accepted for his accommodation

Drawer Indorser

Drawer and drawee same person

Drawee fictitious or no capacity Drawee is fictitious or no capacity,

and indorser knows

Drawer is to whom instrument was

presented for payment

Indorser is to whom instrument was


Drawer has no right to expect it will

be paid by drawee

Made or accepted for indorser’s

accommodation (same principle: no

right to expect it will be paid)

Drawer countermanded

• When can there be waiver of notice of dishonor?

o 1. Before actual time for giving it comes

o 2. Or after failure to give it

o Can waiver be implied?

Yes.

o Who is affected by a waiver in an instrument?

If written on the instrument – all the parties

If written over a signature – just that person

o Waiver of protest

Includes presentment and notice of dishonor (steps to

hold a person secondarily liable)• Failure to give notice of dishonor by non-acceptance does not prejudice

rights of a HIDC subsequent to the omission.

o Ex. A drew a BOE payable to B. B indorsed to C. C presented

the BOE for acceptance to X. X dishonored the instrument. C

did not give notice of dishonor to A or B. C indorsed the

instrument to D, a HIDC. D will not be precluded by C’s failure

to give notice of DH to A and B.

25



Discharge

• How is a negotiable instrument discharged?

o 1. Payment in due course by holder

o 2. Payment in due course by accommodated party

o 3. Intentional cancellation by holdero 4. Any other act that discharges simple contract for money

o 5. Principal debtor becomes holder of instrument in his own

right

• How those secondarily liable are discharged:

o 1. Discharge of instrument

o 2. Intentional cancellation of his signature by the holder

o 3. Discharge of a prior party

o 4. Valid tender of payment by prior party

o 5. Release of principal debtor, unless holder’s right of recourse

against secondarily liable party is expressly reserved

o 6. By extension of time of payment or right to enforce

instrument

Except if secondarily liable party assents

Or right to recourse is expressly reserved

• What is the effect of an absolute and unconditional renunciation?

o A holder renouncing against prior parties terminates

recourse to that party

o If against primarily liable person discharges the instrument

o But it does not affect subsequent HIDC. So if C renounces all

claims against A and B, then negotiates it to D, who is a HIDC,

D is not prejudiced by the prior renunciation.

• What is the form of renunciation?

o It must be absolute and unconditional

o If it is merely oral and the instrument is not surrendered, the

renunciation is not effective.

o It is not effective if unintentional or by mistake

• OTHER methods of discharge:

o 48 – striking out indorsements (relieves that person and all

those subsequent to him)

o 89 – those secondarily liable to whom notice was not given

o 122 – renunciation by holder

o 142 – qualified acceptance by drawee discharges those

secondarily liable

Unless they assent to it. Failure to dissent within

reasonable time is an assent

o 186 – stale check

o 188 – holder of a check procures it to be accepted or certified

Material Alteration

• What is the effect of a material alteration?

o Discharges all parties not party to the alteration

o

Binds the one who made the alteration, those who assented,and subsequent indorsers

• What is the right of a HIDC?

o If he is not party to the alteration, he may enforce it according

to the instrument’s original tenor

• What is a material alteration?

o 1. Date goes into the obligation

o 2. Sum payable, principal or interest into amount

o 3. Time or place of payment into enforcement

o 4. Number or relations of parties into obligation

o 5. Medium or currency of payment into amount

• A issued a PN to B for 4K. B indorsed to C. C changed the amount

to 40K and indorsed to D. D indorsed to E. E is a HIDC. What is

E’s right?

o Enforce the instrument for 4K against A or B

o Enforce the instrument for 40K against C (made the alteration)

or D (indorsed and warranted)

BOE

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• Can a BOE be addressed to more than one drawee?

o Depends. If joint drawees, yes.

o If alternative or successive, no.

• When can a BOE be considered a PN?


o 2. Drawee is fictitious person or has no capacity to contracto But can the holder treat it as a BOE still?

Yes.

Promissory notes and checks

• What is the nature of a check?

o Special kind of BOE.

o No need to present for acceptance – you can present them for

payment immediately

o Rules on BOE apply to checks too, such as the 24 hour

acceptance rule. If you don’t return it in 24 hours, it is deemed

accepted

• What are cashier’s and manager’s checks?

o Drawer and drawee is the same

• What are memorandum checks?

o It’s just usually used as evidence of credit, by a drawer who

received goods. He usually redeems it for cash

• What is a traveler’s check?

o You sign it twice (first as a specimen signature, and second

when paying. You present your passport too)

• Crossing a check has three consequences:

o 1. Can be negotiated only once

o 2. Cannot be encashed; must be deposited

General – can be deposited in any bank

Special – must be deposited only in that bank

o 3. To be a HIDC, the holder must inquire as to what purpose

the check was issued for

o But is it still negotiable?

Yes, it is still negotiable.

o What if you try to encash a crossed check?

It will be denied. You cannot run after the drawer

because there is no proper presentment for payment

• Payee of a check presented a check in the morning; the bank said the

drawer had insufficient funds. Presented again in the afternoon, but the

computers are offline, so the bank accepted it. Bank found out after and

chased after the payee to recover.

o HELD: By accepting, the bank admitted authority of drawer to

draw.

• Customer bought a manager’s check and asked that his account be

debited to purchase it. The bank realized that it made a mistake

because the account was actually closed. The customer already used

the check to buy goods.

o HELD: It was a manager’s check so the store owner was a

HIDC.• Certified checks:

o Banks usually do not do this anymore

• Check must be presented for payment within reasonable amount of time

o Banking practice: 6 months, or else stale

o What happens when the check goes stale?

View one (2 cases): the obligation is discharged.

Payment of an obligation with an NI – the obligation is

discharged when there is encashment or the value is

impaired due to the fault of the holder.

View two: the obligation remains because the

drawer’s bank account was not prejudiced. And there

was no loss caused by the delay. This will only

happen if the bank becomes insolvent, that if the

payee didn’t dilly-dally, he would have received

money.

• Sito: When the payee delays in presenting a check for payment, the

indorsers are discharged, because they have an interest to discharge

27



their potential secondary liability. Unreasonable delay will discharge

them.

o So contrast the rules: the drawer will not be discharged; the

indorsers will be discharged

MERCANTILE INSTRUMENTS

Letters of credit

• What is a Letter of Credit (LOC)?

o An instrument issued by banks on behalf of a customer

authorizing a beneficiary to draw a draft/drafts which will be

honored upon presentation to the bank

o Must be drawn in accordance with the terms and conditions

specified in the letter of credit

o Purpose: to ensure certainty of payment

• Illustrate the nature of a LOC:

o ABC Company wants to buy chemicals from Dupont. But

Dupont has no assurance that when it ships chemicals, it will

be paid. So ABC gets a letter of credit (LOC) with PBC. PBC

then corresponds with a bank in the US (ex. Citibank) – PBC

will transmit to Citibank the text of the LOC, through SWIFT.

Dupont then finds out that when it delivers the chemicals, the

bank will pay him. Since the bank is more trustworthy, Dupont

is now willing to sell the materials.

o Dupont ships the chemicals to PBC. So when the bill of lading

arrives, PBC will tell ABC Company that the goods arrived.

PBC tells ABC Company that it will release the goods if there is

a trust receipt arrangement between them. So the proceeds of

the goods can be used to pay PBC if ABC does not pay.

o Dupont will not collect directly from PBC. Dupont will issue a

BOE addressed to PBC, to pay Dupont. Dupont then submits

the bill of lading, delivery receipt, etc. to PBC as proof of

delivery so that Dupont will be paid.

• What is the nature of a LOC?

o A contract between the customer who applied for it and the

bank, with a stipulation in favor of a third person

o An LOC is a primary, absolute, and unconditional obligation. It

cannot be affected by defects in the underlying obligation

Philamlife: X took a loan from ABC. ABC required X

to open a standby LOC from Z bank. Z bank issued

the LOC, payable when ABC shows documents

proving that X defaulted on the loan. ABC gave this

document. Z bank, however, refused to pay the whole

amount stating that X informed it that X had alreadymade some payments, so these have to be deducted.

HELD: Cannot do this! The LOC is a primary,

absolute, and unconditional obligation. It is not an

accessory obligation, so the defect in the underlying

contract cannot affect it. If there really was

overpayment, X just has to run after ABC.

o Purposes:

1. Safe mode of importing goods

2. Reduce risk of nonpayment

3. Substitute for and support the agreement ofpurchase (although not necessary to perfect it)

• Types of LOC?

o 1. Commercial LOC

issued as payment pursuant to contract of sale

The seller will be paid if the seller gives proof that he

complied with obligation to deliver

o 2. Stand-by LOC

28



Secondary payment mechanism, where a seller is

paid upon certification of a party’s non-performance of

an agreement

Show proof that the applicant hasnot performed his

contract

o 3. Confirmed LOC

Beneficiary stipulates that the obligation of the issuing

bank should also be the obligation of another bank to

himself (usually the notifying bank)

o 4. Back-to-back LOC

Credit with identical documentary requirements and

covering the same merchandise as another LOC

except for a difference in the price of the merchandise

as shown by the invoice and the draft

The second LOC can be negotiated only after the first

is negotiated

• When is it considered a consummated contract?

o When the bank pays the creditor (seller-exporter), and not

when the debtor-buyer pays the bank because the bank can

give an extension of payment to the debtor.

• What is the governing law?

o 1. Governed now by UCP 600 (Uniform Customs and Practice

for Documentary Credits). This is revised every 10 years or so.

The observance of UCP is justified by Art. 2 of the

Code of Commerce, which provides that in the

absence of a particular provision in the COC,

commercial transactions are governed by usages and

customs.

o 2. Code of Commerce, Art. 568:

LOC must be issued in favor of a definite person and

not to order

Limited to fixed or specific amount or to an

undetermined amount but with maximum limit stated

exactly

• Who are the parties to a letter of credit (essential) and their

obligations?

o 1. Buyer (applicant) –

procures LOC

obliges to reimburse the bank upon receipt of

document’s title

o 2. Issuing bank –

undertakes to pay seller upon receipt of draft and

proper documents needed

and to surrender the documents to the buyer upon

reimbursement

Obligation is solidary with the buyer. It is a primary

obligation (unlike a guaranty, which requires default by

the obligor)

o 3. Seller (beneficiary) –

ships goods to the buyer

delivers documents of title and draft to the issuing

bank to recover payment

o Who are the optional parties?

1. Advising (notifying) bank –

• May be utilized to convey to the seller the

existence of the credit

• BUT does not assure that the issuing bank

will pay and may refuse to accept the drafts

without being liable

2. Confirming bank –

• Lends credence to the LOC issued by a

lesser known issuing bank

• Is directly liable to pay the seller-beneficiary

3. Paying bank –

29



• Undertakes to encash drafts drawn by the

seller-exporter

4. Negotiating bank –

• Instead of going to the place of the issuing

bank to claim payment, the buyer may

approach another bank to have the draft

discounted

• There are 3 underlying contracts in a LOC:

o 1. Application of customer for LOC –

where customer-buyer undertakes that he will

reimburse the bank when it pays the draft, and also

pays for bank charges

o 2. LOC –

bank tells beneficiary-seller that if it draws the draft, it

will pay him after submitting documents

o 3. Underlying contract of sale between buyer and seller

• Independence principle (always asked in Bar)

o Basic principle: cannot invoke defect in one of the other 3

contracts to avoid compliance with obligation

o A bank which issued a LOC is obliged to pay the draft so long

as the beneficiary submits the documents required by the LOC,

without verifying if he actually complied with the obligation in

the underlying contract

o “Banks deal with documents only!” They do not deal with

goods nor are they required to examine them.

Ex. Seller-beneficiary submitted the documents

required, so the bank must pay, even if the goods

delivered turned out to be fake.

o PBC v. Chua Tiep Seng: The bank does not guarantee the

genuineness of the documents submitted to it. All that is

required is the bank act in good faith.

o There was a case (Feati Bank ) where somebody shipped

timber to someone abroad. There was an agreement that

payment is by LOC. Among the documents is a certification of

the buyer that the goods delivered were the proper goods. The

buyer collected the goods but refused to send the certification!

HELD: The LOC requires buyer’s certification, so the bank

need not pay. (This is a stupid move by the seller, because he

is at the mercy of the buyer.)

o A seller can commit fraud by submitting forged or false

documents. To combat this, the buyer may require a

surveyor’s certificate to examine the goods. But the seller may

always give a fake one if he really wanted to defraud the buyer.

• Interpretation of Letters of Credit – MUST BE STRICT (Rule of Strict

Compliance)

o 1.Particular genus –If the LOC requires that the seller submit

an invoice for pine lumber, but the invoice states “pine timber,”

the bank may refuse to payo 2.Quality specifications – If the LOC requires Italian marble

and the document just says “marble,” the bank may refuse to

pay

o 3.Misspellings –If the LOC requires noodles but the

document says “woodles” the Bank may refuse to pay – who

knows what a woodle is or could be.

• When the bank discovers a discrepancy, what does it do?

o It forwards the documents to the buyer and notifies the latter of

discrepancies it discovered. If the buyer agrees to waive the

discrepancy, then the bank pays. If the buyer does not waive,

the bank does not pay.

o Cojack: Buyer is a con artist, so it ordered 3M worth of bags

from Cojac company. It opened a letter of credit, and the

condition is that an invoice from “Cojack” be submitted. Cojac

submitted an invoice, of course, without the misspelled K. The

bank asked the buyer if he waives the discrepancy; the buyer

30



refused. The bank did not pay. Later, the buyer just paid 1M to

Cojac.

• “Red clause”

o A clause, usually written in red ink, where the beneficiary/seller

may get payment in advance, meaning, even if the

beneficiary/seller has not yet delivered the goods to the buyer.

This is usually because the beneficiary will purchase goods

from a third party producer that does not accept anything but

cash (hunters, lumberjacks, etc.). If the beneficiary does not

deliver the goods, too bad. The buyer still bears the risk.

• “Evergreen clause”

o A provision that allows an expiring LOC to be automatically

extended for indefinite number of periods until the issuing bank

informs the beneficiary of its termination.

o Ex. A foreign company not doing business here sues and asks

for a provisional remedy. The court requires a bond, so the

company obtains one from a surety firm. The surety firm

requires that the company open a stand-by LOC with a bank,

which will pay the surety firm if the company is held liable. This

LOC will most likely contain an evergreen clause, to keep

renewing it until the case is over.

• May the seller in the Feati bank case (where the buyer refused to

issue a certification so the seller was not paid) sue the

correspondent bank when it failed or advance funds?

o No. The correspondent bank cannot be sued unless itconfirmed the letter of credit. It becomes solidarily liable.

• Revocable, irrevocable –

o Revocable: no need to notify the beneficiary, can be done

anytime

o Usually it’s irrevocable, for certainty of payment

• Revolving letter of credit

o Automatically replenishes, whether per month, when the

amount is finished, or it can be cumulative, etc.

• Bank lien over applicant’s property

o Usual stipulation in a LOC if the applicant has a deposit there,

too.

o CASE: The depositor/applicant owed the bank for a LOC, but

he also assigned the certificate of time deposit to a third party,

who has the better right?

o HELD: The bank. It had a lien on the deposit.

• FRAUD EXCEPTION: when can there be enjoinment of payment in

a stand-by LOC?

o 1) Proof of fraud is strong, 2) fraud must involve abuse of

independence principle, 3) irreparable injury (Transfield)

o Distinguish between out and out fraud vis-à-vis failure to

meet specifications:

In a landmark case by the CA of New York, instead of

the seller delivering goods, he delivered rubbish. The

court allowed the buyer to have a preliminary

injunction to stop payment be issued because this

involves out-and-out fraud.

However, if there is mere failure to meet

specifications, you cannot enjoin payment

• Metro v. Daway: Case for corporate rehabilitation does not suspend

payment from a stand-by LOC. It is a solidary obligation, there is no

need to exhaust the resources of the applicant corporation that applied

for the stand-by LOC.

Trust receipts

• What is a Trust receipt transaction (TRT)?

o The entruster(bank), who has absolute title over the goods,

releases these to the entrustee

o The entrustee(buyer) executes and delivers atrust receipt,

where:

1. He holds the goods in trust for the entruster

31



2. Sell or otherwise dispose of the goods

3. Turn over to the bank/entruster the proceeds of the

sale to the extent he is indebted

4. Or turn over the goods to the bank, in case unsold

• Note: if the entrustee returns the goods, he does not incur any further

liability. The entruster/bank then sells the goods

• What is the nature of the entruster’s title?

o The entruster has a security interest. By fiction of law,

ownership is with the entruster-bank, until it has been paid or

the proceeds of sale turned over to him.

o But since it is a mere security interest, the entruster is not

responsible as principal in the contracts entered into by the

entrustee. The entrustee bears the losses (ex. if the imported

goods burn or are stolen).

o Since the entrustee is not the owner of the goods he cannot

mortgage them yet. Or, at least, he has no free disposal of

them yet.

• Allied Banking: X imported goods, and opened a LOC with ABC bank.

When the equipment arrived, X took the goods from ABC and issued a

trust receipt in ABC’s favor. X installed the goods in his factory. X failed

to pay. ABC sued X for violation of PD 115. X claimed the goods were

not covered because he did not sell nor manufacture/process them.

HELD: The goods were covered. It says “sell or otherwise dispose.”

“Otherwise dispose” covers the installed goods.

o

“Otherwise dispose” can cover giving goods to a sistercompany

• For estafa, there has to be misappropriation

o Meralco/steel towers case: X fabricated steel towers (hired

by Meralco). X imported materials, which X received and gave

a trust receipt to ABC bank for. X used the materials to build

the steel towers. But Meralco hasn’t paid X yet, so X couldn’t

pay ABC bank. ABC sued X for estafa. HELD: No estafa, no

misappropriation.

o Another case: X could not sell the goods covered by the TR.

X tried returning the goods to ABC, but it refused. HELD: X

did not commit estafa.

• Can the trustee execute a Chattel Mortgage over the goods

covered by the TR?

o No. He does not have free disposition of the property.

• Can a TR cover a purchase independent from the credit?

o No.

o Illustrate:X purchased goods. Independent of this purchase,

X applied for a credit facility with ABC bank. ABC bank

required X to sign a trust receipt for the goods he just

purchased. HELD: This is invalid. The bank did not have any

lien or title to the goods; they were purchased separately from

the credit application.

• Can TR apply even to domestic transactions?

o Yes, TR can apply even in domestic transactions

• What is the nature of ownership/security interest?

o X imported puka shells, covered by a trust receipt with ABC

bank. X failed to sell the puka shells. X decided to return the

shells and claim he is not liable anymore because X claimed

ABC was the real owner of the shells and X just held it in trust.

HELD: X is wrong. ABC can still recover the money.

A TRT is a security transaction, and the buyer is still

really the owner of the goods; it just relies on a legal

fiction to create a lien. ABC still has the right to

recover the money; or it can sell the goods.

o PNB Case: The bank getting back the goods does not

terminate the obligation. It just has a lien, and to realize it, the

bank must foreclose – otherwise, it is pactum comissorium.

The bank then returns the excess or runs after the deficiency.

• Rights and liabilities of parties:

o 1. Entruster not liable in any sale or contract entered into by the

entrustee. He merely has a security interest.

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o 2. Entrustee bears risk of loss – thus, loss of the goods does

not extinguish the obligation

o 3. A purchaser for value and in GF of goods covered by TR is

free from entruster’s security interest

o 4. Failure of entrustee to turn over proceeds of the sale

constitutes estafa or may be basis of suit for damages

o 5. If the parties agree to reschedule debts and impose

conditions incompatible with the TR, then there is a novation

and no liability under TRL avails.

Warehouse Receipts Law

• What are the three functions of a WHR?

o 1. Contract for deposit

o 2. Evidence of receipt of goods

o 3. Represents the goods and operates as a transferable

document that carries with it control over the goods

• When is a WHR negotiable?

o If payable to order or bearer

o If payable to order or bearer, can one insert a stipulation

that it is non-negotiable?

No. The stipulation is void.

o This is a key difference between WHR and negotiable

instruments:

For NIs, a negotiable instrument can be made non-

negotiable.

For negotiable WHR, it cannot be converted into a

non-negotiable WHR. The stipulation is void.

o What if an order instrument is only delivered but not

indorsed?

1. Transferee acquires right against the transferor

2. There is no direct obligation by the WHM against

the transferee

3. The transferee can compel the transferor to

complete the negotiation by indorsing the instrument

o What is the effect of negotiation?

1. The holder receives title to the goods as the

indorser had [NOTE: the holder never obtains better

rights than the indorser, unlike under the NIL] and title

that the depositor had over the goods

• X stole goods from Y and deposited with

WHM. X negotiated the WHR to Z. WHM

found out that the goods were stolen and

delivered them to Y. Can Z hold WHM

liable?

o No. The depositor, X, never had

title over the goods, so the

transferee Z never acquired title

over them either.

2. Direct obligation of the WHM to hold the goods for

him

o Who can negotiate a WHR?

1. Owner thereof

2. Person to whom possession of the WHR has been

entrusted to by the owner, if by the terms of the

receipt:• 1. The WHM must deliver the goods to the

order of the person to whom possession has

been entrusted, or

• 2. If at the time of the entrusting, the receipt

is in such form that it may be negotiated by

mere delivery

Can a thief negotiate a WHR?

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• YES, but the WHR must be in such form that

he need not forge any signature.

• When is it non-negotiable?

o Not payable to order or bearer AND there is a large print,

usually in red, that it is non-negotiable

N.B. so if it’s “order or bearer” the WHM cannot insist

on putting the red print that it’s non-negotiable

o What is the consequence of not marking it so?

If someone relied in GF that it is negotiable and acted

upon it, it will be treated as negotiable.

• What is the rule on duplicate WHR?

o Same as non-negotiable – if the holder thought in GF that it

was the original, he could sue the WHM for damages

• What is the effect of absence of any of the required provisions to

be found on a WHR?

o It does not invalidate the WHR. WHRs are liberally construed

to better serve their purpose.

• What is the right of a transferee of a non-negotiable WHR?

o 1. Title of the goods subject to the terms of any agreement with

the transferor

o 2. Right to notify the WHM of the transfer and acquire the direct

obligation of the WHM to hold the goods for him

o What is implication of failure to notify the WHM of the

transfer?

Prior to notification, the title of the transferee can be

defeated by: a) an attaching or executing creditor of

the transferor, or by b) notification by the transferor or

another transferee of a second transfer

Ex. X deposited 10 crates of goods with WHM.

WHM delivered a non-negotiable receipt to X. X

transferred the WHR to Y, for value. Meanwhile, C,

a creditor of X, obtained a judgment against X for

unpaid debt and was levying against the 10 crates

of goods. Who has a better right?

• C, because Y did not obtain title over the

goods due to lack of notification to the WHM.

• If Y had informed WHM of the transfer prior

to the levy, then Y would have had a better

right.

• What are the obligations of the WHM?

o 1. Safeguard the goods

o 2. Deliver the goods

To deliver

• What are the conditions before the WHM delivers the goods?

o 1. Holder pays the WHM’s liens

o

2. If the WHR is negotiable, to surrender the receipto 3. Readiness and willingness to sign an acknowledgment of

receipt of the goods

• To whom must the WHM deliver the goods to discharge his

liability?

o 1. Person lawfully entitled to the goods or his agent

o 2. Person entitled to delivery under non-negotiable WHR or

who has authority from the person entitled to delivery (SPA)

o 3. For negotiable WHR, the person in possession

o When is there misdelivery or conversion?

1. Delivery to one not in fact lawfully entitled to the

goods

2. The holder of a WHR informs the WHM prior to

delivery not to make such delivery, but he still did

3. The bailee had information that the delivery he was

about to make was to one not lawfully entitled to the

possession of the goods, but he still did

• Rules on refusal to deliver:

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o 1. WHM cannot refuse to deliver the goods just because of a

third party claim

But he may submit the situation for interpleader

o 2. WHM is excused for failure to deliver if he sold the goods to

satisfy an unpaid lien

o 3. WHM is excused for selling perishable or hazardous goods

• What are valid defenses for non-delivery or misdelivery?

o 1. Loss or destruction of goods fortuitously

o 2. WHM has a right over the goods

A. Failure to satisfy the WHM’s lien

B. legal title over the goods through transfer

o 3. Holder of receipt does not comply with requirements

Failure to surrender the WHR

Failure to satisfy the WHM’s lien

Failure to show willingness to sign an

acknowledgment when the goods are delivered, uponrequest by the WHM

o 4. Right or title of third persons

A. Request by person lawfully entitled to goods to

WHM not to deliver the goods

• Can lead to interpleader

B. WHM has information that the delivery about to be

made was to one not lawfully entitled to possession of

the goods

• WHM ascertains the facts first

C. Disposed to third person to satisfy WHM’s lien orbecause the goods are perishable

D. Delivery to claimant with better right

E. Attachment or levy by creditor where the document

is surrendered or its negotiation is enjoined, or

document is impounded

F. Document of title is attached by creditor

• What is the effect of alteration?

o Unlike in NIL, it does not discharge the WHM. The WHM is

liable under the original tenor of the WHR.

• What is the effect of loss of the receipt?

o The claimant has to file a case in court and get a court order

telling the WHM to deliver the goods, after proof of loss. He

also has to post a bond, in case the WHR falls in the hands of

a person who took it in GF and for value. The latter goes

against the bond.

• How does a creditor go about attaching/levying the goods covered

by a negotiable WHR?

o Ask for enjoinment of indorsement or renegotiation of the

receipt – have the WHR frozen or surrendered, so it doesn’t

end up in the hands of someone who takes it for value and in

GF. Until this is done, the WHM cannot be compelled to

deliver.• The WHM in general, as a bailee, cannot claim ownership over the

goods. What are the exceptions?

o 1. WHR negotiated to him, so takes the goods in his own right

o 2. Has unpaid lien, so he foreclosed it and bought the goods

during auction

• What if the WHM delivers the goods without asking for surrender

of the WHR?

o He is liable for damages to any person who takes the WHR in

GF and for value.

o What if the WHM makes partial delivery of the goods?

He must cancel the WHR and issue a new one

reflecting the balance of the goods, or indicate partial

delivery on the receipt.

Again, failure to do so makes him liable to one who

takes the WHR in GF and for value.

• Can an unpaid seller claim right over the goods over the holder of

the receipt who purchased it for value?

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o No. The vendor’s lien does not affect the transfer of title to the

purchaser for value.

o X sold Y 10 sacks of rice on credit. Y deposited the sacks

with WHM, who issued a receipt. Y delivered the receipt to

Z who purchased it for value and for good faith. Who has

a better right over the rice, Z or X who is still unpaid?

Z. While X has a vendor’s lien, it cannot defeat the

rights of a purchaser for value of the receipt.

The only way for the unpaid seller to get the goods is

to validly reacquire to the receipt from Z and surrender

the receipt for cancellation.

• What is the effect of pledge of a receipt?

o The pledgee is in the same footing as a vendee for purposes of

the WHR law. He is thus also preferred.

o Except of course, once the underlying obligation is paid, the

pledgee has to return the WHR to the pledgor.

o X sold Y 10 sacks of rice by quedan, on credit. Y loaned

money from ABC bank and to secure his indebtedness, Y

delivered the quedan to ABC bank. Y died. Who has the

better right, ABC bank (pledgee) or X (unpaid seller)?

Same principle as above – ABC bank wins. Even as

a pledgee, it has the same preference as a purchaser.

X’s recourse is run after Y’s estate.

• What are the warranties of the transferor?

o NOTE: MOST IMPORTANTLY – the indorser or one who

negotiates for value is not a guarantor. He is not liable to the

bona fide purchaser if the WHM fails to deliver the goods. He

does not guarantee to performance of the WHM of his duty.

o 1. The receipt is genuine

o 2. He has a legal right to negotiate or transfer it

o 3. He has no knowledge of any fact which would impair the

validity or worth of the receipt

o 4. He has a right to transfer title to the goods and that the

goods are merchantable or fit for a particular purpose

• What is the rule on attachment or levy of the goods covered by a

negotiable receipt?

o There can be no attachment or levy of the goods unless the

receipt is first surrendered to the WHM or its negotiation is

enjoined

o What can the creditor do?

1. Have the courts attach the receipt

2. Compel the holder to deliver the receipt to him by

injunction or otherwise

o What if the receipt is non-negotiable?

Remember the discussion above about whether the

transferee was able to notify the WHM first before the

creditor could attach or levy.

To safeguard

• If the goods are lost, he is presumed to be at fault

• But not for fortuitous events

• What is the duty in keeping goods?

o He must segregate the goods belonging to different depositors

o But he is allowed to commingle if:

It is stipulated

It is customary to do so

• What are the rules on commingled goods?

o Each depositor gets a pro rata portion of the common mass

upon claim

o What happens if there is partial loss?

The depositors also share in the loss proportionately

Key distinctions between NI and Negotiable WHR:

Negotiable Instrument Negotiable WHR

When deliberately altered, becomes When altered, still valid, but it may

36



void be enforced only according to the

original tenor

If payable to bearer, always remain

so payable regardless of the way it

was endorsed, whether specially or

in blank

If payable to bearer and it is

endorsed specially, it will be

converted in a receipt deliverable to

orderHDC may obtain a title better than

the negotiating party

Endorsee, even if he is a HDC,

obtains only such title as the person

negotiating had over the goods

WHM’s lien

• What are included in the WHM’s lien?

o 1. All lawful charges for storage and preservation

o 2. All lawful claims for money advanced, interest, insurance,

transportation, labor, weighing, coopering, and other charges in

relation to the goods

o 3. Reasonable charges and expenses for notice,

advertisements, and for sale of goods (to satisfy WHM lien)

• What is the rule on notice?

o The charges present at the time of issue of the WHR must be

stated or else there is no lien. He will only have a lien on

charges occurring after the WHR was issued.

• What are the properties subject to the lien?

o 1. All goods deposited belonging to the person liable for the

claims

o 2. All goods belonging to others which have been deposited by

the person who is liable for the claims if the person has been

entrusted with possession of the goods, such that a pledge by

him of the goods at the time of deposit would have been valid

• When is the lien lost?

o 1. Surrendering possession of the goods

But can he claim a lien over other goods

deposited to him but under different bailments?

• No. His lien only pertains to that one and the

same bailment, which was lost upon

surrender.

o 2. Refusing to deliver the goods when he should have complied

• How is the lien enforced?

o 1. Valid refusal to deliver the goods until the lien is satisfied

o 2. Causing EJ sale of the property and applying the proceeds

to the value of the lien

o 3. Filing civil action for collection of claims

INSURANCE

In general

• Elements:

o 1. Insured possesses interest susceptible of pecuniary

estimation

o 2. Insured is subject to risk of loss

o 3. As consideration, the insured pays premium

• Someone organized a jeepney association. They give membership fees

and if a driver gets into an accident, the association pays indemnity.

Sued by Insurance Commission for not having license to do Insurance

Business.

o Held: Was conducting insurance business without license. All

requisites concurred.

o Contra Maxicare:Even if all elements are present, but if

primary purpose of contract is to provide services, then it isnot

an insurance contract. In Maxicare there is no insurance

contract because physicians pay for the first six sessions of

therapy after injury or loss, but the main purpose is to give

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medical services. But here, even if you did not get injured or

sick, you can avail of medical checkup.

• What are the characteristics of an insurance contract?

o 1. Aleatory

If you don’t lose what was insured, there is no

indemnity.

o 2. Personal

It does not adhere to the property insured because

the personality of both parties is crucial and is the

primary consideration for the contract.

Ex. teenagers will be charged higher insurance over

cars.

The buyer of a car, for instance, will only be insured if

the insurance company allows for an endorsement of

the seller’s insurance contract.

o 3. Unilateral

It is only the insurer that has an obligation to perform

(the insured already paid).

o 4. Conditional

• Can you insure against losing the lottery?

o No, this is wagering.

Parties

• Who can be the insurer?

o One authorized by the Insurance Commission

• Who can be insured?

o Anyone except a public enemy (citizen of a country with which

the Philippines is at war with)

o Wenfeld: German company filed claim with Insurance

Company, and the Philippines was under US at that time. The

Germany and USA were at war (WWII) so the company cannot

collect.

• What is the standing of mortgagors to sue on an insurance

contract and what is the effect of his acts?

o 1. The mortgagor can sue the insurance company if it does not

pay.

o 2. If the mortgagor performs an act that prejudices, the

mortgagee cannot collect.

Ex. The Mortgagor brought fireworks to the building

and it exploded. The mortgagee cannot collect.

o 3. The mortgagor can have the mortgagee perform acts that

benefit the contract

Insurable interest

• When is there insurable interest over life?

o 1. Own life, spouse and children

Children – even if emancipated

Spouse – need valid and existing marriage

o 2. Based on support or pecuniary interest

Ex. a key basketball player you signed for your team;

a concert impresario in an opera you organized

o 3. Based on legal obligation, whose death might delay or

prevent performance

o 4. Any person upon whose life any estate or interest vested in

him depends

Ex. X is allowed to stay in the family home of his

parents as usufruct. They have interest to continuethe life of their parents

o Note: for the first, mere relationship is enough. For 2-4, there

must be pecuniary interest. So the interest of the creditor over

the debtor’s life ceases upon full payment.

So mere friendship does not fall under any of the

categories.

• When is there insurable interest over property?

o 1. Existing interest

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o 2. Inchoate interest on an existing interest

Ex. stocks, which is based on subscription contract

o 3. Expectancy coupled with existing interest

o N.B.MAIN DIFFERENCE: there must be a valid pecuniary

interest

• What is the value of insurable interest over property?o The insurance cannot go beyond the value of the property

o Whereas in life, you cannot put value over life of a person

EXCEPT: if there is a way to place pecuniary value in

the life of the person.

• Who can be the beneficiary in life insurance?

o 1. If over own life, he can designate anybody, even if the latter

has no insurable interest.

But: you cannot name one to whom you are

prohibited to make donations to

Ex. co-guilty party of adultery/concubinageo 2. If you are the beneficiary, you need to have insurable interest

over the life of the insured

• X took an insurance policy over his own life for 1M and named his

friend Y as beneficiary. X died, and his debt to Y is worth 50k. The

executor of X’s estate claims only 50k must go to Y and the 950k

must go to X’s estate. Correct?

o No. Since the insured took a policy out of his own life, he is

free to name anyone as beneficiary.

o The rule would be different if Y took an insurance out of X’s life

– the insurable interest is only P50k.• Can the insured change the beneficiary?

o Yes, unless it was made irrevocable in the policy.

o If the beneficiary is irrevocable, can it still be changed?

Yes. But if irrevocable, can only change beneficiary

with the latter’s consent.

Ex. A father made his child an irrevocable beneficiary

of an insurance contract. If the father wanted to

revoke, the child must consent.

• What is the rule for beneficiaries in life insurance?

o 1. The beneficiary/assignee must have insurable interest

o 2. If the policy is going to be assigned, the insurer must

consent

o Contra: Assignment of a life insurance policy –

The assignee need not have insurable interest• When does the beneficiary forfeit?

o If he causes the insured’s death.

Except:When the killing is lawful (ex. self-defense,

the beneficiary is the executioner in death penalty)

o What is the effect of unlawful killing?

Benefits go to the estate of the insured (nearest

relative? – see sec. 12)

• Various situations re: insurable interest over property:

o 1. Importer has insurable interest in goods he is buying even if

undelivered, because he can compel delivery. The seller alsohas insurable interest because he has legal title.

o 2. Contractor has insurable interest over the building he is

erecting because under the law, he bears the risk of loss prior

to completion.

o 3. Mortgagor and Mortgagee both have insurable interest

o 4. Lessor and lessee both have insurable interest

o 5. Mere possessor.

Ex. X Colleges was allowed to use a building by the

owner, as a school. It insured the building. It caught

fire. HELD: There was insurable interest.o 6. Partners, over the property of a partnership

o 7. Carrier, over goods it is transporting since he will be liable

o 8. WH man, over goods for safekeeping since he will be liable

• What is the nature of a mere contingent interest over something?

o Not insurable.

o Ex. Creditor with no collateral over properties of buyer

o Ex. Expectant heir

o Ex. Fictitious contract of sale (completely simulated)

39



• Can smuggled property be insured?

o No – against public policy

• When must insurable interest exist in life insurance?

o In life, need only exist when the policy takes effect

o Ex. X insured his wife’s life. They annulled their marriage. But

the wife failed to revoke the insurance. X can collect.• When must interest exist in property insurance?

o When the policy takes effect and when loss occurs

o Need not exist in the meantime

Ex. Owned a car, insured, then sold it. Then

repurchased, and then loss in fire.

o A person mortgaged his building. The property had been sold

in foreclosure. Then it was lost by fire. He had no more right

to redemption. HELD: Lost insurable interest.

o What if he still possessed the right of redemption?

He still has insurable interest• What happens when there is change of interest?

o If you sold your car, if the buyer wants insurance, you have to

endorse the policy.

o Change in interest after the loss does not change indemnity. It

is already an accrued liability at this time. It is a chose in

action.

o Change in interest in one or more listed things:

A taxi company insured 20 units. Sold 4 of them. The

insurance over 16 is still valid.

o

Change of interest in will or succession does not avoidinsurance.

X insured Family Home against fire. X died and

children inherited. The house burned. The children

can collect.

What if the children bought the house from the

father when he was still alive?

• Insurance does not transfer.

o For co-owners, partners, etc:

X Y and Z co-owned a house. X bought Y and Z’s

shares and became sole owner. The house burned.

Insurance company must pay because X was part of

the original insured.

But if there is a new person brought into the group,

the insurance is avoided.

• Can one stipulate against insurable interest?

o No. Stipulation that there need not be an insurance interest for

an insurance contract – NULL AND VOID.

• What is the interest of a mortgagor over property he mortgaged?

o The extent of the value of the property

o How can the mortgagee be made the beneficial payee in

the mortgagor’s policy?

1. Assign (with insurer’s consent) or pledge (no need

for insurer’s consent) the insurance K

2. The original policy may have a mortgage clause or

there is a rider making the policy payable to the

mortgagee as long as he has interest (loss payable

clause)

3. Independent contract between mortgagor and

mortgagee

4. Acquired by the mortgagor under a contract duty to

insure the mortgagee’s benefit (in which case the

mortgagee acquires an equitable lien on proceeds

collected by the mortgagor)

• What is the extent of the mortgagee’s interest on the property

mortgaged to him?

o To the extent of the debt secured

o The interest exists until the debt is extinguished

o N.B. the mortgagee may procure the policy and have the

mortgagor pay for the premiums

• Distinguish:

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o Standard/union mortgage clause – subsequent acts of

mortgagor cannot affect the rights of the mortgagee

o Open/loss payable mortgage clause – acts of the mortgagor

can affect the mortgagee’s rights, because the former is a party

to the contract

• D had a loan of 3M from C. To secure it, D mortgaged his house

worth 5M in favor of C.

o Who has insurable interest over the house?

D 5M (value of house)

C 3M (extent of loan)

o Will insurance procured by D in his own name and for his

own benefit inure to benefit of C?

No. Insurance is a personal contract and just like any

other contract, it just involves the parties unless there

is a stipulation pour autrui (see examples above)

But under Art. 2127 of the NCC, the mortagee has an

equitable lien on the proceeds of the policy.

o C procured insurance. D fully paid C. The house burned

down. Can C recover? Can D recover?

No and no. C has no more insurable interest. D is

not a party to the insurance contract.

Concealment

• What is the nature of concealment?

o

Failure to communicate what a party knows and ought tocommunicate

o Need not be intentional

• What is the consequence?

o Insurer can rescind

• Requisites:

o 1. Party must have known the fact concealed

Ex. he did not know he had cancer

o 2. Must be material to the policy

Test:

• Insurer would not have entered into the

contract had he known of the fact concealed

or the conditions in the K would have been

different

Concealment in life insurance:

• Failure to disclose serious ailments

• Need not disclose very minor sickness/injury

A Couple got an insurance policy for their mongoloid

baby, but they did not say he was a mongoloid.

• HELD: concealment

There is a law prohibiting insurance companies from

refusing to issue insurance to someone with AIDS, as

long as he discloses that he has AIDS

Is good faith a defense in concealment?

• No. Whether it is intentional or unintentional,

the injured party can rescind.

• So if X, a laundrywoman, did not disclose

that she had stomach cancer because she

did not know, there is still concealment. (but

there was no knowledge – concealment?)

o 3. Party must make no warranty of the fact concealed

In this case, if there was a warranty, the violation is

not a concealment but a breach of contract

o 4. Other party has no means to ascertain the fact concealed

If a party discloses that he has been hospitalized and

gave the contact # of the hospital, the insurer’s failure

to look into his records – there were means to

ascertain the fact

• If the agent commits a concealment, the applicant will be bound by that,

the insured made the agent his own agent for the purpose of filling up

the application form

• There are matters the party need not indicate:

41



o 1. Insurer could have known

The inspectors went to the place and found that it was

near a squatter’s area. But the company issued a fire

insurance policy anyway. A fire broke out. The

insurance company cannot use the defense that it

was near a squatter’s area, because it sent

inspectors.

o 2. Matters of public knowledge/insurer should have known

Insured an oil tanker. Cannot use the defense, “why

did you not disclose that there was a war in

Afghanistan.” They should have known.

o 3. Information of one’s own judgment.

o 4. Matters which pertain to excluded or exempted risks.

Ex. need not disclose that members of NPA are

burning houses in their neighborhood if the fire

insurance policy exempts rebellion/coup/etc.-related

destruction

• What if the insured dies from another reason apart from the fact

concealed?

o Insurer still not liable because it wouldn’t have issued a policy.

• Can there be waiver?

o Yes. Either express (in the terms of insurance) or implied (as

when there is failure to make follow up inquiries as to facts

already communicated).

• Is there need to disclose nature or amount of one’s interest?

o No. EXCEPT if one is not the absolute owner of the insured

property.

Representations

• What is a representation in general?

o Statements made to induce the other party to enter into the

contract

• What is a misrepresentation?

o 1. Untrue statement

o 2. With knowledge and intent to deceive; or stated as true

without knowing it to be true and which tends to mislead

o 3. Fact is material

• What is the consequence?

o Voidable at option of insurero But waived for acceptance of premium payments despite

knowledge of ground for rescission

• What are the kinds of representations?

o PROMISSORY: Representation as to the future

o AFFIRMATIVE: Representation as to a present fact

• What is the nature of a representation?

o Can be written or oral

o Representation is not part of the contract. It is a collateral

inducement.

o But it may qualify as an implied warranty

• As a rule, parole evidence is not allowed to vary the terms and

conditions of the contract. It may qualify an implied warranty. It is

imposed by law.

• When is a representation presumed to refer to?

o A representation is presumed to refer to the date on which the

policy goes into effect.

o If somebody applied to insure his vessel. Ex. voyage from

Manila to Cebu. “Where is the vessel?” “It is anchored in

Manila Yacht Club.” But it is actually in Curimao. However,

when the policy takes effect and the vessel is in Manila already,there is no misrepresentation.

• What if the insured has no personal knowledge of a fact?

o He may repeat the information he has on the subject which he

believes to be true

o Ex. There is a question in life insurance about medical history

of the family. If one thinks his father died as a soldier, in action,

when he actually died of AIDS, and he says the former.

42



o But if the info came from the insured’s agent, and exercise of

due diligence was possible, he is liable for the truth of the

statement

o Ex. There is no misrepresentation because he relied on what

the physician told him.

• Representation is false if facts do not coincide with what was asserted

o Test for defense:“substantially true” in every particular

material to the risk

o EXCEPT: Marine insurance – where what is required is the

exact and whole truth

o Ex. “Have you ever applied for a life insurance policy and the

application was rejected?” He said no. But before, he had an

application denied, but then accepted on reconsideration.

HELD: No misrepresentation.

o “Do you take alcoholic beverages?” Applicant said no. But he

has been drinking since he was 16. He died of liver failure.

HELD: Misrepresentation. But if he only drank small

amounts on cocktail parties, it is not material. There

is no misrepresentation.

o Insured filled up the application form. The insurance company

said that they will only accept if the applicant is not more than

60 years old. He was more than 60 years old.

HELD: he wrote on the application form his date of

birth, but the company still issued a policy. There was

no misrepresentation.

• Test of materiality? –

o SAME AS CONCEALMENT.

o If the other party would not have entered into the contract, or

under different conditions

Warranties

• Express or implied:

o Express – found in terms and conditions

o Implied – imposed by law

Only exists in Marine insurance

• Usually embodied in a rider

o These riders, issued with the policy, need not be signed

• What is the difference of warranties from representations?

o Warranties are express and placed in the contracto Representations are not written and are but collateral

inducements

• May relate to:

o Past – ex. warranty that insured was never confined

o Present – ex. warranty that insured is in good health

o Future – ex. warranty in fire insurance that owner of property

will not store flammable materials

• When does non-compliance with a future warrantynot avoid the

policy?

o 1. Loss occurs prior to the warranty taking effect

o 2. Performance becomes unlawful

o 3. Performance becomes impossible

• Give an example:

o Somebody tried to insure his house for fire. Inspectors said his

neighborhood is not nice. Insurer said that it will insure, but

insured must put up a firewall within 30 days. A fire razed his

house in 10 days.

o HELD: the insurer is liable. Same if there is no cement

available (impossible) or if it becomes unlawful.

• What is the effect of violation of warranty?

o Allows the other party to rescind.

o Even if not rescinded, it can be launched as defense by the

insurer.

o Can the insured argue that it is not material?

No. The fact that it is in the policy entitles the insurer

to rescind. The basis is not materiality but breach of

contract.

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When there is breach of warranty, it is presumed to be

material.

• If there is a breach of warranty, and loss occurs EVEN IF not related to

the breach of warranty, the insurer is not liable.

o Ex. cannot bring explosive materials into his house. He

brought fireworks inside. His kitchen caught fire without

relation to the fireworks. Insurer not liable.

o Because the risk increased regardless.

o What is the exception?

When it is merely incidental to the business. For

instance, placing alcohol to retouch the varnish of

one’s insured furniture store does not breach the

warranty against placing inflammable materials.

Ex. where there was gasoline in the warehouse for

consumption of the owner’s car within 2 days. Or

mothballs in a drug store.

• Double insurance not just to those he acquired before but also the

future. Failure to give information is a breach of warranty.

o X obtained fire insurance over his house with Insurer A.

He warranted against past and future double insurance.

Then he obtained fire insurance over his house with

Insurer B. The same clause is included. The house burns

down. Is Insurer A liable? Is insurer B liable?

Both are not liable. There was breach of future

double insurance warranty for contract A and breach

of past double insurance for contract B.

o X insured his stocks in trade. Mortgaged them, and insured

them again, where there is loss proceeds go to mortgagee.

Fire destroyed the things. Insurer said X did not disclose

second insurance.

HELD: No need to disclose. Different interests

involved. First goes to the mortgagor. Second goes

to the mortgagee. It is not double insurance.

• When is there a waiver by the insurer?

o Despite knowledge of the breach, it accepts the renewal

premium

• X was issued an ordinary driver’s license. Can only drive 4 wheeled

vehicles. He drove a 10 wheeler. Vehicle involved in accident.

o HELD:Insurer not liable because X is not authorized to drive

the 10-wheeled vehicle.

• How is the authorized driver clause interpreted?

o Usually it means that it’s just the owner of the policy and an

authorized third party with a license that must drive the vehicle.

o Is the expiration of one’s license a violation of the

authorized driver clause?

No. While it may be a violation of the law, it does not

violate the authorized driver clause that would breach

the warranties in an insurance policy.

The requirement for a license applies for a third party

not the insured himself.

o When the car is stolen or misused by a repairman, is it a

violation of the ADC?

No. It is considered theft under the policy.

• What does “under influence of liquor” clause mean?

o No need to actually be drunk, as long as he is under the

influence

• When there is breach of warranty without fraud, what is the rule?

o It only exempts the insurer from the time the breach occurred.

o Give an example. X obtained fire insurance over his house. Warranted

against storage of inflammable materials. On Sept

31, a fire broke out. On December 31 he stored

inflammable materials (fireworks) then a fire broke

out. The insurer is not liable for the Dec 31 fire, but is

liable for the Sept fire.

44



o What if there was fraud, i.e. there were inflammable

materials inside the house?

The policy doesn’t attach in the first place.

• Compare a warranty from a representation:

Warranty RepresentationPart of the contract Collateral inducement

Written in policy/rider Need not be written

Conclusively presumed to be

material

Must be established to be material

Fact must be strictly complied with Fact can be merely substantially true

Rescission of insurance contracts

Sec48(a) – action to rescind

• If insurer has right to rescind, insurer must rescind prior to

commencement of action on the contract

• Tender of premiums and notice that the policy is cancelled before suit is

deemed a rescission

Sec 48(b) – incontestability clause

• If a life insurance policy has been in force for at least 2 years since first

effect or last reinstatement – insurer is BARRED from questioning it or

alleging misrepresentation or concealment, or deceit/fraudo N.B. Really, what you are barring are defenses against

fraudulent misrepresentation or concealment, but not anything

else

• Requisites for incontestability clause:

o 1. Life insurance

o 2. Payable proceeds upon death

o 3. In force for 2 years since issuance or reinstatement

Can the 2 year period be shortened by

agreement?

• Yes, but it cannot be lengthened by

stipulation.

o What if the policy lapsed but was reinstated?

The 2 year period will run again.• BUT there are still defenses that can be invoked even after this

period:

o 1. Claimant has no insurable interest

o 2. Uncovered risks (ex. insured engaged in car racing)

o 3. Policy lapsed and insured did not pay

o 4. Policy was entered into pursuant to scheme to kill insured

(“vicious fraud”)

o 5. Someone substituted for the insured during medical test

This fraud is not barred by the clause – there is NO

perfected contract with the insured because it wasanother person

o 6. If insured is riding in a plane and it is not a commercial flight

(ex. 8-seater plane)

o 7. Entered into military without consent

o 8. Failure to furnish proof of death

o 9. Action not filed on time

• What defenses are barred?

o 1. Misrepresentation

o 2. Concealment

o 3. Fraud

• When must the two year period lapse?

o It must have lapsed while the insured was alive. If the insured

dies within two years, the heirs cannot wait for the 2 years to

lapse and claim incontestability.

The Policy

• What is a preliminary policy/cover note?

45



o Has terms and conditions of policy that will be issued.

Insurance company cannot collect separate premium on

preliminary policy and actual policy.

o Common in car insurance and marine insurance

Because there is still some delay or information to be

determined (ex. looking for third-party liability in car

insurance first [give to LTO the cover note] or looking

for adequate carrier for goods for marine goods –

since the policy depends on the state of the boat

• What must be the form of policies?

o Must be in printed form. It can’t be handwritten anymore.

Before you issue a new policy, the terms and conditions have

to be approved by insurance commission.

• What is the rule on riders and additional attached clauses?

o Does not bind insured UNLESS the descriptive name/title of

the rider or clause is mentioned and written on the blank

spaces in the policy

• What is the rule on additional riders or clausesissued after the

original?

o Must be countersigned by the insured or owner

o N.B. No need for signature of insured for earlier riders and

additional clauses

• When must a policy be issued upon issue of cover note?

o Within 60 days, the policy must be issued.

If the cover note extends beyond 60 days, written

agreement of insured must be obtained.

But now: there is a circular that allows cover notes to

extend beyond 60 days.

• Who receives insurance proceeds?

o Applied exclusively to person in whose name or for whose

benefit the policy is made

o If description is so general that it may comprehend any class or

persons, only he who can show it was intended to include him

can claim the benefit.

• When does insurance taken by one partner or part-owner apply to

the interest of his co-partners or co-owners?

o The terms of the policy must be applicable to the joint or

common interest

• Rules on interpretation:

o If the provision is clear, there is no room to interpret

o Tantoco Terminal: had two mills. Old mill was insured. When

the new mill was finished it was insured. The policy however

mentioned the old mill. Burned. Insurer refused.

HELD: Clearly they intended the new mill to be

insured, not the old one even if the policy says

otherwise.

o Fortune: Security guard and driver of armored van had

possession of the money. They stole money. Insurance

company refused to pay because it claimed they were not

employees of the company, but the agency.

HELD: The insurance company pays. The very

purpose of the insurance is to insure against acts of

those holding the money, which in this case are the

two.

• What is an Open policy?

o There must be a maximum amount mentioned. It is a

maximum liability of the insurer.

o So there can be an amount mentioned, but you still have to

quantify the value within this amount.

• What is a Valued policy?

o One expressing a policy that the thing be valued at a specified

sum

Ex. Marine policies are usually this

• What is a Running policy?

46



o Successive insurances

Ex. Goodyear, instead of getting insurance whenever

it ships tires to distributors, it gets a running policy that

covers all of these

o In any case, it would have to notify the insurance company

which would issue an indorsement, for it to be covered

• What is the rule on validity of agreements limiting times for

commencing action?

o In general, a clause in an insurance policy that action upon the

policy must be brought upon by the insured within a certain

period is valid

o But if the period fixed is less than one year from the time cause

of action accrues, the stipulation is void (the period becomes

the default 10 years, from a written contract)

In industrial life insurance – period cannot be less

than 6 months from accrual of cause of action

o When does cause of action accrue?

From rejection of the claim by the insurer, because

prior to this, there is no necessity to bring suit yet

o What if the clause says that action must be brought one

year fromloss?

It’s void, because you have to submit your claim to the

insurer first, and this takes time. The insurer might

decide beyond one year sometimes. In this case, the

action given to the insured will be less than 1 year

from the time cause of action accrues.

o N.B.One year period to file a case is not like period for appeal.

Asking for reconsideration from the company does not suspend

running of the period.

• When can non-life policies be cancelled?

o 1. Only with prior notice AND

o 2. On the following grounds:

1. Non-payment of premium

2. Conviction of crime from acts increasing hazard

insured against

3. Discovery of fraud/material misrepresentation

4. Discovery of willful or reckless acts increasing

hazard insured against

• Ex. a bus company that always gets into

accidents every week

5. Physical changes in property that makes it

uninsurable

6. Determination by Commissioner that continuation

of policy will place the insurer in violation of the code

• Ex. Maximum risk it can insure is 20% of its

net worth (Ex. 100M net worth, so they can

issue up to 20M). It can issue policies

beyond that but it must be reinsured.

• Notice of cancellation:

o 1. Must be in writing

o 2. State ground for cancellation

o 3. State that if the insured asks for the facts as basis, the

insurer will disclose

• When can there be automatic renewal in a non-life policy?

o Insured can automatically renew the policy as long as he is

willing to pay the premium

o Except: 45 days before expiration of policy, the insurer informs

him that it will not renew

If insurer does not do this, insured can renew as a

matter of right

• Policy written for term longer than 1 year, it will be treated as written for

successive terms of 1 year

o Ex. construction contract requires policy covering the building

as it is completed. There were 2 fires, and 3 years. It will be

treated as if it is expiring at every anniversary of the policy.

47



Premiums

• When is the insurer entitled to the payment of the premium?

o As soon as the thing insured is exposed to the peril insured

against

•

What is the effect of payment of premium to the liability of theinsurer?

o Notwithstanding any agreement to the contrary, no policy is

binding until the premium has been paid.

• What are the exceptions?

o 1. An acknowledgement under the policy that the premium has

been paid is conclusive evidence, even if there is no actual

payment yet

But this does not estop the insurer from recovering the

payments afterwards

o 2. Payment in installments Makati Tuscany: In fact, if only a few installments

were paid, the insurer can sue to collect the rest

Tibay: The policy provided that it will not be binding

until all installments have been paid. Thus, here,

Makati Tuscany does not apply.

o 3. Grace period in life and industrial life policies – by default,

there is a 30 day grace period. But it can be increased

o 4. Grant of credit by the insurer to the insured

Masagana added this. There was a market insuring

its premises with UCPB since 1988, and every yearthere is usually a 60-90 credit period to pay renewal.

The market burned within the period and UCPB paid

the premiums a day after. The insurer was held liable.

o 5. Estoppel

As in Masagana where UCPB always granted

Masagana a credit period.

• What is Cash Surrender Value?

o Amount of cash the insurer receives upon surrender of the life

insurance policy prior to maturity

• What is Paid-up Insurance?

o When the insured defaults, he gets the cash surrender value.

The insurer then applies the cash surrender value to check

how much insurance it can buy until the end of the policy.

o Can the insured apply for reinstatement at the end of the

policy?

Yes, but he has to undergo medical examination again

to show he is insurable, and pay the premium in

arrears

• What are the rules on refund of premium?

o Insured entitled to a refund of the premium if no part of the

interest was exposed to the peril

Ex. Insured shipment of rice was never shipped

o What if the insurance is for a particular period and there

was surrender prior to the end of the period?

Entitled to refund corresponding to unexpired time

Deducting any previous payment of the insurer due to

losses

o What the exception to partial refund rule?

In life insurance, because the insurance on human life

is not divisible. So no matter how short, the insured is

not entitled to a return of the premium.

o X insured a shipment of goods from Manila to Cebu. Can

he can cancel it halfway, i.e. when it is in Romblon, and

ask for refund of premium?

No. The insurer was already exposed to the risk; he

cannot ask or the return of the premium. It is not

“divisible.”

o What if the contract is avoided due to fault of the insurer?

Insured gets the premium returned.

o Avoided due to fault of the insured, but not actual fraud?

48



Insured gets return of premium, if the insurer did not

incur any liability.

Ex. Pre-condition for fire insurance over house is to

build a firewall. Insured didn’t get to build it, so the

policy never attached.

o Avoided due to fault of insured, with actual fraud?

No return.

Ex. Insured claimed he had a firewall, but he really did

not.

• Can there be return of the premium due to over insurance?

o Yes. The insured gets a ratable return of the premium.

o Ex. a house worth 10M is insured for 10M with X, 5M with Y,

5M with Z. Paid premiums: 10K to X, 5K to Y, 5K to Z. He is

entitled to return of premium: 5K from X, 2.5K from Y, 2.5K

from Z.

• Agreement not to transfer the policy after loss has occurred is void,

because at that time, the liability has accrued. It is a chose in action.

Loss, claims settlement, subrogation

• When will the occurrence of the peril insured against make the

insurer liable?

o 1. If it is the immediate cause.

Ex. Insured against fire. Faulty wiring exploded

(proximate cause) and led to fire.

o

2. If it is the proximate cause of the immediate cause Ex. Insured against fire. Fire broke out and burned

down a tree, which fell and destroyed a house.

o 3. If it is damaged in the process of rescuing the insured

against the peril insured against.

Ex. Saving insured furniture from a house fire. When

they were brought out, they were stolen. Insurer is

liable.

Ex. Fire broke out in neighbor’s house. To prevent the

fire from spreading to the other house contained

insured furniture, the firemen pointed their hoses. The

furniture was soaked and damaged – insurer is liable.

• When is the insurer not liable even if there is loss?

o 1. The insurer is not liable for loss caused by connivance of

insured

Ex. told someone to steal his car, sell parts, and claim

insurance

o 2. Loss from unlawful act – not liable

Ex. committed arson

o 3. Loss in which peril insured against is only a remote cause

Ex. fire insurance policy covers store and stocks in

trade. The house across the street caught fire.

Everyone congregated. While distracted, robbers

broke into the store and stole the stocks in trade. Fire

is just a remote cause.

o 4. Loss, the proximate cause of which is an excepted risk

Fire insurance policies say that they do not cover loss

due to coup d’etat, rebellion, riots, etc.

o 5. Loss where the insured is guilty of gross negligence

SMC hired a shipping company to transport thousand

cases of beer. The SMC rep met the captain and told

the latter that the boat should be moved to a safer

place since there is a typhoon brewing. The captain

ignored it and tied the barge to the wharf. During the

typhoon the rope broke, the barge was cut loose.

• Burden is on the insurer to prove that it is an excepted risk

o But for fire insurance, the burden is on the insured to prove that

it is not under an exempted risk

o Ratio: because the thing is in possession of the insured, so he

can best give an explanation for the loss

• How must notice to the insurer of loss be given?

49



o 1. Notice must be given without unnecessary delay

If reported an unreasonable time later – ex. 6 months

– opportunity is gone

Usually policies have a provision that claims must be

filed within a certain time. Beyond that, barred.

Delay in presentation of a claim/proof of loss is waived

if the insurance company did not invoke that as a

reason to deny the claim

o 2. When proof is required, insured is not required to give proof

that stands in court

Noda: police report should be sufficient

Defects in the notice or substantiation thereof which

the insurer didn’t specify are waived, because the

insured is usually a layman

o 3. If the policy requires a certificate, and the insured cannot

produce it, it is enough to say that he cannot produce it not

because the document is prejudicial but because he could not

procure it

“I cannot submit the report not because the contents

of the report are prejudicial, but because the

investigator is abroad and cannot be found”

• What is the rule on subrogation and release of liability?

o General rule: when the insurer pays the insured, the insurer

becomes subrogated to the rights of the insured and can run

after the wrongdoer

o But the insurer will be discharged from its liability to the insured

if the insured committed any act that would prevent the insurer

from recovering from the wrongdoer

In motor vehicle insurance, the insured settled with

the wrongdoer for P2500. The insured still claimed

from the insurer, which paid. The insurer ran after the

wrongdoer, which raised the defense that there was a

settlement. The insurer thus canrecover from the

insured because it paid by mistake.

o What are the grounds when there is no subrogation?

1. Insured by his own act releases the wrongdoer from

liability

2. Insurer mistakenly paid for an excepted risk 3. Life insurance

4. Recovery of loss in excess of insurance coverage

Double insurance

• Requisites:

o 1. Insured must be the same

Ex. mortgagor mortgagee – not the same

o 2. Several insurers

If someone takes an insurance from Insurer X, then

takes another after 6 months, no double insurance

o 3. Same subject matter

Ex. factory and stocks in trade – not the same

o 4. Same interest

Ex. Insured property with proceeds payable to him,

then mortgaged same property with proceeds payable

to the mortgagee for his interest – no double

insurance

o 5. Risk is the same

Ex. against fire, and then against earthquake – not the

same

• What is the consequence of double insurance?

o Usually there is a clause in insurance policies that will release

insurers from liability if there is double insurance

• What is the consequence of over-insurance?

o The insurers can ask for reimbursement based on

proportionate liability

50



o Ex. A house worth 10M is insured for 10M with X, 5 M with Y,

5M with Z:

Owner cannot recover more than 10M, the value of

the house

If owner recovered 10M from X, X can ask for 2.5M

from Y and 2.5M from Z.

In the same way, depending on who the owner

collects from, they have to reimburse each other in the

said proportions.

o In car insurance policies, there is a usual clause that for over-

insurance you can just collect proportionately. So two insurers

covering a car worth P500K can only be liable for P250K each,

and nothing more.

Reinsurance

• What is reinsurance?

o Insurer obtains another insurance to cover for loss for liability

due to the original insurance

o The reinsurer is a liability insurer

o What is retrocession?

Subsequent layers after the first reinsurance

• Two types:

o Treaty

o Facultative – case by case

• Can a reinsurer intervene in the original action?

o A reinsurer cannot intervene in the case of insurer and insured

because the reinsurer has his own interest anyway. So he has

to wait until the original insurer sues the reinsurer to recover, if

it wants to raise defenses.

• Insurance is covered by the rule ofuberrimae fides

• What is the nature of a contract of reinsurance?

o It is presumed to be against liability, not damages. So even if

the original insurer fails to pay, the reinsurer will be liable to

pay.

• Most of the time, there is a clause that says that the original reinsurance

need not litigate with every reinsurer. If the original insurer paid, the

reinsurers will pay too. They will “rise and fall” with the fortunes of the

original insurer.

• Can the insured sue the reinsurer directly?

o No. There is no privity of contract between them.

• What is the exception?

o The cut-through clause

Insured can go straight to the reinsurer

o Ok in California, invalid in England

Marine insurance

• What is an all-risk policy?

o All the insured has to prove is that the property was lost; no

need to prove that it was due to fortuitous events.

o The only defense the insurer can raise is that the loss was due

to misconduct of the insured.

• What is it’s not an all-risk policy?

o It only covers perils of the sea.

• Perils of the sea:

o 1. Connected with navigation

o 2. Unusual movement of the sea/winds

There must be a fortuitous event. A normal typhoon

is not a fortuitous event.

• It does not cover perils of the ship. What are these?

o If the ship is not sea worthy, or that the cause is due to the poor

condition of the ship.

o Ex. if it springs a leak.

• What is barratry?

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o Insuring against the willful misconduct of the master or crew,

not mere wrong judgment.

o A ship captain cuts loose a barge. Was this barratry?

Just an error of judgment. There has to be willful

misconduct by the master or crew of the ship. So the

insured cannot claim from the barratry clause.• When is arrest of the ship recoverable from?

o Covers arrest of the ship by administrative or executive order –

as settled in English jurisprudence. But inMalayan our SC

included arrest by court order.

• What is the insurable interest of the owner of a vessel that has

been chartered?

o Only the amount which the charterer did not agree to cover, in

case of loss.

o Ex. the ship is worth 10M. The charterer agreed to pay 5M in

case of loss. The insurable interest is 5M.

• What is freight?

o It is the expected profits of the owner of a ship which has been

chartered to ship goods. These expected profits (freight) can

be insured.

o What is the insurable interest of thecharterer?

To the extent that can be indemnified for his loss.

o O is the owner of a boat. C chartered it, agreeing to pay

P500K if the vessel arrives safely and C was able to solicit

goods paying freight of P600K. The vessel sinks. What

happens?

C need not pay O, because the ship did not arrive

safely.

C can only collect 100K because that is the profit

which was lost.

• Insurer answers for general average

o Those who were saved will contribute to the general average

o Insurance policy will cover share in general average

o DOES NOT cover particular average

Ex. fruits became rotten due to nature of the fruits

• Rule on concealment is stricter, because the ship is usually in the high

seas so the insurer is at a disadvantage – harder to inspect.

• What is the different rule as to concealment in marine insurance?

o Usually, the cause of the loss need not be due to the factconcealed. But for the following matters, concealment does

not avoid the policy EXCEPT if these were also the cause of

the loss:

1. National character of the insured

2. Liability of the thing to capture/detention

3. Liability to seizure due to breach of foreign laws

4. Want of necessary documents

5. Use of false/simulated papers

o Ex. Insured conceal that certain important documents are

missing. The vessel encountered a perfect storm and sank.The insurer is still liable even if there was concealment,

because the fact concealed was not the cause of the loss.

• What is the different rule as to belief of a third person as to marine

insurance?

o Marine insurance – belief of a third person as regards what is

material

o Ex. surveyor saying that the ship is not seaworthy MUST BE

DISCLOSED – it is material

• What is the rule on misrepresentation as to expectation?

o If there is no fraud, misrepresentation as to expectation doesnot avoid the policy.

o Ex. The insurer asks the owner when the vessel will go out to

sea, and the latter said April. The vessel only went to sea on

June. The misrepresentation was not tainted with fraud and

does not avoid the policy.

Subject Ordinary insurance Marine insurance

52



Concealment Can rescind even if

concealed fact was not

cause of loss

Five exceptional

grounds apply

Belief of a third person Need not be disclosed;

immaterial

Must be disclosed;

material

Misrepresentation as toexpectation

Can rescind If there is no fraud,cannot rescind

Implied warranties N/A Four implied warranties

automatically apply

• What is the presumption on knowledge of loss?

o There is a presumption if the knowledge of the loss could have

been received by the owner in usual rate of communication.

• What are the implied warranties?

o 1. Sea worthy

May there be a waiver of warranty of

seaworthiness?

• Yes. If there is a waiver, even if the ship is

not seaworthy, the insurer is still liable.

o 2. will not deviate

o 3. Will not engage in illegal ventures

o 4. It will carry necessary papers if nationality was expressly

warranted

• When is a ship seaworthy?

o If it can perform the services and encounter the peril of the

voyage contemplated.o Warranty of seaworthiness extends from the hull also that it

is properly laden, and the complement of the vessel (master,

etc.) is fit

• When must a ship be seaworthy?

o At the start of the voyage

o If there are different portions of the voyage, it must be

seaworthy in all such portions

o If it is an insurance of cargo taken by different ships, all the

ships must be seaworthy

o What if the ship becomes unseaworthy during the voyage?

There must be no delay in the repairs; else, the

insurer is discharged.

• What must the voyage route follow?o Usual maritime usage

o If none, then the most natural, direct, and advantageous

Deviation

• Three types of deviation?

o 1. Departure from course of the voyage

o 2. Unreasonable delay in pursuing the voyage

o 3. Commencement of an entirely different voyage

• When it is proper to make deviations?

o 1. Caused by circumstances which neither the master or owner

has control

Ex. when there is a typhoon

o 2. Necessary to comply with a warranty or avoid a peril

(whether insured against or not)

Ex. when the engine gets busted

o 3. Made in GF, upon reasonable belief to avoid a peril

Ex. received of reports waiting in ambush, thus

deviated

o 4. Made in GF, to save human life or another ship

• Once the vessel deviates, even if it returns to the original route, theinsurer is exonerated.

Loss

• Loss is either total or partial

• Total loss is either:

o A. Actual total loss

Actual loss of the thing, renders it valueless

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Examples of total loss:

• 1. Total destruction

o Ex. the ship burned

• 2. Loss by sinking or being broken up

o The ship sank or was broken up,

making it irretrievable• 3. Damage to thing rendering it valueless for

the purpose it was shipped

o Ex. palay got wet and became

seedlings

o Ex. a race horse broke its legs, so it

cannot race anymore

• 4. Any other event depriving the owner of

possession of the thing at the port of

destination

o Ex. Ship was ordered seized Is there need for abandonment for actual total

loss?

• No, the insurer become liable upon actual

total loss

o B. Constructive total loss

Unique in marine insurance

Abandonment is act of insured after constructive total

loss. He relinquishes his share to the insurer

If damage is more than ¾ of value of property insured,

insured can declare constructive total loss• What if the ship cannot continue but the cargo is transferred, what

is the effect?

o The marine policy on the cargo remains

o The insurer is liable for expenses for transfer, discharge,

storage, reshipment, and all other expenses to save the cargo

o What if loss occurs?

The insurer is liable for the general average\

• What are the requisites of abandonment?

o 1. Actual relinquishment by the person insured of his interest

over the thing insured

o 2. Constructive total loss

o 3. Unconditional and not partial abandonment

o 4. Made within reasonable time from receipt of information of

losso 5. Must be factual

Ex. So in a case where the shipment of oranges was

reportedly lost, but they actually just ripened during

the trip and were sold by the captain, there is no

factual basis for abandonment

o 6. Give notice to insurer whether orally or in writing

o 7. Notice of abandonment must specify the particular cause

• What is the effect of abandonment?

o The insurer gets all the interest of the insured over the vessel

(ex. salvage, proceeds of the salvage, etc.) This same effect will result if the insurer paid as if

there was actual total loss – as if there had been

abandonment

o Acts done in good faith by the agents of the insured after

abandonment is for the risk/benefit of the insurer (ex. effort to

repair the ship – is for the risk/benefit of the insurer. So the

insurer pays for it, and if the ship gets repaired, benefits.)

• Insurer is liable for those acts of insured in good faith

o Ex. salvor’s fee, repairs in GF

• Acceptance:o If abandonment is proper but insurer refuses unjustly, it does

not prejudice the insured

o Acceptance of the abandonment can be express or implied

Mere silence of insurer after notice is not an

acceptance

o Acceptance is conclusive and cannot be revoked [except if the

ground is not factual, like the oranges case]

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o What if the insurer unjustly refuses to accept the

abandonment?

The insured can sell the vessel and earn scrap value.

The insurer is liable for the balance.

• Upon accepted abandonment, who is entitled to the earned

freightage?o Freightage earned before the loss – to the insurer of the

freightage

o Freightage earned after the loss – to the insurer of the ship

Measure of indemnity

• What is the “Co-insurance clause”?

o It applies by default only to marine insurance. It has to be

stipulated in fire or other insurance.

o The prerequisites are:

1. Loss is partial

2. The property is insured for less than its total value

o What is the effect?

The insurer is liable only for the difference between

the amount of insurance and the value of the property.

o Huh? Give an example na lang.

Vessel X was worth 1M but was insured for only

800K. It was damaged to the extent of 200K. The

insured can recover 160,000 which is 1/5 of 800k

(since 200K is 1/5 of 1M)

• What is the difference in what the insured can recover if the profits

are separately insured and if not?

o Profits separately insured: Sugar being shipped is worth 100M

and has expected profit of 120M. 50M worth of sugar was

destroyed. Insured can recover 60M as insurance for expected

profit.

(Because for every 5 M of sugar it earns 6M sugar

[100:120], so loss of 50M worth of sugar is loss of

60M in profits)

o Not separately insured: Sugar being shipped is worth 100M

and has expected profit of 120M. 50M worth of sugar was

destroyed. Insured can recover ½ of 20M, which is 10M for

expected profit.

• Is a marine insurer liable for expenses attendant upon damage and

subsequent repairs?

o Yes, the insurance is liable pursuant to “sue and labor”

expenses, because the insurer is presumed to be willing to

incur these expenses to avoid loss.

• Is a marine insurer liable for contribution expenses made by the

insured for general average loss?

o Yes.

Fire insurance

• What are the requisites of alteration?

o 1. Change in the use or condition of a thing insured

o 2. Which is limited by the policy

o 3. Without consent of insurer

o 4. Through means within control of insured

o 5. Increasing the risk

• What is the consequence of alteration?

o The insurer can rescind the contract

• Give an example of alteration that increases the risk.

o Conversion of a bookstore to a restaurant

• Give an example which does not.

o Conversion of a residential condominium into an office

condominium.

• What is a hostile fire and friendly fire?

o Hostile fire – fire that escapes and burns in a place where it is

not supposed to

55



o Friendly fire – fire that burns in a place where it is supposed to

burn

Friendly fire can convert into hostile fire

o X is seeking to recover from the insurer for soot marks

caused on the wall by a gas stove burner. Can X recover?

No. The marks were caused by friendly fire.• Does “co-insurance” apply to fire insurance?

o Not by law. But it is a standard clause placed by companies.

• What is the rule on valuation for fire insurance (if there is none

provided in the policy)?

o The valuation must reflect depreciation suffered by the property

before it was burned.

o SMC had a building worth 100M, which burned. But

instead of depreciating, the value of construction

materials that year skyrocketed. So SMC is trying to

recover insurance based on those new prices. But theinsurer claimed SMC thus was underinsured in this case.

SMC said that it was not, based on the old prices. What

happens?

SMC cannot use new valuation for the amount to be

recovered, and old prices to disclaim underinsurance.

• What is the effect if the insurance gives the insurer the option to

rebuild the property instead of paying?

o This is valid. The contract is novated and it becomes a

contract for a piece of work.

o The insurer becomes liable for quality of the work done.

Casualty insurance

• If intentional injuries caused by the insured or a third person are

excepted, what does “intentional” mean?

o Exercise of reasoning faculties, consciousness, and volition of

the person.

o It is the intention of the person inflicting the injury that controls.

o Usual accident policy doesn’t cover death or injury caused by

assault or murder. You have to pay extra to cover this.

• What does “accident” or “accidental” mean?

o No technical meaning. Something that happens by chance or

fortuitously, without design or intention.

o Is this the same as “no fault”? No. It just distinguishes itself from “intentional.”

• What is the rule on third party liability?

o There can be a provision allowing a third party to directly sue

the insurer.

But the insurer is not solidarily liable; just directly

liable. The liability of the insurer is contractual, not

quasi-delictual. The liability of the insurer is limited by

the policy.

o If there is no such provision, the contracts are separate, so the

third person cannot sue the insurer.o What if the indemnity is against actual loss or payment?

The third party cannot sue the insurer, because it has

to wait for the insured to pay him. The insured

recovers from the insurer.

o What if the indemnity is against liability?

The insured need not pay first before proceeding

against the insurer.

• Is the insurer liable even if the insured commits criminal

negligence?

o Yes. This is still accidental. What is not covered is intentionalor deliberate criminal acts.

• A guy was showing off his gun. A friend asked if it was loaded,

and he said no. To prove it, he pointed the gun at himself and

pulled the trigger. There was a bullet. He died. Can the heirs

collect?

o HELD: Yes, because it was accidental.

o JJ’s viewpoint: No, because he was stupid.

56



• Sometimes, there is a clause where the insurer will defend the case on

behalf of the insured in court. In a case, the insured sued the insurer

not because of the liability clause (because the insured was not yet

made liable) but because the insurer was negligent in defending the

case.

Suretyship

• What is suretyship?

o Agreement where surety guarantees the performance by

another of an undertaking or obligation in favor of a third party.

• Examples?

o Fidelity bond – contract of insurance against loss from

misconduct

o Fidelity guaranty insurance – for consideration, one agrees to

indemnify the assured against loss arising from want ofintegrity, fidelity, or honesty of persons holding positions of trust

• What is the nature of a suretyship agreement?

o Solidary agreement, but only to the extent of the contractual

amount in the bond

o The court/obligee is not concerned w/n the premium has been

paid. It will go against the surety when the obligation is not

paid or the insured absconds.

• What if the bond is not accepted?

o The principal-applicant is entitled to return of the premiums

paid.o But not entitled to return of taxes paid (ex. DST) and other

service fees, like what was spent to review the application.


If there was fault of the insurance company, leading to

denial of the application. Even the taxes paid shall be

returned.

• What is a continuing bond?

o One that will last until the end of the case. The company is

entitled to charge premiums every year.

Life insurance

•

Kinds:o 1. Ordinary life, general life, or old line policy

Insured pays a premium every year until he dies.

Surrender value after 3 years.

o 2. Limited payment policy

Insured pays premium for limited period. If he outlives

the period, he does not get anything.

o 3. Endowment policy

Insured pays premium for specified period. If he

outlives the period, the face value of the policy is paid

to him. If not, the beneficiaries receive the benefit.

o 4. Term insurance

Insured pays premium only once, and is insured for a

specified period. If he outlives the period, no person

benefits from the insurance.

No cash surrender value.

N.B. kind of like life insurance policies you take before

flying commercial

o 5. Industrial life

Insured pays premiums weekly, or monthly, or oftener

• What is the effect of death of insured through suicide?

o The insurer is only liable if the insured committed suicide after

the policy has been in force for a period of two years from date

of issue or last reinstatement, unless shorter period is provided

o If the suicide was committed in a state of insanity, the insurer is

liable too, regardless of date of suicide

The business of insurance

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• Certificate of authority from the Commissioner lasts one year

• What is the margin of solvency for insurance companies?

o For a domestic firm, the excess of its admitted assets excluding

paid-up capital, over the amount of liabilities, unearned

premiums, and reinsurance reserves

o For a foreign firm, the excess of its admitted assets in thePhilippines excluding security deposits, over the amount of

liabilities, unearned premiums, and reinsurance reserves

• Agents and brokers:

o Must be licensed

Soliciting for compensation without license –

criminally liable

o Rebate of premiums is also prohibited.

o Can agreements regarding kickbacks be enforced?

No, they are illegal.

Compulsory motor vehicle liability insurance

• “Third party” excludes

o Driver, etc.

o Relative by affinity/consanguinity within 2nd degree

o Employee [see qualification]

• What if a provision says that final judgment is needed before

liability attaches?

o It’s a void provision. If you have to wait until final judgment, it

will take a really long time.

• What is the no fault clause?o The injured third party or passenger can claim for death or

injury without necessity of proving fault or negligence, under

the ff conditions:

o 1. Indemnity shall not exceed P15,000

N.B. this value can adjust – please check

o 2. Ff proof of loss is sufficient to substantiate the claim:

If there’s death, death certificate

If there’s injury, medical certificate

In all cases, police report

o 3. Claim is against one motor vehicle only

• From whom must the insured claim against?

o If a passenger, mounting, or dismounting the vehicle, against

the insurer of the vehicle he is riding ino Else, against the insurer of the directly offending vehicle

• What is the right of the insurer paying under the no-fault clause?

o It can directly claim against the owner of the offending vehicle

• What if the claim exceeds the amount awarded under the no fault

clause?

o If the claim exceeds 15,000, then the insured canstill claim it

from the insurer, but he has to prove there was negligence or

fault.

o The insurer cannot ask the insured to waive the rest of the

claim as a precondition to pay under the no fault clause.• What are the important periods?

o Claim from the insurer within 6 months from accident

o Go to court within 1 year from denial of claim

• Importance of a license:

o If the one recovering is the driver himself, he can recover

damages even if his license is expired. The authorized driver

clause does not apply to the owner.

o If it is someone else, who is authorized, he must have a valid

license

o What if the car is unlawfully taken and driven by a person

who is not authorized?

The theft clause applies, and not the authorized driver

clause

Ex. a repairman took the car out for a joyride

Intellectual Property Law

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In general

• What do intellectual property rights cover?

o 1. Copyright

o 2. Trademarks

o 3. Geographic indications

Indication identifying a good as originating in a certain

place where a given quality, characteristic, or

reputation is attributable to the place

o 4. Industrial designs

o 5. Patents

o 6. Layout designs of integrated circuits

o 7. Protection of undisclosed information

Natural and legal persons can prevent information

lawfully within their control from being disclosed to,

acquired by, or used by others without their consent in

a manner contrary to honest commercial practices.

As long as:

• A. It is a secret

• B. It has commercial value because it is a

secret

• C. It has been subject or reasonable steps to

keep it a secret

• Differentiate between copyrights, trademarks, and patents:

o Copyright: literary and artistic works which are original

intellectual creations, protection upon creation

o Trademark: visible sign of distinguishing goods (“servicemark”

if services) of an enterprise, including stamped or marked

container of goods

o Patent: technical solution of a problem in any field of human

activity which is new, involves an inventive step, and industrially

applicable

• What are technology transfer agreements?

o Contracts involving transfer of systematic knowledge for the

manufacture of a product, application of process, rendering of

service (including management contracts), and transfer,

assignment, or licensing of all forms of IP rights (including non-

mass market computer software)

o N.B.this cannot cover mass market software such as Windows

Copyright

• Rights of intellectual creator exists from moment of creation

o Even if you haven’t registered yet with the National Library

Who owns the copyright?

One creator Creator, heirs, assigns

Joint creators, where individual parts

are not identifiable

Co-owned by authors

Joint creators, if the joint authorship

consists of separate and identifiable

parts

Copyright over the parts they

prepared

Commissioned work Creator (although the commissioning

person owns the work)

Audio-visual work For exhibition, producer

For other purposes: producer, author

of scenario, composer, director,

photo director, author of work

Anonymous Publisher

But if the writer can be identified (ex.

Quijano de Manila is Nick Joaquin,

he still gives consent)

Employee’s work in regular course of

employment

Employer

Employee’s work, if not part of his Employee

59



duties

• What are covered:

o Even choreography, musical compositions, drawings, paintings,

architecture, sculptures, computer etc.o Are email and letters also covered?

Yes. Any form of text is covered.

o Can a dictionary be copyrighted?

A dictionary can be copyrighted. While no one has a

monopoly on words, the court held that the original

writer used his judgment in selecting which words will

be used.

o For DVDs?

The producer, music composer, director of

photography, screenwriter, author of the work onwhich the movie is based, etc.

But for collecting, the producer has the right

o Architect –exclusive rights over the plans he makes.

Also covered by special law

You cannot use these same plans to make another

building

• Are derivative works also covered by copyright?

o Yes, but you have to get the consent of the original creator.

Examples of these are dramatizations of novels,

translations, or adaptations (ex. Miss Saigon, from

Madame Butterfly)

o What about compilations?

Yes, they are covered by the rule on derivative works.

This involves judgment of, for instance, the best

Filipino short stories. So he has to get the consent of

those whose stories he included in the compilation.

And if someone else wants to make another

compilation, he cannot use the same set of stories

since these were chosen by the first compiler; unless,

of course, he gets permission.

• What is the main principle?

o To be protected it must be original.

• What are not copyrightable?

o

1. Mere data, idea, procedure, system, etc. even if embodied ina work

o 2. News of the day or miscellaneous facts amounting to press

information

o 3. Official text of legislative, administrative, or legal nature, and

their translations

o 4. Works of the government

But if the work will be economically exploited, need

permission of the government agency

• Transfer or assignment of copyright:

o

If you sell, mortgage, convey your copyright, you must registerit with the National Library to bind third parties.

o The transfer or assignment must be in writing

• What if an author’s work is distorted?

o Owner can object to the distortion of his work.

o Will transfer to new media distort a work?

No.

• How long is the copyright?

o Lifetime of author + 50 years

o What if there are several authors?

From death of last author

o What if the author is anonymous? Count 50 years from first publication (commence from

Jan 1 following the date of publication)

What if the author’s identity is found out?

• You change the period to his lifetime + 50

years

o What if it’s work of applied art (artistic creation with

utilitarian functions or incorporated in a useful article)?

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25 years from making

o What about broadcast?

20 years from date of broadcast

o They are not extended by assignment

• The economic rights of author – need his permission for:

o

1. Reproduction or substantial reproduction (ex. photocopyingan entire book)

o 2. Derivative works

o 3. Public distribution or exhibition

Businesses started playing certain songs to drum

up business. Is this exploitation of the work?

• Technically, this is economic exploitation of

the work.

Ex.The character Charlie Brown is copyrighted. So

sporting goods cannot use Charlie Brown on their

goods. Or a bakery cannot use Cookie Monster.• Some artist connoisseurs bought X’s paintings for a cheap price.

Then they sold the paintings for a fortune when he became

famous. What is X’s right?

o He must get 5% of the selling price. (Sec 200 –Droit de suede)

o This ensures that the artist benefits from the higher price

o This right exists as long as the copyright exists.

• What is infringement?

o Piracy or substantial reproduction, and so much is taken that

the value of the original work is substantially diminished

• Is infringement the same as plagiarism?

o No. Every act of infringement is plagiarism. Not every act of

plagiarism is infringement.

o Plagiarism is passing off the work of another as one’s own. It

may consist of copying verbatim the work of another w/o

acknowledgement, or rewriting in one’s own words the idea

expressed by another

BUT you cannot have a copyright over an idea. So

copying an idea is plagiarism, but not infringement.

• Must copying be substantial for plagiarism?

o No. Because infringement requires substantial copying,

plagiarism does not.

o Case: There was a book on grammar and styles of writing,

and it quoted actual literary works exhibiting those figures of

speech. There was infringement when another book copied

even the same examples.

• Is intent needed for plagiarism?

o Law requires bad faith or intentionality

o But academic institutions as a matter of discipline remove this

requirement

• There must be copying for there to be infringement. How do you

establish this?

o Through circumstantial evidence

o Ex. a book has a missing page 23. Another book that is similar

is also missing page 23.• Action for infringement. Remedies?

o 1. Injunction to restrain infringement

o 2. Payment of damages

Within 4 years

But usually it’s hard to prove the amount lost since

infringers do not have accounts or receipts. So

usually temperate damages are awarded.

o 3. Order delivery under oath of the infringing works and

tools/instruments that produced the work

Moral and exemplary damages awardedo 4. Criminal case

• When is there no infringement of copyright?

o [Limited use]

o 1. Used for the benefit of a charitable institution, or if privately

and for free

o 2. Ephemeral recordings by broadcasting organization using

own facilities for broadcast use

Production of works as part of current events

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Ex. newscast covering ribbon cutting in an event, and

the camera caught a mural in the footage – this is

valid use, the artist cannot demand money

o [Valid purpose]

o 3. Used as teaching aid

Ex. using Filipino folk dance songs to teach nativedances

o 4. Used for judicial proceedings or giving advice

Ex. citing law book in legal opinion or memorandum to

court

o 5. Fair use

For criticism.

• Ex. quoting portions of a book for comment

For research and private study

o [Back-up]

o 6. Reproduction by libraries of fragile works, isolated articles in

composite works, brief portions of published work, or to

preserve or replace a copy

o 7. One back-up copy of computer programs

• Four factors to determine fair use:

o 1. Purpose

If one is citing portions of a work because one is

writing a brief or a thesis, is this fair use?

• Yes.

If one is citing portions to use for an anthology, is

this fair use?

• No. This is economic exploitation

o 2. Nature of work

What is example of nature preventing copyright?

• Trying to copyright the phone book – invalid

because of nature of the work

Example of a statement that can be reproduced?

• Ex. simple fact – that Rizal died on

December 30. Cannot claim that one stole

that fact from another book.

o 3. Extent

Amount of work used

Infringement requires substantial copying. But thisdoes not just involve quantitative, but also qualitative

• Ex. ‘Quoth the raven “nevermore”’ is just five

words but is qualitatively the heart of the E.A.

Poe’s “The Raven”

• Ex. In a satirical work, you are poking fun at

another work. For it to work, the

viewer/listener must identify the work being

satirized. So copying must really be

substantial.

Libraries can make photocopies (ex. the book is

fragile already ex. Maximo Kalaw’s The Malolos

Congress or Apolinario Mabini’s books). If you only

need isolated portions of the work for a thesis or

research; instead of photocopying the whole book,

you can just copyright the 10 or so pages.

To complete a set, where it is missing one book or so,

and it cannot be procured – the library can borrow a

book and photocopy it

o 4. Effect on the market

Patents

• What can be patented?

o 1. Any technical solution to a human problem which is new,

involves an inventive step, and industrially applicable

Ex. Machine, computer, cellphone, product,

medicines, process, etc.

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Example of process:

• Developing a synthetic replacement for wood

alcohol to prevent jamming the barrel of a

gun

o 2. An improvement on current machines

Ex. colored television, 3G phoneso 3. Microorganisms created artificially in a laboratory

Ex. those to combat oil slicks

Budapest treaty: governs the patentability of

microorganisms

• What cannot be patented?

o 1. Discoveries –

Newton cannot patent the law on gravity

But he can patent inventions based on it

• Ex. parachutes

o 2. Mathematical methods, scientific formulae, schemes, forms,

or methods to do mental acts

o 3. Methods for treatment of animal or human bodies

If patented, patients have to pay royalties to get

treatment, which is not humanitarian

Contra: machines used for treatment can be patented

o 4. Plant varieties, animals, etc.

o 5. Aesthetic creations

Covered by industrial design

o 6. Against public policy

Ex. invention to help commit suicide

• To patent an invention:o 1. New

When is it not “new”?

• 1. Already available to the public anywhere in

the world

o Ex. a plow

• 2. Prior filed or effective patent, utility model,

or industrial design

When is prior disclosure of the information in the

patent in the 12 months preceding application for

patentnon-prejudicial?

• 1. Disclosed by the inventor

• 2. Disclosed by the patent office and the

information was in an application filed by theinventor or a third party who got the

information from the inventor but did not get

his consent in filing the application

• 3. Disclosed by third party who obtained the

information directly/indirectly from the

inventor

o 2. Involves an inventive step

If it is useful, but it is not an invention and anyone with

mechanical skill can do it – it cannot be patented

Ex. putting a block of wood over two rollers to rewind

printer ribbon is not patentable. It does not show

“flash of genius”

o 3. Industrially applicable

Something that spins perpetually. Has no industrial

use, so it cannot be patented.

• The rule on invention patents: who wins?

o First to file gets the right.

o The same rule applies for industrial design

o Must be registered with intellectual property office.

• What is the first-to-file rule?o First to file – first to apply – wins.

o If they file the same day, they will be joint owners of the patent.

o What is the right to priority for a foreign registered patent?

If there was an earlier application for patent filed in a

foreign country that allows same rights for Filipino

citizens, then one can use that date of filing in the

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foreign country as the same date of filing in the

subsequent Filipino application

Provided, that it is filed within 12 months of earliest

foreign registration and the local application expressly

claims this priority rule

• What is the remedy of the actual inventor after proving in court thatthe one who filed attained it through fraud?

o 1. Order patent to be cancelled OR

o 2. Substitute the actual inventor in the patent (alternative)

• If two or more persons invented it?

o The patent is owned jointly

Ex. Wright brothers over flying machine

o What if it is commissioned?

Follow their agreement.

If there is none, the one who commissioned the work

owns the patent.

o What about employees?

If it is part of his duties, it belongs to the employer. If

it is not, he owns the patents.

• Ex. an employee in the NFA invented a

machine to salvage rotten rice. It belongs to

him because it’s not his job to do it.

• What is the value of registration?

o Assignments – in order to bind third parties – must be

registered with the Intellectual Property Office. Otherwise,

subsequent buyers or mortgagees in good faith will be

protected.

• What is an industrial design?

o Any composition, lines, colors, etc. which form a pattern for

making a product. Ornamental design may be copyrighted

Ex. design for jewelry, clothes, shoes, cars, tiles, etc.

o Compare to:Integrated circuits – electronic components of

digital equipment (ex. cars with electronic keys, elevators, etc.)

• What is required for it to be registrable?

o The design must be new.

Someone copied a design for a suitcase from a

foreign catalogue. This is cannot be registered under

industrial design.

Someone registered as industrial design the Y design

on jockey briefs.• How long is the term of protection for ID?

o Term of protection for industrial design is 5 years, renewable

for two consecutive terms of 5 years.

EXCEPT: period of 10 years for layout design

o Period starts from first commercial exploitation anywhere in the

world

• Compare patents and industrial design:

o Limitations of the right of owners of industrial design are the

same as patents, but industrial design cannot be the subject of

compulsory licensing• What is the term of a patent?

o 20 years from date of filing of application

• What is infringement?

o Infringement is the making, using, or importing of the patent of

the product without authorization by the owner

o But importation of medicines has been excluded – parallel

importation is allowed(see notes below)

• What are the grounds to cancel registration of a patent?

o 1. What is patented is not new or patentable

o 2. Patent does not disclose the invention in a manner

sufficiently clear and complete for it to be carried out by a

person skilled in the art

o 3. Patent is contrary to public order or morality

• Two tests to determine infringement:

o 1. Literal infringement

When you file an application for a patent, you submit a

claim explaining how the product works. If you

64



compare the patented product with the claim, and it is

exactly the same, then it is literal infringement.

o 2. Doctrine of equivalence

If you appropriate an invention and make some

changes, but it performs substantially the same

functions, and it achieves the same results, it’s thesame thing.

N.B.Having the same effect, but not proving that it

achieves it through the same means does not prove

equivalence

• What is contributory infringement?

o Aside from the infringer, anyone who induces the infringer or

provides the infringer with the component knowing that it is

specially adapted for infringing and not for any other use is an

infringer too.

o Betamax case: the VCR was alleged as being used to pirate,

but it was proved to be usable for lawful purposes

• Is an improver an infringer?

o Yes, if there is no consent from the owner of the patent.

• What if there is a pending petition to cancel a patent?

o A petition for infringement may prosper, because it is still

effective.

• Can a foreign corporation not doing business here sue for

infringement?

o Yes, as long as its country gives Filipinos reciprocal right to do

this.• Defenses against infringement?

o 1. Prescription

Action prescribes after 4 years from infringement

o 2. Patent is not new or patentable

o 3. Patent does not disclose an invention in a manner that will

make a skilled person to make that invention

o 4. Against public policy

• Remedies?

o 1. Damages

If the damages cannot be readily ascertained, the

court can award reasonable royalty

Court may treble the actual damages (equivalent to

exemplary damages) – so trebling and exemplary

damages are mutually exclusiveo 2. Injunction

o 3. Destruction of infringing product and implements used to

make that product

o 4. Cancellation of patent if the invention is not new, patentable,

or does not disclose the invention sufficiently to make a person

skilled in the art to produce it

o 5. Criminal action against the infringer for repeated

infringement even after finality of judgment against him

• Cheaper Medicines Law amendments:

o The CML provides for what medicines cannot be patented.o If you just discovered anew form for the medicine it is not

patentable as a separate invention.

Ex. Medicine sold in liquid form, and then converted to

capsule form. It cannot be patented.

o Neither if you just discover anew property, but did not add a

new chemical reagent.

Ex. Viagra was originally used for heart ailments, but

serendipitously they discovered it can cure erectile

dysfunction. It cannot be patented again because

there was no chemical reagent added.• Voluntary licensing:

o IPL regulates technology transfers.

o There was a decree providing for regulation of technology

transfer arrangements. We cannot abolish it, for being

constitutionally mandated, so it was restored, when initially

omitted.

• Prohibited provisions in licensing agreements:

65



o [Anti-competitive measures]

o 1. That the licensee must get goods, products, raw materials

from specific sources. Then the license becomes a captive

market of the supplier.

o 2. Prohibits the use of competitive technology, and the

technology transfer agreement was not exclusiveo 3. Require that the technology recipient should not contest the

validity of any of the patents of the tech supplier

o [Too much control]

o 4. The licensor can fix the sale or resale price of the products

produced under the license

o 5. Restricting volume and structure of production

o 6. Prohibit the licensee to export the product, except if it is

because some other country has exclusive contract with the

owner of the patent

o [Exploitative benefit to licensor]o 7. Gives licensor option to buy the product used by the licensee

(purchase option)

o 8. Obligates licensee to transfer for free to the licensor the

improvements or licensed obtained through the licensed

technology

o 9. Exempting the licensor from obligations under the

agreement or to third parties brought about by suits re: use of

the licensed product

o [Beyond actual use]

o 10. Require payments of royalties for patents which are notused

o 11. Restricting use of the technology even after expiration of

the patent

o 12. Require payment of patents after expiration of agreement

o [Anti-adaptation]

o 13. Restricting R&D of the licensee which gear towards

adaptation/application of the technology to local context, or for

new products, processes, or equipment

o 14. Preventing licensee from adapting imported technology to

local conditions or introducing innovations to it, as long as it

does not impair the quality standards imposed by the licensoro [Catch-basin]

o 15. Analogous cases

• Law provides compulsory provisions:

o 1. Philippine Law must govern

o 2. In case of litigation, proper court in the Philippines governs

o 3. If there is arbitration, venue is Philippines or a neutral

country only

Governed by UNCITRAL rules or ICC ONLY

o 4. Licensor bears all taxes

• When may the IPO grant exceptions from prohibited or mandatory

provisions?

o If there is substantial benefit for the country:

High technology content

Increase in for-ex earnings

Generate jobs

• What if the agreement does not comply with the prohibited or

mandatory provisions?

o It is unenforceable

• What is the right of the licensor and licensee?

o The licensor is not prohibited from entering into licensing

agreement with a third person or exploiting the subject matter

himself

UNLESS there is provision to the contrary

o The licensee can exploit the subject matter of the agreement

during the whole term

• What are rules on the rights of the owner of the patent?

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o 1. For patented products: restrain, prohibit, and prevent

unauthorized persons from making, using, selling, or importing

the product

o 2. For patented processes: restrain, prohibit, and prevent

unauthorized persons from using the process or

manufacturing, dealing with, using, selling, or importing any

product obtained directly/indirectly from the process

• What are the limits on these patent rights – i.e. when can the owner

of the patent not claim the rights above?

o 1. When product has been put on the market by the patent

owner or with his consent

If you bought the patented product, you should be

able to use the product. So the old rule that you can

buy an IBM product but you cannot use it unless you

pay a royalty is not allowed.

The moment a patented medicine is allowed to be

used anywhere in the world. Ex. it was registered in

the US and the inventor allows it to be used

elsewhere, automatically you can use it here. (Of

course you must buy the patented medicine)

o 2. Charitable purpose

o 3. Valid parallel importation

o 4. Where the act is done privately, for non-commercial

purposes

o 5. Used for educational/scientific purposes

Once a patent expires, the owner loses his exclusive

rights and anybody can make that invention. But in

the case of medicines, use of that for experiment

should be allowed even if the patent has not yet

expired. You need lead time to study that medicine

(ex. 3 years), so the moment the patent expires, they

will be ready to produce that medicine.

o 6. Act is to prepare a medicine in accordance with prescription

or acts concerning the medicine so prepared, by a pharmacy or

medical professional, for individual cases

o 7. Government or a 3rd person authorized by government may

exploit an invention when public interest, national security,

safety, etc. requires it Ex. if there is public health need for a medicine and

the demand is not fulfilled by the supply, the

government can import it

If a person is allowed to use it for these needs, the

use isnon-exclusive (so others can use it too) –

• This use can only be enjoined by the

Supreme Court

o 8. Invention is used in a ship, vessel, craft, or land vehicle of

another country entering Philippine territory temporarily or

accidentally

It must be exclusively used for the vessel

• What is the prior user rule?

o When there is a prior user in GF of the invention or has

undertaken serious preparations to do so, before the filing or

priority date of the application by another, the prior user can

keep on using the invention even when the patent is granted to

another.

o The right of the prior user may only be transferred along with

the enterprise or business, and not separately.

• When can the government use the invention even without prior

agreement by the patent owner (compulsory licensing)?

o 1. National emergency

o 2. Public interest/national security, health, development of vital

national economy

o 3. Judicial or administrative determination that the exploitation

of the patent has been used for anti-competitive purposes

o 4. Has not satisfied the demands of the market (for medicine)

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o 5. Public non-commercial use of the patent with no satisfactory

reason

o 6. Where the demand for patented medicine is not being met,

and on reasonable terms determined by the Sec. of Health

• What is the effect/role of compulsory licensing?

o N.B.Most cases involve medicine.o Compulsory license in medicine usually is done to decrease

prices through competition

• Petition to compulsory license:

o Can only be filed after four years from filing of the application of

the patent, or three years from the date the patent, whichever

ends later must fall within both periods

o Medicines anytime

• What are the terms of the licensing agreement?

o Usually parties are given time to negotiate terms and

conditions of compulsory license, but then the Director will stepin after

Trademarks

• What is a trademark?

o Visible sign capable of distinguishing goods/services/enterprise

Ex. including Coca-Cola bottle, which was specially

designed

• What can be a trademark?

o 1. Anything fanciful can be used as a trademark. If a word is

arbitrary and fanciful, it is entitled to immediate protection.

Ex. “selecta” (Spanish word for selected), maiden

form bra, Big Mac, “Citi”

o 2. “Secondary meaning” is only required if it is originally not

trademarkable, but after long use, it has acquired another

meaning

• What cannot be registered?

o [public policy]

o 1. Immoral

o 2. Public order or morality

o [same or misleading]

o 1. Identical with a registered mark

A. Referring to same goods/services or closely related

goods/services• Ex. Ang Tibay is registered for shoes and

slippers. Ang Tibay cannot be registered for

pants and shirts, because they’re both

haberdashery products and it’s reasonable to

assume they expanded.

B. Not exactly identical but one is a colorable imitation

that could cause confusion(see tests below)

C. Too similar to a trademark known around the world

D. Identical to a translation of a foreign trademark

•

Ex. Promesa soaps becomes “promise”

o 2. Deceptive

o 3. Likely to mislead public – publicly known symbol

Ex. red/white/blue barbershop pole

o [relating to persons]

o 4. May disparage or falsely create belief that it is related to a

person living or dead

o 5. With signature of living individual unless with his consent

o 6. Name of deceased president during lifetime of the widow,

except with the latter’s consent

o [generic symbols]

o 7. National symbol

o 8. Flag of Philippines or other foreign country

o 9. Uses geographical indicator known for that product

Ex. Isabella tobacco

o 10. Signs that are customary or usual in everyday language

o 11. Signs that are used to designate the kind or quality of the

product

Ex. “Shoes” or “Funeral Parlor”

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o 12. Over a color or shape

o 13. Emblem of the United Nations (under special law)

• What if the applicant is registering a similar trademarkfor closely

related goods?

o The prior trademark will be protected.

o

Examples of closely related goods (INVALID): Ex. X-7 Soap X-7 Pomade (both bathroom

products)

Ex. Wonder Beauty Soap Wonder Laundry Soap

o Examples of not closely related goods (VALID):

Ex. Esso Oil =/= Esso Cigarettes

Ex. Bruth briefs =/= Bruth soaps

Ex. cigarettes =/= liquor

Ex. Jollibee sandals =/= Jollibee restaurant

• What are the tests to determine if two products are confusingly

similar?

o 1. Dominance test

This looks past trivial differences

This applies if a questioned TM contained the main

pictures of the older TM, such that confusion would

likely result

Deception need not be actually proved

Ex. Both Paddock’s and Dockers jeans had the words

as the dominant design, and not the eagle, so it’s not

confusingly similar to Levi’s

o 2. Holistic test

Consider the TMs in their entirety

What must be considered?

• 1. Relevant market (is it targeted to

physicians? Illiterate household helpers?)

• Ex. Physicians are less likely to be confused

• 2. Kind of product, since more expensive

products will have more prudent buyers

o Ordinary household items are not

purchased with great care.

Examples:

• Ex. “Fruit of Eve” was challenged by “Fruit of

the Loom.” Fruit of Eve was rectangular with

concave sides, and just had a green apple.Fruit of Loom was circular, and had a red

apple, with bananas, and grapes.

• Ex. Lorenzana Patis had a carp. Lorenz

patis had a bangus and had the same font.

• Ex. Lard was sold with a big Roman V.

Another used III

• Ex. Black Cat Tea and Black Dog Tea

• Ex. Master Roast and Famous Master, since

the dominant word is “master”

• What if the TM is internationally well-known?o It can be protected even if not sold here, whether or not

registered

o Passage of time will not bar action to protect that international

trademark

• What is the rule on secondary meanings?

o Trademarks which originally may not be registrable may be

registered if it already obtained a second meaning.

Ex. “California manufacturing”

• Not just the State but the manufacturer of

Lady’s Choice mayonnaise Ex. Some colors or shapes

o What are the requirements?

1. The use of such as a trademark must be exclusive

2. The name has been used for at least 5 years (“long

period of time,” according to law)

• Is prior use necessary to register a trademark?

o No. Prior use is no longer a requirement to register a trademark

• When must a registered trademark be used?

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o Within 3 years from registration

o What if you did not use it?

If you did not use it, you must file an affidavit of non-

use and explain why. Otherwise, it will be cancelled.

o What is the ONLY acceptable reason?

Force majeure N.B. other reasons like “poor economy” are invalid

• How long is the duration of registration?

o 10 years, with indefinite renewal for similar periods

• What if someone just imports or distributes a foreign product?

o He cannot register the TM. He does not own it.

• Can a TM be assigned or transferred?

o Yes. A trademark may be assigned or transferred without

transferring the business.

• What is the principle in registration?

o The law adopts the Torrens principle. If the assignment is to

bind third parties, it must be registered in the IPO.

o Otherwise a third party may buy it in GF.

• What are theinter partescases (contested cases before the IPO)?

o 1. Opposition against registration of mark

Within 30 days after publication

• Ground: registration will damage the

oppositor

o 2. Petition to cancel the registration of mark

A. Within 5 years of registration

• Ground: confusingly similar

B. Any time

• Grounds:

o 1. Mark became generic (“aspirin”

became generic, “cellophane,”

“Thermos” bottle)

o 2. Abandonment – failure to use for

uninterrupted period of 3 years

o 3. Misrepresentation of source of

goods

o N.B. compare this with periods for actions under copyright and

patent – which are generally both 4 years

• When is there infringement of trademark?

o Use, copying, etc.o Includes preparatory steps to carry out the sale of goods

This applies to those who make fake shirts. They

make the shirts first, without attaching the label. They

will only sell the label when they are about the sell the

shirts. So this way, even if they haven’t attached the

labels, the manufacturer can be held liable for

infringement.

o Copying, counterfeiting, making colorable imitations of TMs

and using it for labels, packages, etc.

• Three elements to prove infringement?o 1. The TM is valid

o 2. The plaintiff owns it

o 3. There is likelihood of confusion due to use of defendant

• When is registration not needed for an action?

o 1. For unfair competition

A. Passing off a product format of another

B. Giving goods the appearance of another

o 2. False designation of origin

• The law says the right is acquired from time of registration. When

is this counted?

o From filing of the date of application

o Or from the priority date. This is when there is actual

registration in other countries covered by the reciprocity rule.

• Types of confusion?

o 1. Confusion of goods

o 2. Confusion of business

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Goods are different but the product can be reasonably

assumed to originate form the plaintiff, deceiving the

public

Chattel Mortgage

• What are the requisites of Chattel Mortgage?

o 1. Constituted to provide security for a principal obligation

If the principal obligation fails, there can be no CM

o 2. The mortgagor must be the absolute owner of the property

mortgaged

X bought a car and placed it up for CM. But when he

signed the CM mortgage, the car hasn’t been

delivered to him yet.

• HELD: Cannot CM the car because delivery

is needed to transfer ownership.

Seller sold an oil tanker, and seller has not been fully

paid. They agreed the buyer will not register the

property until there has been full payment. The buyer

breached the agreement and registered it.

• HELD: The registration was valid, because

the mortgagee was in GF and the buyer was

the absolute owner by that time anyway.

o

3. Must have free disposal of the property Trustee cannot CM property because he has no free

disposal

o 4. Must be personal property

Ex. moving vehicles, shares of stock, machinery

placed by persons on property of another, etc.

Can personal property considered real property

under the NCC by subject to CM?

• Yes.

What is the status of standing crops?

• They are real property under the NCC but

personal property under CM Law, so it can

be chattel mortgaged.

•

Property which may be real property underthe NCC may be personal property under

special law.

The parties considered the house as personal

property, and subjected it to CM. Does it bind

them and third parties?

• By estoppel this classification binds the

parties. But this does not bind third parties,

because it will not occur to third parties to

check with the CM registry if real property is

treated as personal.

o 5. Mortgage must be registered

If the residence of the mortgagor and the property are

in different places, they must be registered in both

places

• Ex. Shares of stock have situs in the

principal office of the corporation (ex. Makati)

and the mortgagor lives in Pasig. It must be

registered in both.

Register with appropriate specialized agency:

• If Motor Vehicle, with LTO, aircraft, Civil

Aeronatics, ships, Maritime office, copyright,

National Library, trademark, IPO.

What if it is not registered?

• Valid between the parties, but not against

third persons.

o 6. Affidavit of GF

What if there is no affidavit of GF?

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• Binds the parties, but not third parties.

But if a third party actually knows of the execution of a

CM and the CM was done in good faith, it will bind the

third party.

• Can the CM extend to improvements and future property?

o No.o Contra:In REM, the mortgage extends to improvements

introduced on the real property by the mortgagor.

Ex. REM over land with one property, and another

building is built, the REM extends on it.

o There was a CM over machines in a factory. But then more

machines were introduced later on. Does the CM extend

over the new improvements?

No. Because the machines were treated as personal

property so the parties are estopped and cannot apply

the REM principle.• Can a CM secure future loans or indebtedness?

o No. Cannot constitute CM to provide security forfuture

indebtedness, whereas REM can be used to do this. The

provision that it will cover future loans isvoid.

You can amend the CM over the first loan to cover the

new one if the first loan still exists.

If the first loan has been extinguished, you constitute

a new CM.

o Because here, the parties have to swear that they constituted it

to secure a valid obligation and not to defraud creditors.o You cannot swear by an obligation that does not exist yet.

• Someone mortgaged his car and it was completely wrecked,

collected money from Insurance, and bought a new car, does the

CM cover the new car?

o No. Must constitute a new CM.

• Who owns the property under CM? Can he sell it?

o Still the mortgagor. He can sell the property since he retains

ownership.

o The sale is valid, but he can be liable under the RPC for selling

something that has been mortgaged under CM Law.

• If a personal property was mortgaged and the mortgagor has a

judgment creditor who levied on the property mortgaged, whowins?

o The creditor must respect the CM. He can only garnish on the

equity of redemption and not the property itself.

• If the mortgagor defaults, can the mortgagee appropriate the

property?

o No. This is pactum commissorium which is invalid.

o Can the mortgagee take the property?

Not forcibly. He can file for replevin to get it, and then

sell it.

•

Is a private sale of the property to foreclose valid?o Yes.

• To foreclose, what is needed?

o 1. Publication in the newspaper is not needed,

o 2. Notice must be posted in two or more public places, where

the mortgagee resides or where the property is located at least

10 days before the sale.

o 3. Notice to mortgagor

o What if there is a stipulation as to where the property must

be sold?

It must be followed

• What if the proceeds of the foreclosure exceed the amount owed?

o Return to the mortgagor.

o If there is deficiency, the E can run after mortgagor for it.

o Exception?

Art 1484. Sale of property payable in installment

basis. If sale was done to cover for the balance of the

price, if the foreclosure sale results in deficiency, the E

can no longer sue for payment of the deficiency.

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Extrajudicial foreclosure of REM

• What is required before property can be foreclosed extra-

judicially?

o There must be stipulation giving the mortgagee a SPA to

foreclose it extra-judicially.

• If a loan is overdue, what will not preclude foreclosure of the REM?

o 1. Allegations that the mortgagee did not furnish the mortgagor

an updated statement of account

o 2. Negotiation for restructuring of the loan

• What is the rule on interest rates?

o While the ceiling rates on interests have been lifted by the

monetary board, it doesn’t mean the parties can stipulate on

any rate of interest. If it is unconscionable, it will be void.

Ex. 5% a month or 6% a month arecontra bonus

mores for being unconscionable.

o What is the effect of this on the foreclosure?

The foreclosure is thus void, because you have to first

determine the amount that is properly due to the

mortgagee.

o What if the provision says the bank can unilaterally

increase the interest?

The provision is void, violating mutuality of contracts

in the NCC. The parties have to agree in advance a

formula on how to increase the interest rate. This will

make the formula valid.

• What if the foreclosure was done in another place as opposed to

what was stipulated in the agreement?

o Valid. If there were no words of exclusivity, there is waiver of

venue (Rule 4 of ROC).

• What is the notice requirement?

o 1. Notice must be published once a week for 3 consecutive

weeks in a newspaper of general circulation

N.B.If you publish it on Monday the first week, it must

ALWAYS be Monday the next two weeks. Not

Wednesday or Friday.o 2. It must be posted in 3 public places where the property is

located

o Is personal notice to the mortgagor needed? What if there

is failure to do so?

No need. No effect.

o What if there was no posting but there was publishing?

It is sufficient.

o What if the sale is postponed?

You must give notices again through posting and

publishing.o What are the exceptions?

1. Sale not finished that day and will continue the next

day

2. Waiver (see below “What if mortgagor talks to the

bank…”)

o What if there are clerical errors in spelling the name of the

mortgagor?

If the property is properly described, then it is valid.

o But what if the notice puts the wrong date when the

mortgage was executed?

This made the foreclosure invalid because there was

no mortgage constituted on that date

• What if the mortgagor talks to the bank before foreclosure

promising to pay the loan, and the bank makes him sign a waiver

of republication, is it valid?

o Yes.

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o While commentators have said that third parties who want to

buy the property will be prejudiced since they did not know, this

waiver is valid because it is for the benefit of the owner of the

property.

• Can the foreclosure be done by a Notary Public and not a sheriff?

o Yes, although the courts now require the payment of filing feesfor foreclosure even if it is a notary public who does it. The

judge also has to confirm it after.

• To what extent does Rule 39 apply to EJ foreclosure of mortgage?

o Only to the extent of redemption.

o But not for other provisions, such as the requirement in Rule 39

that the sheriff must sell the properties one by one and stop as

soon as the loan is covered. So if a subdivision developer

mortgaged all the lots, they can be sold in EJ foreclosure lump

sum.

• What happens to the excess or deficiency after foreclosure?o Excess goes to mortgagor

o Mortgagee can sue for payment of deficiency

• Is there a right to redemption?

o Yes.

• How do you redeem?

o 1. Tender the correct redemption price, or

o 2. File a case to compel delivery of property for redemption

(tantamount to tender of payment)

BUT this doctrine is based on the premise that the

redemption price is not settled. If the redemption

price is not disputed, this doctrine does not apply. If

after filing the case, the redemption price was

determined when before it was unknown, he must

then tender the redemption price.

• Can the parties agree to extend the redemption period?

o Yes, this is valid.

o Ex. In a case, the sheriff placed that there are 2 years to

redeem and the bank-mortgagee did not object.

• Under the Banking Law, i.e. the mortgagee is a bank, what is

provided?

o If the mortgagor is a natural person, he has one year to

redeem. If the property is covered by Torrens title, count fromregistration of the sale.

o If the mortgagor is an artificial person like a corporation, the

redemption period is three months from date of sale or the date

when the deed of sale was registered – whichever comes first.

• In the ROC, if real property is sold on execution you have to pay

1% per month for interest. What if the lender-mortgagee is a bank?

o The rate stipulated on the loan document governs.

• What if there are two loans falling due on two dates, where one

was due, and the second fell due during redemption?

o The R must pay for BOTH loans; otherwise the first redemptionis not valid.

• What can the buyer of the foreclosed property do?

o He can ask for a writ of possession. Granting this is ministerial

and non-litigious. This is ex parte and there is no need to

require presentation of evidence.

o He must just allege that there was a valid mortgage, default,

foreclosure sale, and the sale was according to Act 3135.

• When can you ask for a writ of possession?

o Either during redemption period or after lapse of redemption

period.o Does the rule in Rule 39 where enforcement of decision is

through motion for 5 years and independent action til 10

years apply here?

No. This right is imprescriptible.

o What if you enter into a new contract – ex. a K of lease?

74



That new contract will govern the relationship of the

parties. You cannot file for writ of possession – you

file for ejectment.

o To whom can the writ of possession not be enforced

against?

The writ of possession cannot be enforced against athird party who is in possession of the land in GF and

is not in privity with the parties in the mortgage. The

case has to be ejectment.

o What if the owner-mortgagor of the property has a lessee

on the property?

A lessee stands in privity with the owner of the

property so the lessee has to respect the writ of

possession.

But the writ of possession cannot be enforced

against the lessee when:• 1. The lease hasn’t expired and it is

annotated on the title

• 2. The lease is not annotated but the buyer

has actual knowledge

• 3. House Rental Law: if the property of the

apartment is covered by the House Rental

Law, the buyer must honor the lease even if

it is not registered. He cannot evict the

tenant until the expiration of the contract

o What if a third party’s rights are adverse against the

owner-mortgagor?

If the rights of the third party are adverse against the

mortgagor, it cannot be enforced against him because

it violates due process. It violates their rights without

prior hearing.

• Ex. A third party claims that he bought the

property prior to it being mortgaged.

• How can the mortgagor question the validity of foreclosure?

o Within 30 days from when buyer takes possession, the

mortgagor can file a petition to annul the foreclosure sale.

N.B. if he fails to file the petition within the 30 day

period, it will be barred.

o

But what if possession hasn’t been delivered yet (sinceyou count the period from there)?

When no writ of possession has yet been issued, the

mortgagor can file a case to litigate to question the

validity of foreclosure (ordinary civil case)

• What if the owner’s duplicate remained with the mortgagor (since

he failed to surrender it), and there was failure to register?

o The court should order the register of deeds to annotate the

deed of sale even if the owner’s duplicate was not given.

o Otherwise, the owner can prevent mortgage from being

effective just by withholding the owner’s duplicate.

N.B.for other aspects of CM Law and REM Law, see Civil Law and

Remedial Law notes.

Truth in Lending Act

• What is the purpose of the law?

o To protect citizens from lack of awareness as to true cost of

credit by assuring full disclosure of the cost

o To prevent uninformed use of credit to the detriment of national

economy

• What is the basic obligation of the lender?

o The debtor must be informed how much it is costing him to

borrow money – the charges he has to pay

• Which creditors are covered?

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o 1. Any person engaged in the business of extending credit,

who requires a finance charge

o 2. Any person engaged in the business of loaning or selling

property/services on a time, credit, or installment basis (either

as principal or agent), who requires a finance charge

•

What does the Act cover?o 1. Any loan, mortgage, deed of trust, advance, or discount

o 2. Any contract to sell, contract of sale property or services, on

installment basis;

o 3. Lease purchase contract with financing company

o 4. Hire, bailment, lease of property

o 5. Option, demand, lien, pledge, or claim against property or

money

o 6. Purchase, acquisition of, or any credit upon the security of

any obligation arising from any of the foregoing

• What must be indicated?

o Cash price

o How much downpayment will go to the principal, and the

interest

o Total amount to be financed + finance charges

Percentage of finance charges vis-à-vis total amount

• Central bank prescribed a form to be used by banks to give this

information. But this law is not limited to financial institutions. This law

even covers private persons (5-6 lending, for instance).

o What if the form is not given to the debtor?

Need not follow the exact form, as long as the

instrument reveals the pertinent information

• Effects of failure to comply?

o 1. The credit agreement is still binding

o 2. The borrower is entitled to be paid double the finance

charges (not less than 100 pesos, not more than 2,000 pesos)

o 3. When the debtor sues the creditor for payment of finance

charges, he can get atty’s fees.

o 4. The creditor who did not comply with the law may be

prosecuted criminally

• Manual of regulation for banks

o If a bank lends more than P500,000, it can charge a handling

fee.

o

If that was not disclosed in the statement to comply with theTruth in Lending Act, the bank cannot charge the handling fee

• The statement given did not mention that the bank can increase

the penalty in case of default. Can the bank charge this increase in

a penalty?

o No.

Anti Money Laundering Act

• What is money laundering?

o Crime where proceeds of illegal activity are transacted, to

make them appear to have originated from legitimate sources

• Who are guilty?

o 1. Person who transacts the money coming from the illegal

activity

o 2. He who knows that the money came from an illegal source,

but performs acts to facilitate the transaction

Ex. Bank officer who helps open bank account, with

knowledge that the funds came from kidnapping

o 3. Person who does not comply with disclosure requirements of

law

• Who are covered?

o 1. Banks

o 2. Quasi-banks

o 3. Financing institutions (ex. financing companies, pawnshops,

investment houses, trust companies, institutions supervised by

Central Bank, insurance companies, securities dealers,

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brokers, investment houses, investment managers, mutual

funds, common trust funds, pre-need companies, foreign

exchange corporations, money changers)

o 4. Those engaged in exchange of valuable property like

jewelry, paintings, etc.

•

Does it cover real estate companies?o NO. So if someone uses illegally obtained money to buy land,

the real estate company is not required to comply with AMLA.

• What are the two kinds of transactions?

o 1. Covered transactions

More than P500,000 or its equivalent on one banking

day

Automatically, these have to be reported although

legitimate

o 2. Suspicious transactions

The amount is irrelevant, even if less than P500,000.

If it is suspicious, it mus be reported.

Ex. there is no underlying legal or trade obligation or

justification.

Ex. the transaction is structured to avoid reporting (for

instance, instead of remitting an amount more than

P500,000, everyday he remits P499,999.)

• The underlying crimes whose commission will give rise to violation

of AMLA:

o [By public officers]

o 1. Violation of Graft and corrupt practices

o 2. Plunder

o [Grave crimes with property implications]

o 1. Kidnap for ransom

o 2.Violation of dangerous drugs law

o 3. Piracy

o 4. Hijacking, destructive arson, murder

(N.B. this is the HK-MAD enumeration + piracy)

o [Obtaining property illegally]

o 1. Robbery and extortion

o 2. Jueteng and illegal betting on jai alai

o 3. Qualified theft

o 4. Swindling

o 5. Smuggling

o [Commercial violations]

o 1. Violation of e-commerce law

o 2. Securities regulation code violation

• What is the composition of the AMLC?

o 1. Governor of Bangko Sentral, 2. Chairman of SEC, 3.

Insurance Commissioner

• How are decisions reached?

o Decisions must be unanimous (all 3 of them)

• Powers of the AMLC?

o 1. Implement measures to prevent AML

o 2. Coordinate with foreign countries for enforcement of AML

o 3. Investigate transactionso 4. Recommend for prosecution

o 5. Apply for order, ex parte, for freezing accounts (with the CA)

o 6. Could institute forfeiture proceedings

o 7. Enforce sanctions for violations

• What are duties of covered institutions?

o Establish true identities of their clients

o Are anonymous accounts allowed?

No. The Bank must know who actually owns the

account, even if it’s just numbers indicated.

• What is the effect of compliance with required reporting under this

law?

o Transaction is removed from coverage of law on secrecy of

bank deposits

o The officers who make the reports in GF are given immunity

from prosecution.

• Petition for ex-parte order to freeze an account:

o Filed with the CA

o The freeze order is valid for 20 days.

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But it may extend the period

o Contra: in the case ofinquiring into deposits or investments, it

is not ex parte so the court has to conduct a hearing first.

• General rule: The AMLC must get court order to investigate any

deposit in accordance with this law. Then they have to establish

probable cause.o When is court order not required to inquire?

In case of: kidnapping, DDL, hijacking, destructive

arson, and murder (HK-MAD)

• Contrast with powers of the BSP?

o The BSP is authorized to inquire into any deposit or investment

to ensure that the Bank is complying with this law.

o It may be done in accordance with its regular annual

inspection, or through special examination.

o So the Monetary Board can inspect the accounts even without

the order.

Phil. Deposit Insurance Corporation Law

• What is the mandatory coverage of the PDIC?

o The law requires that checking accounts, savings accounts,

and time deposits must be insured with the PDIC

o Does the PDIC law cover trust accounts?

No. Remember this. It applies to deposits.

o What about other obligations of the banks?

If considered deposit liabilities upon order of the

PDIC, may be covered also

o Deposits of a branch of a domestic bank abroad (ex. BPI

has a branch abroad) – what is the rule?

Not required to be insured.

But the domestic bank may ask the PDIC to insure the

deposits of the branches abroad.

• What banking transactions are not covered by insurance?

o 1. Investment products like bonds, securities, trust receipts

o 2. Deposit accounts that are unfunded

Ex. Issued a check that bounced, so he had no

money. Then the bank closed. Cannot recover from

PDIC.o 3. Deposits from unsafe/unsound bank practices

o 4. Proceeds from money laundering

o 5. Contents of safety deposit box

• What is the maximum coverage?

o P500,000

• What is the period to claim?

o Within 2 years from actual takeover by the receiver

• Somebody has a current account, saving accounts, time deposits,

and if you add it all up, the value exceeds P500000. If the bank

closes, how much can he collect?

o P500000 only. You add it up. It’s not per account.

• What is the rule to determine what is covered?

o Add up all deposits altogether. But if he has another deposit in

another capacity (ex. guardian of minor, administrator of

estate), this is a different capacity so it’s another P500K.(“Per

capacity rule”)

o X has a separate account and a joint account (X and/or Y).

What is the rule?

Two separate accounts, one for the separate account,

one for the joint account.

The rule is that joint accounts are insured separately

from any individually-owned account.

• What if there are two or more depositors, such as in a joint

account?

o The P500K will be divided among them unless there is a

different agreement.

o What if the account is held jointly by a juridical entity and

one or more natural persons?

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It is presumed that the deposit entirely belongs to the

corporation. The natural persons are assumed to be

just officers.

• If you have a person with several joint accounts, then what is the

total he can get?

o Add all joint accounts together, and subject to the ceilingo Ex. three separate joint accounts, with A, B, and with C, then

his share will be added up and the shares on the three

accounts cannot exceed P500K

• What if the depositor owes the bank too?

o There will be set-off with what he collects.

• Two ways for PDIC to comply:

o 1. Hand over the money to the depositor

o 2. Open another account in another bank in the name of the

depositor

• What is the right of PDIC after payment?

o There is subrogation, so in liquidation of the bank, the PDIC

can represent the depositor.

• What if there is monetary or financial instability in the banking

system?

o If established by the Monetary Board, the PDIC directors may

adjust the maximum coverage. But they must be unanimous

and it will have to be approved by the President.

• What if somebody owns a negotiable certificate and it is payable to

bearer?

o He cannot collect unless his name is recorded in the books of

the bank.

• Can a person split his deposits or create fictitious accounts?

o No. It is illegal to create fictitious deposit accounts or split

deposits to circumvent the maximum liability in case of closure

of the bank.

o Ex. He has 1M so he transfers P500K to the name of his

relative.

• What is the period to pay?

o It must be within 120 days from closure of the bank. If beyond

this, there is no payment, it is a criminal act.

• Decisions of PDIC are FINAL. What is the remedy?

o Certiorari.

Corporation Law

Corporation, defined

• It is an artificial person, created by law.

o What is the implication?

It cannot recover moral damages since it cannot

experience wounded feelings, mental anguish, etc.

It can, however, recover damages for besmirchedreputation.

• It has the right of succession. What is this?

o Stockholders may come and go but its personality remains the

same

• Cannot perform an act unless authorized by law.

o As opposed to natural persons who can do anything as long as

not prohibited by law

• Does a defective incorporation result into partnership?

o No. A partnership requires delectus personarum, which is not

always existent in a corporation, so it is not a “fall back.”o But the liability of persons who form a defective corporation –

they areliable as partners.

o Those who merely subscribed are not liable as such.

Nationality of corporations

• Primary test:

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o Place of incorporation test is the principal doctrine: country

under whose laws it was organized

• When does the control test also apply in addition to the place of

incorporation test?

o 1. Exploitation of natural resources

o

2. Operating public utilities, mass media, advertisingo 3. War-time test –

During war time, the nationality of a private

corporation is determined by control test

o 4. Grandfather rule

• What is the Grandfather rule in corporations and how did the FIA

change it?

o XYZ and ABC both own 50% of the corporation. ABC is 50%

Filipino and 50% foreign. XYZ is 60% Filipino and 40%

foreign.What are the implications?

XYZ makes it 30% Filipino and 20% foreign. ABC

makes it 25% and 25%. So it becomes 55% Filipino

and 45% foreign.

• How did the foreign investments act change this rule?

o XYZ becomes 100% Filipino because it is at least 60% Filipino.

So XYZ contributes full 50% Filipino ownership, added to

ABC’s 25% = the corporation is 75% Filipino and is thus

qualified to own land.

Corporate juridical personality

• It has separate juridical personality.

• Implications?

o The corporate property does not belong to SHs. The SHs

cannot recover property or intervene in a case of the

corporation to recover property.

Case: A SH sued to annul foreclosure of a mortgage.

He wanted to annotate a notice lis pendens. This was

not allowed because he was just a SH.

Case: SH cannot question the search warrant filed by

the government against a corporation, or a

sequestration order against the corporation.

o If there is a judgment against corporation, it cannot be enforced

against property of the SHs, and vice versa.

o A SH cannot be sued if the corporation breaches its contract.• The purpose of the law is justice and fairness. Therefore, when the law

creates a device like the corporate vehicle, and it is abused, the law will

not allow that. So there is piercing the veil of corporate fiction.

• When is there piercing?

o 1. If it is used to commit fraud, violate the law, etc. (“fraud

cases”)

Requisites for this to apply?

• 1. Complete control, not just of stocks but

also policy and business practice

•

2. Control used to commit fraud or wrong• 3. Proximately causes injury or loss

Case: There was a tax imposed on the sale of cars of

a corporation. This company’s 95% owner would sell

the cars exclusively to the second corporation, owned

95% of his wife, for a very cheap price, and the wife’s

corporation sells to the public. This was tax fraud and

there was piercing.

o 2. In the internal dealings, if the SHs show that they are not

treating the corporation as a separate juridical personality

(“alter ego cases”) The corporation is only a conduit or alter ego of the

controlling SH.

Here, no fraudulent intent but there is systemic

disregard for separate juridical personality, and so

third persons could not be expected to be bound by

such

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Ex. there was a controlling SH where she gave four

minor employees 1 share each, and had the four

endorse the certificates in blank to her. The

controlling SH also confused her own funds with the

corporation’s. There were no meetings held, etc.

• Is mere control of a corporation sufficient to pierce?o No. It must be control plus something else.

o If a holding company is exercising control over management of

a subsidiary this is in itself is not enough. The management

must be control for the purpose of committing fraud.

• Against whom can you invoke this rule against?

o You can invoke this only against the majority SHs. You cannot

invoke it against minority SHs.

• Can the corporation use piercing for its favor?

o No. The underlying basis for piercing is that the separate

juridical personality is being used to commit fraud. Thecorporation cannot invoke it for its favor.

o Ex. A SH sued on behalf of a corporation, claiming that since

he was the controlling SH, the veil must be pierced. INVALID

cannot use piercing for the corporation’s favor.

• Piercing can apply even for affiliate companies:

o Ex. Merrill-Lynch Phils. was organized. The AOI said primary

purpose is to transmit orders of customers if you want to play

the stock market abroad. A client placed an order to sell his

holdings of silver. Merrill-Lynch NY delayed it, and by the time

it was sold, the price of silver plummeted. The client sued both

M-L Philippines and M-L NY. MLP said the contract was with

MLNY. MLNY said it was not doing business in the Philippines

so it cannot be sued. HELD: MLNY earns business in the

Philippines but circumvents it through MLP. So it was pierced.

• In piercing cases, how can an officer be held liable while still

respecting the due process clause?

o The general rule is that a judgment cannot bind a person not

impleaded in a case. Check if the officers were actually given

the chance to be apprised and be involved in the defense of

the case.

o If the officers were sued in their official capacity, there is no

problem. When the corporation however has ceased to existalready – it has been held as an exception to the rule that an

officer must be impleaded under AC Ransom.

• What is the corporation’s liability for torts?

o Corporation liable for a tortuous act by an officer or agent only

when the corporation has expressly directed the commission of

the act

o Who is this proved?

1. Corporation issued a resolution

2. Corporation took advantage of the act

•

What is the corporation’s liability for criminal acts?o An officer may be held personally liable for the crime per se if

there is a law expressly making the person liable for the

corporation’s criminal offense

Capital Structure

• What is needed to form a corporation?

o 5-15 incorporators

Majority are residents

Only natural persons

At least one share each

o Can a corporation be a subscriber?

Yes. A corporation can be a subscriber but not an

incorporator.

• What is the maximum corporate life?

o 50 years, extendible for additional periods of 50 years

o You can only extend in the last five years of its corporate

existence

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• Minimum required paid up capital?

o Generally, none

Except for banks, public utilities, insurance

companies, etc.

o For all, at least 25% of the authorized shares must be

subscribedo At least 25% of those must be paid.

Minimum paid-up is P5000.

o Must everyone pay for 25% of their subscriptions?

It is not required that everyone must pay 25%.

Someone can pay less, although one paid 100%.

You just have to pay the 25%, total.

• A corporation may be stock or non-stock (NS).

o Stock:

1. Must have shares and

2. Must be authorized to declare dividends

• So country clubs are NS because they

cannot declare dividends

o A government corporation is governed by its own special Law.

But the Corporation Code is suppletory to its charters.

So there can be no amendment of the Special Law

authorizing that there be less than 5 directors

because the Corporation Code is still suppletorily

applicable.

• Distinguish:

o Corporators: those who compose the corporation

o Incorporators: sign the AOIo SHs: for stock corporation

o Members: for NS

• What is the 25-25 rule?

o At least 25% of the authorized capital stock must be

subscribed, and 25% of the subscription must be paid

o What if 5 natural persons held 1 share each and the rest of

the shares are held by a holding company? Is this valid?

Yes. While a corporation cannot be an incorporator, it

can be a subscriber. You count the subscription of the

corporation to see whether the 25-25 rule is met.

• Classification of shares:

o Generally, broad discretion.

o Shares are presumed to be equal, so unless provided

otherwise, they get same voting rights, dividends.

• What are exceptions to this general rule?

o 1. Shares must not be denied voting rights unless:

A. Preferred

B. Redeemable

o 2. Banks, trust companies, insurance companies, etc. are not

allowed to issue no-par-value shares.

Because they need capital.

o 3. Preferred shares must be par value shares.

What are preferred shares as toassets?

• Priority in distribution of assets in case of

liquidation

What are preferred shares as todividends?

• Priority in distribution of dividends in case of

liquidation

Can preferred shares be given preference over

creditors?

• No, because this violates Trust Fund

Doctrine.

• Ex. You are liquidating a corporation. You

cannot benefit shares prior to the creditors.

o 4. Cumulative vs. Non-cumulative shares

Cumulative preferred shares: entitle holders to

payment of current dividends AND back dividends

before holders of common shares are paid

Non-cumulative preferred shares: entitle holders to

payment of current dividends only, before holders of

common shares are paid

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o 5. Participating vs. non-participating

Participating: entitle holders to participate with holders

of common shares in retained earningsafter the

stipulated dividend paid to preferred shares

• i.e. paid their dividends, THEN still share in

the common pie Non-participating: entitle holders only to stipulated

preferred dividends and nothing more

• This is the DEFAULT RULE

o 6. You can classify shares according to nationalization

requirements.

Ex. SMC (class A shares can only be owned by

Filipinos, class B anyone) to make sure it’s always

60% owned by Filipinos

o 7. Redeemable shares –

How can these be issued?

• May only be issued when expressly provided

in the AOI. Terms and conditions stated in

AOI.

What happens in redemption?

• Corporation pays money in exchange for the

stock. Option rests entirely upon the

corporation, and cannot be compelled or

refused.

• Shares deemed retired after redemption.

What is required for the corporation to do?

• Corp required to maintain a sinking fund to

cover for redemption price if required to

redeem

• No need for unrestricted retained earnings

before shares are redeemedbut there must

be sufficient assets to pay creditors/answer

for operations, or else there can be no

redemption (The latter qualification is based

on the Trust Fund Doctrine)

o 8. Founders shares

If there’s a right to exclusively for or be voted for as

director, it must not be for a period exceeding 5 years

• What are treasury shares?

o Those issued and fully paid for, and then reacquired by the

corporation

Still considered issued; not considered as outstanding

Considered fully paid for and held by the corporation

o May be distributed as property dividends

o What is their status?

Not outstanding, not cancelled. In a state of

dormancy, which in the possession of the corporation.

They will become outstanding again when the

corporation sells the treasury shares

o Can there be stock dividends declared from treasury

shares?

No. These are not outstanding. Cannot vote and

cannot have dividends declared from them. This is a

tax evasion scheme.

Besides, the terminology is wrong. You can only

declare stock dividends fromauthorized but unissued

shares. From treasury shares, you can declare

property dividends.

o

Can cash dividends be declared from the shares? NOT entitled to dividends because the corporation

cannot declare dividends for itself

• When do non-voting shares vote?

o [Key agreements]

1. AOI amendment

2. BLs adoption and amendment

o [Property-related]

1. Increase/decrease of bonded indebtedness

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2. Increase/decrease of capital stock

3. Sale/disposition of all/substantially all of corporate

property

o [Changes in the corporation]

1. Merger/consolidation

2. Investment of funds in another corporation or

another business purpose

3. Corporate dissolution

• What are watered stocks?

o 1. Issued without consideration

o 2. Discounted shares

o 3. Issued as stock dividend when there are no sufficient

retained earnings/surplus

o Who is liable?

Solidary liability of director/officer who issued it and all

those who didn’t oppose it in writing which was filed to

the secretary

Liability is the difference in value

Incorporation and organization

• Who is a promoter?

o Promoter – one who, acting alone or with others, takes initiative

in founding and organizing business/enterprise and receives

consideration for it.

• Distinguish:

o Promoter’s contracts: both parties know corporation doesn’texist yet

o Contracts entered into with defective corporations (de facto or

by estoppel): at least one party is unaware that the corporation

is not yet constituted

• What is pre-incorporation subscription?

o 1. Acquisition of unissued stock in existing or still to be formed

corporation is deemed a subscriptionregardless of appellation

o 2. Subscription is irrevocable for 6 months

1. But revocation valid thereafter if the corporation did

not materialize (offer theory)

2. Or all other subscribers consented to the revocation

(contract theory)

When is revocation disallowed already?

• When the AOI have been submitted to SEC

o Is a corporation bound by a promoter’s contract once it is

formed?

It is not, unless it had received benefits from the

contract by the time it was constituted

• What about other promoter’s contracts?

o In general contract law this would have been void because a

non-existent corporation cannot give consent until it is formed,

but these are exceptions to this general rule.

o What is needed to validate and enforce promoter’s

contracts?

The corporation has to ratify the acts when it is

formed

o Who are personally liable for the promoter’s contracts?

The investors who are the “moving spirit” behind the

incorporation personally liable for expenses incurred

by the corporation. Those who are not are not.

Promoters are also and personally liable for pre-

incorporation expenses.

• Subscription:

o Subscription, not payment, grants rights to stockholders, even

if not fully paid for. Holders of non-delinquent shares have all

the rights of a stockholder.

o This is a consensual contract

No need for tradition, unlike sales – shares deemed

issued already.

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Only need to register in the Stock and Transfer Book

for dispositions, so no need to register for issuance

Not covered by SOF because subscription itself

executes the contract.

o When a condition for issuance of shares is void, then it

becomes a pure, valid subscription agreement. Ignore thecondition.

• What is valid consideration for issuance of shares?

o 1. Actual cash

Cannot be a PN or future services

o 2. Property:

Actually received, necessary or convenient for

corporate purpose, with fair valuation

Appraised by SEC

o 3. Labor actually performed

o 4. Previously incurred indebtedness

o 5. Amounts transferred from unrestricted retained earnings to

stated capital

o 6. Outstanding shares exchanged for stocks in event of

reclassification/conversion

• What if the consideration is unlawful?

o It would violate the TFD if the subscription is deemed void. So

it’s better to just consider the subscription valid, but the

consideration void.

o The subscriber has outstanding payable consideration in cash,

and the directors/officers are liable for watered stocks.

• Articles of incorporation:

o 1. Name of the corporation

Registration of business names is with SEC

o 2. Purposes

Can have several secondary purposes so if the

primary purpose does not become profitable, you can

shift without amending the AOI

SEC can only reject if patently illegal

o 3. Place of principal business

Must be in the Philippines

The SEC now requires that you put even the street

and number

o 4. Term for which it will exist

Period of maximum 50 years, extendable

No extension until last 5 years of term

o 5. Names, nationalities, residences of directors

o 6. Names, nationalities, residences of incorporators

o 7. If a Stock Corporation, amount of authorized capital stock

If there are par value shares, the amount each

The amount subscribed and paid each by the

incorporators

• What is required for amendment?

o Must be authorized by 2/3 of the SHs and majority of the

directors

o When does it take effect? Upon approval by SEC

Or lapse of six months from filing

• Grounds for disapproving application/amendment?

o 1. Articles not sufficient in form

o 2. Purpose is illegal, unconstitutional, illegal, immoral, etc.

o 3. Treasurer’s affidavit is false

o 4. Did not comply with nationalization requirement

N.B. Applies where required. The SEC will endorse it

with the relevant government agency (education

CHED, etc.)• What is the requirement as to the name?

o Required to submit undertaking that you will change the

corporate name if it is the same or confusingly similar.

o What must be considered?

1. The same/confusingly similar name

2. Engaged in the same line of business

• Can you make a corporation that practices a profession?

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o No.

o Acevedo: It is not engaged in the practice of optometry. It

hires employees engaged in optometry. So it’s allowed.

• How does the SEC check for the starting capital?

o When you incorporate, the SEC will require you to waive

secrecy of bank deposits, so they can check starting capital.

o Can the proceeds of a bank loan be counted as paid-up

capital?

No. This is a liability, not paid-up capital. You cannot

include it.

• When does ade facto corporation exist?

o 1. Valid law under which it was organized

o 2. Attempt in good faith to form a corporation

There must also be a certificate issued by the SEC

with a blue ribbon and the seal. Without this, cannot

claim to be a corporation.

o 3. User of corporate powers

• What is the scope of the de facto corporation doctrine?

o Situations where the defective enterprise contracts with an

outsider. The suit by or against the defective enterprise must

be against the de facto corporation and not the individuals

behind it.

• Can its existence be attacked collaterally?

o No. Just directly, through quo warranto, and only by the Sol-

Gen.

• What is the nature of its acts?

o Valid, like that of a de jure corporation.

o Even the acts of the officers are valid, although they also have

liabilities of valid officers.

• Can a corporation to practice a profession be a de facto

corporation?

o No. There is no law allowing that.

• What is a corporation by estoppel?

o So defective in form that it is neither de jure or de facto, but it is

a corporation as to those who cannot deny its corporate

existence.

• When it applies:

o Someone must deal with the association like a corporation and

contracted with this association, and after receiving benefits,claims that the association isnot a corporation. So it covers

obligationstothe defective corporation.

• Differences between de facto and estoppel?

o 1. De facto has real existence in law; estoppel has none

o 2. De facto may exist even if there are no dealings between

parties on a corporate basis; estoppel needs these

o 3. A corporation cannot be de facto unless the requisites are

present; estoppel, even without any requisite

• Two associations of jeep drivers incorporated as NS, non-profit. They

agreed to merge. One president got majority votes. The other guyrefused to recognize the other’s win and continued to collect dues.

o HELD: There was no intra-corporate dispute because there

was no valid merger; there were no articles of merger. There is

no corporation by estoppel because both presidents knew they

did not merge.

• What is the nature of the liabilities of those behind a corporation

by estoppel?

o If the incorporators knew there was no corporation (fraud) –

liable as general partners (all properties)

o If the incorporators did not know or there was no fraud – liableas limited partners (only properties they intended to invest)

• Can the person behind the corporation claim that it is a

corporation by estoppel, when the person was being sued for

execution of properties (because the corporation did not exist)?

o No. Cannot invoke this. Because the person KNOWS that

there was no corporation, so there was no genuine belief on his

part.

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• What are by-laws?

o Intramural document, to govern intra-corporate relationship.

• When are by-laws valid?

o 1. Do not contravene law

o 2. Reasonable and non-discriminatory

o 3. Do not contradict Articles of Incorporation

If there is conflict, AOIs win out

• Is it possible that an express by-law provision be violated and still

bind the corporation?

o Yes, as long as there is corporate approval through the BOD,

express or implied, whether empowered or ratified.

• When can a third party be bound by by-laws?

o He must be duly informed in time of the pertinent provisions,

actually or constructively. Otherwise, he cannot be prejudiced

by the by-laws because it’s an intramural document.

• How can BLs be adopted?

o Majority vote of outstanding capital stock.o What if BLs are not adopted within 1 month from

incorporation?

Not a ground to automatically dissolve the

corporation, but it can be a ground for the SEC to

revoke the certificate.

o How can BLs be amended or repealed?

1. Majority of BOD + Majority of outstanding capital

stock

2. 2/3 of outstanding capital stock may delegate to the

BOD the power to amend or repeal the by-laws.• N.B.Majority of outstanding capital stock

may revoke this delegation.

• What should be included in the by-laws?

o 1. When regular and special meetings are held

o 2. Quorum

o 3. Proxies

o 4. Qualifications, duties, compensation of directors or officers

Can impose additional qualifications (like minimum

number of shares)

o 5. When annual election of officers is done, and manner of

appointment

o 6. Manner of issuance of stock certificates

o Citibank: By-laws allowed country managers to sue and

defend lawsuits, and delegate this power. So a delegation of

this power to the lawyer is valid.

• Valley Golf: A member pledged his proprietary shares to Chinabank.

He forfeited, and Chinabank foreclosed and bought the shares.

Chinabank sought registration of the shares by Valley Golf refused

because the shares were delinquent. Valley Golf claimed its bylaws

gave it a lien over proprietary shares.

o HELD: Valley Golf lost. By-laws do not bind third parties

without actual knowledge.

Corporate Powers

• What is the underlying theory behind corporate powers?

o All powers are exercised by the BOD.

o No person or officer can bind the corporation; it has to be the

BOD. Agents must not exceed the power granted by BOD.

o There are instances, however, where stockholders or members

have to give their consent – this is where the underlying

contractual relationship is being altered or amended.

• A Corporation can sue or be sued in its own name. It must indicate its

corporate name in the pleadings and not use an acronym

• A. Power to extend or shorten corporate term:

o Majority of BOD + 2/3 of OCS

o There is right of appraisal for dissenting stockholders (although

some commentators say there shouldn’t be for mere shortening

of corporate term)

• B. Power to increase or decrease capital stock:


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o Need SEC approval:

For increase – to check whether there is subscription

to at least 25% of increased stock, and at least 25%

paid-up

For decrease – it must not prejudice corporate

creditorso Until approval, the funds are just held by the corporation in trust

for the stockholders. It’s not part of paid-up capital yet.

o Is there a right of appraisal?

No

• C. Power to create, incur, or increase bonded indebtedness:


o What is a bonded indebtedness?

Usually a very large amount

With first lien on important corporate assets

For a long period of time

o Need SEC approval

To check if the corporation has at least P25M net

worth and 3 years operating experience


No

• D. Power to deny preemptive rights:

o Where is there a right of preemption by SHs?

1. If there is increase of capital stock OR

2. If the corporation acquired treasury shares

o What is the purpose of preemption?

So a SH can prevent dilution of his % ownership.

o When is there no right to preemption?

1. Provided for in the AOI

2. Shares issued to comply with order to make a

public offering to comply with the law

3. When the shares issued are in exchange for

property for a corporate purpose

4. Conversion of corporate debt to SH equity

• E. Sale/lease/exchange/mortgage all or substantially all of its

property:


o What is the test of “substantially all”?

W/N it can still continue business afterwards.

Qualitative test, whereas it is quantitative for “all.”

o Compare to sale in usual and regular course of business,

which is covered by business judgment doctrine. This does not

need SH approval.


Yes

• F. Power to purchase own shares:

o What is required?

The corporation must have unrestricted retained

earnings

o Exception?

Redeemable shares, which do not require URE for

them to be redeemed by the corporation

o When can the corporation buy shares from SHs?

1. To eliminate fractional shares because of stock

dividends

2. To collect indebtedness out of an unpaid

subscription

3. To pay dissenting or withdrawing stockholders

entitled to payment of their shares

4. To decrease cost of doing business, by decreasing

amount of dividends to be paid in the future

5. Other similar situations (non-exclusive

enumeration)

o What happens to the shares?

They become treasury shares. These cannot vote.

• G. Power to invest corporate funds in another corporation or

business:

o When do you need SH approval?

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If it is in line with the primary purpose of the company,

then you don’t need SH approval

If it is not, you need Majority of BOD + 2/3 of OCS

o Example:

SMC buying a brewery abroad is in line with primary

purpose

Mau Sugar Central buying a company manufacturing

sugar bags – same doctrine

o What is the nature of investing in another corporation,

deposit accounts, money markets, treasury bills, and the

like?

These do not require SH approval because this fits in

the power, discretion, and purpose of corporation to

obtain best returns.

THUS, the “investment in another corporation” that

requires SH approval above implies somemanagement power involved of the other company,

and not just investment per se.

• H. Power to declare dividends:

o It must have unrestricted retained earnings. Otherwise, it will

be illegal. In effect you are returning the investment of the

SHs.

Creditors can sue the SHs for the dividends they

illegally obtained

o In what forms?

Stock, property, or cash dividends

• For property or cash dividends, no need for

SH approval

For stock dividends, 2/3 SH approval is needed

o Presumed that rights of shares are equal. So they will receive

the same amount.

o Even if a subscription has not been fully paid, the SH will

receive dividends.What is the exception?

If it is delinquent. The cash dividends will be applied

to his outstanding dues.

o A corporation made public offering of shares with par

value of P100. But it was able to sell it in the stock market

for a premium, i.e. P120/share. What happens to the

premium surplus? The surplus cannot be declared as cash or stock

dividends, because dividends can only be declared

from corporate earnings.

They must be retained as part of capital.

o Nielsen had a mgt. contract with Lepanto mining (because

Nielsen had technical expertise). During the war, the

Japanese took over the management of Lepanto. After the

war, Nielsen wanted to continue the unexpired

management contract with Lepanto, and the latter refused.

The agreement included that everything Lepanto declared

dividends, part of it should go to Nielsen. HELD:

Lepanto is guilty of breach of contract, and must pay

Nielsen, including the dividends that were not given.

o Stock dividends can only be declared out of the authorized, but

unissued shares. Treasury shares cannot be declared as stock

dividends, but as property dividends.

Book keeping entry: from retained earnings capital

o Sometimes property is reappraised to increase value.

What are the conditions?

1. There are earnings from operations 2. The property must have depreciated

• So land cannot be reappraised

3. The depreciation allowance must have been

deducted

o Stock corporations are prohibited from retaining surplus profits

in excess of 100% of paid-in capital stock.

Exceptions?

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• 1. Justified by definite corporate expansion

projects approved by the board

• 2. Corporation obtained a loan and there is a

condition in the loan that the corporation

cannot declare dividends without creditor’s

approval• 3. Special circumstances justify retention

If you invoke any of these provisions, your financial

statements must include an explanation

The power to demand dividends is one of the few

powers of SHs where they can initiate action.

o Once a cash dividend has been declared, it cannot anymore be

revoked. Because otherwise, a corporation can manipulate the

price. (Ex. the corporation says “we will declare dividends in a

month,” so prices go up and shares are bought. If they can

revoke it, then the prices can go down and the corporation canre-buy the shares.)

o What are the tax implications?

There is no tax consequence for stock dividends,

because it’s still the same pie, cut in smaller pieces

You only get taxed when yousell the stocks.

o Dividends will be given to stock holders in the books. If a sale

of shares is made and the buyer is not put into the stock and

transfer book, it only binds the parties but not the corporation.

So the remedy is the seller gets the dividends and

turns it over to the buyer• I. Management contracts

o There is now regulation of management contracts to prevent

abuse. It is usually done when one company has technical or

special expertise.

o Requirement?

Approval by BOD

And majority of the SHs of BOTH corporations

o Except, when are 2/3 votes needed from the managed

corporation?

1. If a SH or SHs who own stocks in both corporations

have more than 1/3 of shares in managing corporation

2. Majority of BOD in the managing corporation is

majority of BOD in the managed corporationo Validity?

5 years for any one term. You can keep renewing it.

o Does the principle that a principal can terminate an agent

any time apply here?

No. This is a contract for lease of services.

o What if the management contract is with an outsider

individual and not a corporation?

No need for SH approval because the corporation is

really just appointing an agent in this instance.

Power Requirements Non-

voting

stocks

vote?

Appraisal

right?

Increase or decrease

corporate term

Majority of BOD + 2/3 of

OCS

Yes Yes

Increase or decrease

capital stock


OCS

Yes Yes

Create, incur,

increase bonded

indebtedness


OCS

Yes No

Denying pre-emptive

rights

1. Provided in AOI

2. Comply with public

offering law

3. For property

4. Debt for equity

No No

Substantially all of

property


OCS

Yes Yes

Purchase own 1. Eliminate fractions No No

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shares 2.Pay subscription

indebtedness

3. Pay appraising SH

4. Decrease cost of

business

5. Other similar

Invest corporate

funds in another

business


OCS

Yes Yes (if

going into

another

line of

business)

Declare dividends URE exceeding 100% of

paid-in capital stock

(subject to exceptions)

Can be demanded by SHs

No No

Enter into

management

contracts

Majority of BOD + Majority

of OCS of managing

company + Majority of

OCS of managed

company

Change to 2/3 of OCS of

managed company if:

1. Common SH/s possess

more than 1/3 shares in

managing company, or

2. Commonly sharedmajority of BOD

Yes No

• Ultra vires acts:

o What is the scope of a corporation’s allowable powers?

Powers of corporation include those necessary to

achieve the primary purpose:

Ex. a hotel can hire entertainers

o What are the type of ultra vires acts?

1. Acts done beyond powers of the corporation, as

provided by law or AOI

2. Acts on behalf of a corporation done by those

without authority

3. Acts which are per se illegal

o What is the SC’s attitude in interpreting whether acts are

ultra vires?

Strict, if the act is per se illegal.

If the act is not per se illegal, as long as “fairly

incidental” and “reasonably necessary” to corporate

purpose, acts are deemed valid.

But if the AOI or purpose clause has limiting words,

then the court will hold the corporation to such limited

business.

• Ex. “Transportation of goods by water”

o What is the effect if an act is ultra vires?

First type of ultra vires: void and does not bind the

corporation, but can be ratified by the SHs through:

• 1. Performance

• 2. Ratification

• 3. Estoppel

Second type: no authority so unenforceable contract

• But if the corporation cloaked the person with

apparent authority, the corporation cannot

deny the contract entered into by that person

with external indicia of authority

Third type: always void

o When can ultra vires be invoked?

For purposes of enforceability, if it has been fully

executed by both sides, one cannot invoke ultra vires

If it has been partially executed (by one side), it

cannot be invoked because one side is in estoppel

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If it is merely executory on both sides then ultra vires

can be invoked

• Can a corporation guarantee the debt of another?

o No, because it might prejudice the claims of its creditors and it

violates the trust fund doctrine

o When is it valid?

If it has a business purpose, for instance:

• 1. A mother company guaranteeing the debt

of the subsidiary

• 2. Will result in increased business

• 3. Will enhance the chances of collecting

from the party whose obligation is

guaranteed

• What is the Trust Fund Doctrine?

o Capital stock, property, and other assets of the corporation are

regarded as equity in trust for the payment of corporate

creditors.

o Implications:

Corporation may not dissipate the subscribed capital

stock (which the creditors can check to satisfy their

credits).

Creditors may sue SHs directly for unpaid

subscription.

o Examples of when the TFD is violated:

1. Corporation releases or condones payment of

unpaid subscription.

2. Payment of dividends without URE.

3. Properties transferred in fraud of creditors.

4. Properties disposed or undue preference given to

some creditors even if the corporation is insolvent.

o The TFD is the backbone as to why there is a strict procedure

in distribution of corporate assets, and that it can only be done

if: 1) there is amendment of AOI to decrease ACS, 2) purchase

of redeemable shares regardless of URE, 3) dissolution and

liquidation of the corporation. The Corporation cannot

distribute assets whimsically.

Stockholders and members

• Who can vote?

o Any share, except those deprived of right to vote, which is

allowed only for preferred and redeemable shares

o There must always be a class with complete voting rights

o For joint owners of shares, consent of all is needed, unless one

is constituted an agent

o Pledgor or mortgagor still votes for his shares.

• Take note of instances when even non-voting shares can vote

(fundamental changes in the corporation)

• What are the kinds of meetings of SHs?

o Meetings – may be regular or special.o Provision on meetings applies only if there is no provision in

the bylaws or articles to the contrary.

• What matters can be taken up?

o General meeting: anything can be taken up

o Special meeting: only matters previously indicated can be

taken up

If everybody is present and nobody objected, it is

tantamount to waiver

But if some were absent and those present waived,

those absent may question the waiver• Where must it be held?

o City or municipality where the corporation is located

Metro Manila considered a city

o Need not be in the office

• What determines quorum?

o What is provided for in the BLs. Most of the time it’s a majority

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o Once a quorum is announced to be present, the SH is

competent to take up matters, even if some leave after

• What is the power of executors, administrators, receivers, and

guardians?

o Can vote the shares of stocks they administer without need for

proxy

• What if there are two or more owners of shares?

o They must go together, but if and/or, either can vote

o If both attend and cannot agree on how to vote, the vote is not

counted

• There are different devices how to get votes. How?

o 1. Proxy solicitation

o 2. Voting trusts

o 3. Pooling agreement, where several SHs agree to vote their

shares together

• What are required for a valid proxy agreement?

o 1. In writing

o 2. Signed by the SH

o 3. Filed with corporate secretary before the meeting

o How long is a proxy valid?

Unless it provides that it is a continuing proxy, it’s only

valid for the period for which it was issued

o What is the ceiling for continuous proxies?

5 years, maximum validity

o Is it revocable?

Yes,unless it is coupled with an interest

If he shows up to vote, the attendance to vote willresult in nullifying the proxy,unless it is coupled with

an interest

BUT he must show upto vote. If he doesn’t vote, it

doesn’t revoke the proxy.

• What are required for a valid voting trust agreement?

o 1. In writing and notarized

o 2. Cannot exceed 5 years at a time (except for longer loan)

o 3. Certified true copy of agreement filed with the corporation

and SEC

o What is the maximum duration?

5 years

o What are the powers of the trustee?

Trustee is qualified to sit in the board

If the voting trust agreement was given to a lender, as

is required in a loan agreement, it is coupled with an

interest

o Can the voting trust agreement be coterminous with a

loan?

Yes. It will remain until the loan has been paid; for

instance, 10 years.

o Is it revocable for a period of time?

No, because it is based on contract, unlike proxies

which are based on agency.

o Who receives dividends?

The trustee, with obligation to turn over dividends to

the beneficial owner.

• Derivative suits – requisites?

o 1. Cause of action which calls for such remedy

If it’s covered by business judgment rule, cannot sue

There must be violation of the rights of the corporation

not just the private parties

The cause of action must benefit the corporation, and

not the particular stockholder bringing suit

o 2. Must be filed in the name of the corporation Since the cause of action belongs to the corporation,

the corporation gets the damages that are awarded

o 3. Must be a SH when the offense was committed, but the acts

continued when he became one

o 4. Must have exhausted intra-corporate remedies

Unless excused

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Ex. BOD of corporation granted its own directors

excessive compensation. No need to compel the

BOD to file a suit on behalf of the corporation since

the object of the suit is to nullify the BOD’s own acts.

This is futile.

o

5. No right of appraisal for the rights complained of• Contrast with other kinds of suits?

o Individual suit – brought by the SH in his own name against the

corporation for a wrong directly inflicted on him

o Representative suit – brought by SH in his own behalf and all

other SHs similarly situated when a wrong is inflicted on them

as a group

• Nature of right to inspection?

o 1. SHs: to protect themselves

Must be exercised in his interest as SH for some

purpose germane to the corporation’s interest. Butthe corporation has the burden of proof to contest GF.

o 2. Directors: broader, because they make decisions

o Remedies for refusal to allow inspection?

Mandamus

Criminal case

Damages

o Grounds to deny inspection?

1. Must improperly use information received before

2. Asking for trade secrets

3. No good faith

4. No valid purpose• Ex. bought one share just to inspect

o What is the rule for SHs of corporations with wholly-

owned subsidiaries?

Even if not a SH of the subsidiary, if consistent with

equity, GF, and fairness, the SH can inspect records

of the subsidiary

• Appraisal rights:

o Any dissenting SH can ask to be bought out.

o When is there appraisal right?

1. Amendment affects the rights of SHs

2. Creating preferred shares

3. Shortening or extending corporate life

4. Increase authorized capital stock

5. Going into another line of business

6. Merger/consolidation

7. Corp. sells, leases, mortgages, encumbers, or

disposes all or substantially all of its assets

8. Close corporations (anytime)

o N.B.If the amendment does not affect the rights of SHs (ex.

change of corporate name), no appraisal rights.

o What is the rule for close corporations?

Can ask anytime to be bought out

o When can a SH be asked to be bought out?

Must have voted against the action, not for the action.o When can the SH exercise right?

Within 30 days of the action

o What is the value of shares based on?

Value the day before the action was done. This is

because the action would inevitably change the value

of the shares.

What if they cannot decide on the value of the

shares within 60 days from the time the action

was taken?

•

Appraisal will be done• Pay within 30 days after award was made

• Cost of appraisal borne by corporation. But

if the value offered is close to the value

offered by the corporation, then the SH will

bear the cost because it was close to the

amount offered by the corporation.

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o SH cannot be paid unless there are unrestricted retained

earnings, otherwise you violate the Trust Fund doctrine.

Exception?

• For close corporations, where even if there

are no UREs he can ask to be bought out.

o What is the effect of appraisal?

The SH will lose all his rights, except to receive

payment

o When will his right to be paid cease?

1. Demand for payment is withdrawn with consent of

corporation, or

2. Act he is protesting against is reversed or

disapproved by SEC, or

3. SEC says he is not entitled to appraisal rights

What is the effect of this?

• His SH rights will be restored

o When will his SH rights be restored?

1. Any of the three above

2. The corp. fails to pay within 30 days

• What are the obligations of SHs?

o 1. Liability to corporation for unpaid subscription

o 2. Liability to corporation for interest on unpaid subscription if

required by by-laws

o 3. Liability to creditors of corporation for unpaid subscription

o 4. Liability for watered stock

Solidary with corporate officers responsible

o

5. Liability for dividends unlawfully paido 6. Liability for failure to create corporation

Directors and officers

• Powers of the corporation are vested where?

o Board

• Can the president make a decision on behalf of the corporation,

without board authorization?

o No. It does not bind the corporation

o Islamic directory of the Phils: Acquired parcel of land.

When martial law was declared, the members of the Board fled

to the Middle East. A corrupt member of the board sold the

land to Iglesia.HELD: Invalid, because it was not the board

that sold to INC.o A corporate officer cannot file a case for BP22. There must be

board authorization.

• Requirements to be a director?

o 1.Must own at least 1 share of stock in his name in the STB

What if he is merely holding that as trustee?

• He is still qualified.

The by-laws can require a bigger number (ex. 50K

shares for San Miguel)

The moment a SH ceases to hold even one share, he

automatically ceases to be a director

o 2. Majority of directors must be Philippine residents

o 3. Independent directors

Required for banks (at least 2) and listed companies

(either 2 or 20% of board, whichever is fewer)

o 4. Not disqualified:

A. Criminal offense punishable by more than 6 years

B. Or violation of Corp. Code 5 years prior to election

C. Public officials, appointed or elected, cannot serve

in BOD of non-rural banks

• Directors must be elected every year among the SHs of the

corporation. At what point must the director be a SH, at point of

nomination or assumption of office?

o There are conflicting decisions in US jurisprudence (some say

when nominated, some say upon assumption of office).

Majority view: enough when he assumes office.

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o JJ believes that the minority rule must prevail The provision

says that they must be elected from among the holders of

stock. So he must be a SH at time of election.

• There are two devises peculiar to election of directors:

o 1. Proxy voting

A person need not be personally present to vote; can

just give written proxy.

Even if his shares have not been fully paid, as long as

not delinquent

o 2. Cumulative voting

If someone holds multiple shares, he can castall

those votes for one person (ex. 1,000 shares 1,000

votes in favor of one person)

o Can the board pass a resolution prohibiting proxy voting

and cumulative voting?

No. It’s provided by law as mechanisms to allow

minority SHs to win positions as directors.

• What if shares are delinquent?

o Not allowed to vote

• How may a director be removed?

o 2/3 vote of SHs (or members if non-stock)

o In what kind of meeting?

At regular or special meeting, but the notice must

specifically state removal of the officer will be taken up

o What if it’s not mentioned?

Cannot be taken up

• Who are the directors that cannot be removed without cause?o 1. Director representing minority of SHs

o 2. Independent directors (as required by law – either 2

independent directors or 20% of the board, whichever is less)

• The law mentions conviction as a DQ for becoming a member of

the board. Can the By laws add other qualifications?

o Yes.

o For instance, providing that SHs holding shares in rival

companies cannot run for the board.

• Term of office of directors?

o Usually one year.

o But if the annual meeting is delayed, they remain in hold-over

capacity until successors are elected.

• How are vacancies filled? (CLV DISCUSSION)

o 1. Special vote by majority of directors

Assuming they still compose a quorum

o 2. General or special meeting of SHs

This is required when the remaining directors do not

compose a quorum anymore

o 3. If vacancy is due to increase in seats must be through

election by SHs

o What is the term of the replacement?

Only the unexpired term of the one replaced

• Do they get compensation?o None, except:

1, If the by-laws provide

2. Reasonable per diems.

o Who fixes the compensation?

SHs, not directors; otherwise, there would be conflict

of interest

SHs can give directors performance bonus.

o Is there a limit to director compensation?

The total yearly compensation of the directors cannot

exceed 10% of the income prior to tax.o What about officers?

The prohibitions re: compensation donot apply to

them because they perform services beyond the

ordinary duties of a director

• Special qualifications of officers:

o President must be director

o Sec must be resident of Philippines and a citizen

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o Treasurer need not be a director

• Can an officer occupy two or more positions?

o Yes.

o Exceptions:

1. President cannot be the same as treasurer

2. President cannot be the same as secretary

o Because there are some requirements that require assent of

President and treasurer/secretary as check and balance.

• There were two separate conflicting lists of officers shown. Which

wins out?

o The ones mentioned in the General Information Sheet win out

because it’s required to be filed with the SEC.

• What is the business judgment rule?

o Courts will not set aside decisions/resolutions of officers of the

corporation unless there is bad faith or illegality or gross

negligence

o Courts will not second guess the wisdom of the officers even if

there are losses

• Differentiate treatment of officers from non-officers?

o 1. Officers are hired or fired by the BOD in exercise of business

judgment. Non-officers are protected by security of tenure.

o 2. Officers are subject to common law duties of loyalty and

diligence. Non-officers are not bound by these.

• When can officers be held personally liable?

o 1a. Assented to patently unlawful act of corporation

Ex. approved bribe

o 1b. Bad faith Ex. fired a manager who was instituting reforms to

prevent shenanigans – bad faith

Ex. cooked the books of account to pretend losses, to

justify retrenchment

o 1c. Gross negligence

o 1d. Conflict of interest

o 2. Issued watered stock or being aware of this, did not object to

the corporate secretary.

o 3. Bound oneself solidarily to the obligations of the corporation

o 4. By provision of law

• Examples of bad faith:

o Did not remit SSS collections

o A director acquired interest adverse to the corporation

o Director received kickback from contractors

o Grabbed corporate opportunity (ex. the director bought a goods

up for sale which is in the line of business of the company

which he works in)

• What is the duty of loyalty?

o The Doctrine ofcorporate opportunity. Directors or Trustees

who acquire personal or pecuniary interest in conflict with their

duty as director are liable solidarily for damages.

o Officer X acquires interest adverse to corporation. What

are his responsibilities?

1. Liable for all damages to the corporation

2. Compensate for all lost potential profits

CANNOT be waived/ratified

o Officer Y by virtue of his office acquires a business

opportunity for himself which should belong to the

corporation. What are his responsibilities?

1. Account all profits to the corporation

2. Refund profits that would have accrued to the

corporation

o Which can be waived or ratified? Adverse interest cannot be ratified or waived by the

SHs

Business opportunity can be ratified by 2/3 of the

outstanding capital stock

• What is the nature of contracts of the corporation with its own

directors and officers?

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o They are voidable. The corporation has the exclusive right to

annul the contract.

o When will it be not voidable?

1. Presence of the director must not be needed for

quorum

2. His vote was not be needed to approve the contract

3. The contract was fair and reasonable

• It must be an arms-length transaction

4. If the party is an officer, prior authorization of the

BOD

o What is the effect of the first two defects?

Can be ratified by the SHs in a meeting with full

disclosure.

• What about contracts between corporations with interlocking

directors?

o They are not per se prohibited.

o But if a director has substantial interest in one and minimal in

another, he would be tempted to favor the first.

When is there “substantial interest”?

• When his equity exceeds 20%.

o What is the effect if a director has substantial interest in

one and minimal in the other corporation?

1. Presence of director must not be needed for

quorum

2. His vote was not needed to approve the contract

N.B.these are the same first two requirements as in

self-dealing directors• What is an executive committee?

o By laws can provide for it, composed of at least 3 members of

the BOD.

N.B. They must be directors.

o What powers are delegated?

The BOD must specify what powers are delegated.

The BOD cannot just make a blanket delegation of its

powers to the Ex Com.

o What cannot be delegated?

1. Matters requiring SH approval

2. Filling vacancies in the board

3. Amending/repealing by-laws

4. Amending/repealing board resolution which by its

express terms cannot be amended/repealed

5. Declaration of stock dividends

o What is the power of the board over resolutions of the Ex

Com?

BOD can approve or revoke it.

What is the exception?

• When rights of third parties are involved.

• Ex. A third party entered into a K with the Ex

Com, relying in good faith on the power of

the Ex Com to enter into contracts.

• Powers are vested on the board. An officer acting alone cannot

bind the board. What is the exception?

o Ratification by the authority who should have performed that

act.

• What is the general scope of powers of the officers of a

corporation?

o Can operate without authorization on the usual course of

business, or administrative matters

o Ex. Insurance company can sell insurance even without board

resolution

Capital affairs

• What are the requisites to issue a certificate of stock (COS)?

o 1. Signed by the P/VP and countersigned by the secretary/asst.

secretary

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o 2. Delivery of the COS

o 3. Pay par value of the shares (or entire value if no par value)

o 4. Original certificate surrendered, if the shares are being

transferred

• What are the remedies of the SH when the corporation refuses to

issue a COS?

o 1. Specific performance

o 2. Damages if specific performance not granted

o 3. Mandamus to compel issuance of COS

o 4. Rescind the subscription contract

• What is the nature of the duty to issue a COS?

o It is ministerial , so even if there is a case filed, the buyer must

be given a certificate

• What are the unpaid claims contemplated by the law?

o Payment for subscription, not unpaid claims for monthly dues

• When is the COS issued?

o No certificate will be issued until full amount paid• What is the nature of a subscription contract?

o It isindivisible.

o If somebody has not yet paid full subscription, he cannot assign

part of the shares; it is all or nothing

o If he sellsall the shares, it is a novation of contract, with a

substitution of debtor.

So you need corporation’s consent.

The buyer becomes the debtor for the unpaid

balance.

• What is the nature of shares of stock?

o Quasi-negotiable. Just like N.I., endorse at the back and

deliver. All transfer of shares are valid just between the parties

until registered in the STB.

o No need to execute separate deed of sale or assignment,

because they are quasi-negotiable.

o If there is a deed of sale which is a public document, it is akin

to delivery even if the stock certificate is not itself delivered (as

in usual rule in Sales Law).

• How does one sell shares?

o 1. He must Sign AND deliver the COS; and

Mere signing without delivery – no sale

o 2. Have transaction recorded in the STB

• What if there is a conflict between the Stock and Transfer Book and

the AOI?

o The AOI wins. The AOI is the basic contract between the SHs

and the corporation, while the STB is merely kept for

convenience.

• Who may post in the STB?

o The president cannot post the entries, it must be the Secretary.

o If the secretary refuses, compel performance, but one cannot

record the entries himself.

• What are the allowable restrictions in sale of shares?

o Procedural: Restriction must appear in the AOI, BL, and COS

o Substantive: Not more onerous than allowing the corporation to

purchase the shares of the transferring SH for reasonable

terms

• What if the seller of the COS is not the true owner?

o The buyer cannot get valid title.

o The first buyer, however, was given a fake COS. Effect?

None. The real owner cannot be deprived.

o What if the first buyer sold to a second buyer, signing and

delivering the fake COS? The new buyer will be protected. Give her shares too.

The corporation runs after the seller for damages.

What is the exception?

• When there are no more shares to issue. In

this case, the new buyer does not obtain any

shares, but can sue for damages.

99



• Directors responsible for issuance of shares who issue watered-

down stocks and those who know about it and didn’t give their

objections:

o Solidarily liable with the non-paying SH

• If someone only paid part of the stocks, when must the rest be

paid?

o 1. By provision

o 2. Upon call by the directors

o What is the nature of the call?

It must be uniform – for all, not just for particular

persons.

o When is there interest payable?

Only if there is a provision

If there is no rate mentioned, just that interest must be

paid, apply the legal rate

• What is the nature of the unpaid portion of the subscription?

o It is an asset of the corporation, and is thus a receivableo What is the implication?

Creditors can run after these.

• A. But first they have to sue the corporation,

and if unsatisfied, the creditors can sue SHs

on unpaid subscriptions.

• B. If the corporation is insolvent, the SHs can

automatically be included as co-defendants.

• If after 30 days of call there is no payment, what happens?

o 1. The shares become delinquent.

o 2. The directors can auction the shares Personal notice sent through registered mail

Published in newspaper of GC for 2 weeks

o How can the SH prevent sale of the shares?

Pay unpaid dues, interest, and costs (for publication,

etc.)

o How is the bidding for the shares done?

There is a fixed price, but those willing to accept the

least amount of shares for the highest price get it.

o What if there are dividends before sale?

They will be applied to the unpaid dues.

o If the SH wants to question the sale, what are

prerequisites?

File case within 6 months from the date of sale

He must tender payment of unpaid dues and interest

• What is the other option of the corporation, apart from auction of

the shares?

o Sue the SH in a collection case.

• What is the remedy for a lost COS?

o 1. Owner submits affidavit of loss

o 2. Corporation verifies the affidavit and publishes notice in

newspaper of GC for 3 consecutive weeks at owner’s expense

o 3. After 1 year from publication, right to contest is barred and

the corporation can issue a new COS to the SHo What if the applicant issues a bond to cover for damages?

The 1 year period is waived

o What if there is a contest of the application?

The corporation cannot issue COS until resolved

o What is the “free and harmless” clause?

If there is no bad faith or gross negligence, there can

be no action against the corporation for issuance of

the new certificate

o What if the corporation fails to comply with the procedure

above and just issues a new COS? It is valid, but the corporation cannot avail of the free

and harmless clause

• What is the rule on involuntary dealings with shares?

o A. Mortgage, if not covered by COS –

Mortgage binding on third parties with notice

o B. Mortgage, if covered by COS –

100

R h CM fb hh d l fh Od blhd fGCf



Register in the CM registry of both the domicile of the

owner and place of principal office of the corporation

• No need to register if the COS was delivered

to the pledgee/mortgagee

No need to log in the STB

o C. Attachment or levy –

Creditor must leave with the president or managing

agent a copy of the writ and a notice stating the stock

was attached

• Priority rules:

o A. Two judgment creditors –

Whoever serves writ first

o B. Judgment creditor v. mortgagee/pledgee –

Whichever is first in service of writ v. registry in CM

registry

o C. Mortgagee/pledgee v. buyer/assignee –

First between registry v. STB entry

o D. Judgment creditor v. buyer/assignee –

First between service of writ v. STB entry

Dissolution and liquidation

• When and how can a corporation voluntarily dissolve?

o 1. Vote of majority of BOD + 2/3 of OCS

What if dissolution will not prejudice any creditor?

• 1. Just need SEC approval

• 2. After 3 consecutive weeks publication in

newspaper of GC, dissolution takes effect

What if creditors are affected?

• 1. Petition filed and all the names of the

creditors will be mentioned.

• 2. Set for hearing, so if someone has

objections, he can oppose.

• 3. Order published in newspaper of GC for 3

consecutive weeks

• 4. SEC will decide w/n dissolution is proper

o 2. Amending the AOI, shortening corporate life

Fastest and simplest way

• Who decides on dissolution?

o The SEC

o There must be a tax clearance first from the BIR before the

SEC dissolves a corporation (because this is the last chance to

recover taxes)

• Involuntary dissolution:

o 1. Based on grounds provided in the Corp. Code (see above)

o 2. Violations of PD 902-A (SEC reorganization act – see above

for some acts)

o 3. Quo Warranto

• What are the specific grounds?

o 1. Does not commence business within 2 years from itsregistration

o 2. Suspended transactions for 5 years

o 3. Failure to adopt and file BLs within required time

o 4. Offended provision of law for creation (or renewal)

o 5. Commission or omission of act deemed as surrender of

corporate rights

o 6. Misuse or right or privilege granted by law

o 7. Receiver recommended against continuation of business

o 8. Serious misrepresentation to public

o 9. Refusal to comply with SEC order leading to grave abuse of

franchise

o 10. Failure to file reports with SEC within prescribed period

• What if the corporation claims that the economy was depressed

and there was no demand for its goods; thus, there was no

business?

o Even so, it has to file an ITR and the general information sheet,

even if not operating.

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Idi lti t ti? Th f th ti SEC ddi lti



• Is dissolution automatic?

o No, the SEC determines the cause first.

• Can a minority stockholder file a dissolution case?

o Yes.

o For what grounds?

1. Majority is mismanaging assets

2. Dissipating its assets 3. Fraudulently disposing its properties

o Can a receiver be appointed in an action for involuntary

dissolution?

Yes.

• N.B. You do not dissolve a corporation for every single minor infraction.

This is like the death penalty for corporations.

o Ex. do not dissolve a company just because one employee

does not wear an ID

o Ex. but you can dissolve a corporation that engages in banking

without authorization from the Monetary Board because itharms public interest

• Where is the dissolution case filed?

o SEC, not RTC

• Three ways of providing for mechanics for dissolution:

o 1. Directors themselves can take care of winding up

o 2. Appoint trustee to whom they assign assets of the

corporation; will acquire legal title over properties of

corporation to pay off creditors and distributing the residue to

SH

N.B. Three year period does not count anymore if thisoption is chosen

o 3. Receiver appointed

• What is the effect of dissolution on existing rights and obligations?

o It does not impair its rights and obligations

o Ex. Even if a corporation has been dissolved, it must still be

paid

• How long must winding up be?

o Three years from the time SEC approved dissolution

• What can the corporation do and not do during this period?

o It can only wind up its affairs disposing its properties. It cannot

for example renew a contract of lease. It must not pertain to

acts of that of a going concern.

• Will corporate dissolution abate any ongoing case against or filed

by the corporation not finished within the three year period?

o Yes, under the old rule.

o This now only applies if:

1. The directors are in charge of winding up (option 1)

2. Receivership (option 3)

But not if under trusteeship (option 2), because suit

can be filed against the trustee provided the

prescriptive period has not lapse. The trust will last

until the affairs have been wound up.

o What is the common practice now for the cases that are

still pending before the three years end?

Appoint a trustee. The lawyer handling the case is

often constituted as the trustee himself. Sometimes,

it’s the directors themselves that are the trustees.

Non-stock/non-profit

• What are the characteristics of NSNP corporations?

o 1. No shares of stock

o 2. Not be authorized to declare dividends

As indicated in the by-laws or AOI Only exception: distribution as a consequence of

dissolution

o 3. Eleemosynary purpose

• For what purposes may a NSNP corporation be organized?

o 1. Charitable

o 2. Religious order, to manage its properties

o 3. Educational

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4Oth f i l iti lt lft llit 2 Rt ll t hld b ti ith lt



o 4. Others: professional associations, cultural, fraternal, literary,

scientific, social, civic service, similar purpose like chambers of

commerce

• What is the rule on the right to vote?

o By default, each member may vote

o Unless limited, broadened, or denied in the AOI or BLs

o For stock corporations, even non-voting shares vote for

certain transactions. Does this rule apply to NSNP?

No. They can even be denied voting rights for these

fundamental issues, unlike in stock corporations.

o NSNP corporations can make classifications of members.

Example:

Golf and country clubs for instance have honorary

members. But usually associate and honorary

members do not have voting rights, just playing rights.

• What are the peculiar rules in proxy voting?

o Can be allowed to vote by e-mail or similar means.

o Membership is not transferred in proxies.

Ex. X is a member of a golf and country club. He

died. His son Y inherits his shares. He does not

automatically become a member. He has to be

approved first. But he has proprietary rights, so he

can sell it, pledge it, etc.

• What is the policy in elections of the board?

o 1. There can be more than 15 directors

Purpose:to broaden representation

o 2. By default, the voting is staggered, 1/3 of positions are voted

for every year (for policy continuation)

N.B.But you can also provide that everybody will be

elected every year or any other system

• How are assets distributed upon dissolution?

o 1. Pay all liabilities and obligations of the corporation

o 2. Return all assets held by corporation with resolutory

condition of dissolution

o 3. Transfer assets received by the corporation subject to

limitations of usage for eleemosynary purposes to

organizations with similar purpose

o 4. Other assets distributed according to BLs or AOI, or follow

plan of distribution

• Can a NSNP corporation be converted to a stock corporation

through amendment of AOI?

o No, because this is tantamount to distribution of profits to the

members. You have dissolve the NSNP corporation first.

Close corporations

• Why are close corporations important?

o Most corporations in the Philippines are family corporations.

• What is the definition of a close corporation? What are thefeatures that make up a close corporation?

o 1. AOI provides there are at most 20 SHs and none more

o 2. There are restrictions on transfers

Ex. before a SH sells shares, he must ask permission

from the other SHs

Usually it provides too that if none of the SHs are

willing to buy the shares, it must be offered to the

corporation itself

o 3. Prohibition on listing shares in the stock market

o 4. Articles may provide for classification of shares Ex. If there are three brothers, there can be class A,

B, and C shares – one for each brother and his family,

to ensure that each has equal ownership; can only

hold shares of the class pertaining to his family

o 5. Can provide for higher quorum or voting requirements

o 6. Can agree that the SHs manage the corporation and not the

directors

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InthiscasetheSHshavepowersdutiesobligations 2 Alterprohibitorcancelanyresolutionoractionofthe



In this case, the SHs have powers, duties, obligations

of directors

• Which corporations are not allowed to be close corporations?

o Those vested with public interest.

o Specifically:

1. Mining companies, oil companies

2. Stock exchanges, banks, insurance companies

3. Public utilities

4. Schools

• How can the restrictions on transfers bind third parties?

o 1. Must appear in AOI, and

o 2. Must also appear in BLs, and

o 3. Must also appear at the back of the COS

• What’s the effect of pre-incorporation agreements?

o They remain binding even after incorporation

o Ex. a pre-agreement that the president comes from Family A,

the treasurer from Family B, etc.• When are board meeting not necessary?

o Board meetings not necessary if everyone signs or SHs know

that the board members were signing minutes without a

meeting and they did not object.

• What is the nature of the preemptive right?

o Covers ALL issuances of stock.

o There is right of pre-emption even if debt is being converted to

equity.

• What is required for amendment of AOI?

o If the amendment seeks to delete any provision required by the

title on Close Corporations or reduce quorum/voting

requirement – not valid or effective unless there is 2/3 vote of

OCS (all, even those with no voting rights), or a higher

proportion of votes if required by AOI.

• What are the remedies that may be done by SEC in case of

deadlock in close corporations?

o 1. Amend/alter provision in the AOI that causes the deadlock

o 2. Alter, prohibit, or cancel any resolution or action of the

corporation, board, SHs, or officers

o 3. Require the purchase of the shares of a SH even if there are

no unrestricted retained earnings

o 4. Appoint a provisional director as tiebreaker

o 5. For extreme cases, dissolving the corporation

Educational corporations

• How many trustees must be there?

o Always multiples of five (5, 10, 15, etc.)

• How long must their terms be?

o Five years

o Every year, only 1/5 is elected to provide for continuity

o But can there be contrary stipulations as to term and

elections of trustees?

Yes.

Religious corporations

• How can a religious organization administer its properties?

o 1. NSNP corporation

o 2. Corporation sole

One person only: ex. the Archbishop

o 3. Religious aggregate or society

• How does a corporation sole come about?

o 1. File affidavit with the SEC, stating that:

A. the affiant is the head of a religious sect and wouldwant to be corporation sole

B. His religion allows him to incorporate as a

corporation sole

C. He is charged with administration of properties

o 2. Submit the following:

A. Inventory

B. Manner for choosing successor

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CWherehewillholdoffice • XisaforeigncorporationwithnolicenseItenteredintoacontract



C. Where he will hold office

• Can the archbishop be a foreigner and hold land?

o Yes. He is actually just administering it, and the property really

belongs to the faithful.

• What if the corporation sole wants to dispose property?

o He must get authorization from RTC unless his religion allows

him to dispose or mortgage real property

• What is the nature of a religious aggregate or society?

o Incorporated to manage its properties.

o The articles provide that members constitute a religious society

and at least 2/3 of members have agreed to incorporate.

Foreign corporations

• What is a foreign corporation?

o 1. One formed, organized, existing under laws other than those

of the Philippineso 2. AND whose laws allow Philippine corporations to do

business there

• What is the effect of a foreign corporation having no license and

doing business?

o It cannot sue.

o If it’s not doing business, and has no license: can sue.

• What is required to do business here:

o Must appoint resident agent to receive summonses for the

corporation

Resident agent required to be in good financial

standing

o What else must it do?

To say that if it has no resident agent, summonses

may be served to the SEC

Also, any officer in the Philippines may be served with

summons

• X is a foreign corporation with no license. It entered into a contract

with another corporation, which breached the contract. X got a

license, and then it sued. The other corporation said that the

contract is void. Valid?

o The contract is valid; the only effect is that there is no power to

sue for the foreign corp. Here, it can sue.

• How can you sue a corporation not doing business here and also

without a license?

o Make the action quasi in rem by attaching its property to obtain

jurisdiction over it.

• What if the corporation is doing business and is not licensed and

the other party was aware of it?

o Then it cannot have the case dismissed because the other

party benefited from the contract.

• When is it considered doing business?

o 1. There must be habituality. Transactions must not be

isolated.

If the corporation is just buying here, it’s not doing

business because there is no profit from buying

Except isolated transactions that indicate intent to

habitually do business is doing business. Ex. renting

out a space for lease and sending officers here.

o 2. Substantial portion of the business of the primary purpose of

the corporation

If a shipping company goes here and hires a cook,

that’s not doing business because it’s not as

substantial portion of its business of the primary

purpose

o 3. Contract consummated in the Philippines

If the contract is consummated abroad then the

foreign corporation is not doing business here

• Foreign investments act has a definition of what is doing business.

The definition includes:

105

o 1Solicitingorders Mergerandconsolidation



o 1. Soliciting orders

Even if it’s isolated transaction, as long as it’s

indicative of doing business

o 2. Service contracts

o 3. Opening offices

Whether liaison office or branch

o 4. Appointing representatives or distributors who are either –

Domiciled here

Or staying here for at least 180 days

o 5. Participating in management, supervision, or control of any

domestic business, firm, entity, or corporation here

o 6. Any other acts implying continuity of dealings/operations

here

• What “doing business” under FIA does not include:

o 1. Mere investment of a foreign entity in a local entity or

exercise of rights as investor

o 2. Having nominee officer or director to represent its interests inthat local corporation

o 3. Having a distributor or representative doing business in its

own name

• What are the grounds to revoke a license?

o 1. Failure to file annual report or pay fees

o 2. Failure to appoint or maintain a resident agent

o 3. Failure to submit to SEC notice of change of resident agent

or address

o 4. Failure to submit to SEC notice of amendment of AOI or by-

laws or articles of mergers/considerationo 5. Misrepresentation of material matter

o 6. Failure to pay taxes or fees due to the Government

o 7. Transacting business outside of purpose clause

o 8. Transacting business as agent of foreign corporation not

licensed to do business here

o 9. Any other ground that would render it unfit to do business

here

Merger and consolidation

• What is a merger, and what is a consolidation?

o Merger one corporation absorbed by another

o Consolidation combine to form a new corporation

• What is the procedure?

o 1. Plan for merger or consolidation drafted by eachcorporation’s BOD

Approved by majority of BOD and at least 2/3 of OCS

Any amendment subject to same voting requirement

o 2. Articles of merger or consolidation executed by each

corporation, signed by P or VP and certified by Sec/Asst. Sec,

setting forth:

A. Plan of merger or consolidation

B. For stock corporation, the number of outstanding

shares, and for non stock, the number of members

C. The result of votingo 3. Four copies of Articles submitted to SEC for approval

For special corporations, must have approval of the

designated government agency as well (ex. banks)

• Can dissenting SHs exercise appraisal right?

o Yes.

• When does merger or consolidation take place?

o Upon SEC approval

• What is the effect of merger or consolidation?

o 1. The separate existence of the absorbed corporation will

cease to exist

o 2. Acquire rights, portfolio of business, and assume liabilities of

the absorbed corporations

o Is it bound to absorb the employees?

No, as long as it is done in GF. The decision to retain

employees is within legitimate sphere of management

prerogative.

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• XYZcorpissuedaPNtoD XYZwasthenabsorbedbyABC D o 3Examinationinanimpeachmentcase



• XYZ corp issued a PN to D. XYZ was then absorbed by ABC. D

then sought to enforce the PN against ABC. Is it liable, even if the

PN was in XYZ’s name?

o Yes. ABC assumed XYZ’s liabilities.

Laws on confidentiality of bank transactions (RA 1405)

• What is the purpose of this law?

o To encourage people to deposit in banks and avoid private

hoarding

• What is secrecy of bank deposits?

o Bank deposits and investment in bonds issued by the

government are confidential

o Thevery existence of the account is confidential

•Who are covered by the prohibition under law?

o Prohibition against giving details is only limited to bank officers

and employees. So this prohibitiondoes not cover private

persons.

• What deposits are covered?

o 1. ALL DEPOSITS OF WHATEVER NATURE, with banks or

banking institutions

o 2. Investments in bonds issued by the Philippine Government,

its subdivisions and instrumentalities

• Does this law cover trust accounts?

o

Yes.o The law says that deposits of whatever kind or nature are

covered by this law. So concept of deposit is not limited to

savings, time, or current deposits.

• Exceptions?

o 1. Depositor gave written consent

o 2. If a bank officer or SH will borrow money from his own bank,

he’s required to waive secrecy of bank deposits

o 3. Examination in an impeachment case

o 4. When there is an order from the court in cases of bribery or

dereliction of duty

o 5. When the money/bank account is the subject matter of the

litigation

Even if it is no longer in the possession of the

defendant

Ex. in a case, the money was transferred from

account to account to make it difficult to trace

Ex. To settle the estate of the deceased (in Special

Proceedings)

Contra:X sold treasury bills to Y for a sum of money.

X refused to deliver the bills. Y sued for specific

performance. Y then wanted to examine the bank

account of X.

• HELD: This is NOT covered by this exception

because the account is not the subject

matter of litigation.

o 6. Under theAMLA, the AMLC can inquire into deposits where

there is probable case of money laundering (some requiring

court order, some not – see discussion of AMLA), or if there

are covered or suspicious transactions

o 7. Under theHSA, Anti-terror council can apply with CA for

authority to examine deposits upon probable cause of

commission of terrorism/conspiracy

o 8. Under theNIRC, the CIR can examine bank deposits if: 1. The depositor died, to check net estate

2. Taxpayer applied for compromise of tax liability on

ground that he is in no financial position to pay

3. Upon the request of information from the foreign tax

authority pursuant to an international convention or

agreement to which the Philippines is party

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o 9ThePDICmayexaminedepositsincaseoffindingsthat o Whocaninquire?



o 9. ThePDIC may examine deposits in case of findings that

banks engage in unsafe or unsound bank practices

o 10. Under theUnclaimed Balances Act, disclosure to the

Treasurer of the Philippines of dormant deposits of at least 10

years

• Gangcaico: The OMB Law provides that the OMB can inquire into bank

deposits during investigation. This was the old doctrine. But in this

case it was reversed.Requisites now before OMB can examine:

o 1. There must be a case in court already

o 2. The account must be clearly identified

o 3. Inspection covers only the account identified

o 4. Bank employees and owner are notified

• Is there a violation of secrecy of bank deposits if the account is

garnished?

o No, there is none. Bank accounts can still be garnished. The

amount is not actually disclosed.

• Foreign Currency Deposits Act

o Foreign deposits are exempt from examination

o And also exempt from garnishment

BUTsee exception below, in the rape case

Judgment was rendered against a foreign national

who raped a Filipino child. He escaped. The only

source of money he had was a foreign currency

deposit with Chinabank. The bank argued it

cannot be garnished. HELD:

• It can be garnished. The FCDA was for the

purposes of encouraging investment, which

this situation does not fall under.

o Only one exception under the FCDA itself:

Depositor gave written consent

o Which exceptions under other laws apply to FCDA?

1. AMLA exceptions

2. HSA exceptions

3. NIRC exceptions

o Who can inquire?

1. PDIC

2. AMLC

N.B.But not the Anti-terrorism council because the

law forgot to provide for it

• General Banking Law:

o There is secrecy of bank transactions. No officer or employee

may disclose information about funds or property belonging to

private individuals without court order. This covers all funds

and property, unlike FCDA.

o It covers even safety deposit boxes.

o It does not cover public officials’ accounts (ex. Clarissa

Ocampo during impeachment trial) –requisites:

1. Funds belonged to public officer

2. It was disclosed to an official body (ex. Senate)

3. And it was by court processes

General Banking Law

Types, defnition

• What is the definition of banks?

o An entity engaged in lending funds obtained in the form of

deposits

o Receives money from the public and lends it out to them

o What is required?

Banks must be STOCK corporation with funds

obtained from the public

“Public” means that there must be at least 20

depositors

• How are banks classified?

o 1. Universal banks

o 2. Commercial banks

o 3. Thrift banks (RA 7906 primary)

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A.Savingsandmortgagebanks 2.Musthavepurely100%Filipinoequity



A. Savings and mortgage banks

B. Stock savings and loan associations

C. Private development banks

o 4. Rural banks (RA 7353 primary)

o 5. Cooperative banks (RA 6938)

o 6. Islamic banks (RA 6848)

• What are the powers of a universal bank?o 1. Everything commercial banks can do

o 2. Powers of an investment house

o 3. Power to invest in non-allied enterprises

• What are the powers of a commercial bank, in addition to ordinary

powers?

o [Instruments]

o 1. Accepting and issuing LOC

o 2. Discounting and negotiating PNs, drafts, BOEs, and

evidences of debt

o 3. Accepting and creating demand deposits (checks and drafts)

o [Deposit, credit]

o 4. Receiving other types of deposits and deposit substitutes

o 5. Extending credit

o [Foreign exchange, securities]

o 6. Buying and selling foreign exchange, gold, and silver bullion

o 7. Acquiring marketable bonds and debt securities

• What are thrift banks?

o Those that provide short-term working capital, medium-to-long

term financing to businesses engaged in agriculture, services,

industry, and housing, by –

o 1. Accumulating savings of depositors and investing them

o 2. Capital loans secured by mortgages, bonds, CM, etc.

• What are rural banks?

o Those that provide credit facilities to farmers and merchants, to

their cooperatives, people of rural communities

o Special rules:

1. Can have elective or appointive local officials serve

as director, officer, or consultant

2. Must have purely 100% Filipino equity

3. Cooperatives or corporations primarily organized to

hold equities in rural banks may be incorporators

• What are cooperative banks?

o Those organized primarily to provide financial and credit

services to cooperatives

• What are quasi-banks?

o Entities engaged in borrowing through deposit substitutes for

the purpose of relending or purchasing receivables/other

obligations

o (Ex. money market placements)

• What are trust entities?

o Trust entities are those authorized by the MB to act as trustee

or administrator of any trust, or hold property in trust or on

deposit for benefit/use of others.

o These funds and properties in trust must be kept separate from

those held under general banking functions.

• Central Bank (CB) supervises bank operations.

o CB can examine companies where banks or quasi-banks have

controlling interest

o Nobody can engage in banking or quasi-banking without

Monetary Board authorization.

Shares, etc

• What kind of shares can banks issue?

o

Banks can only issue par-value shares so you can ensure itmet the minimum paid-up capital requirement.

• Can banks acquire their own shares?

o No, unless given as security as loan.

o The bank has to dispose these shares within six months after it

got them.

• What is the limit on ownership of shares?

109

o Unlike the former law, the GBL does not impose a limit on the • Equity investments of universal banks in financial allied



, p

number of shares that can be owned by the same family or

related interest.

o Rules on family groups and related interests

What are family groups?

• Stockholdings of individuals related to each

other within 4th degree of consanguinity or

affinity, legitimate or common law, are

considered family groups.

What are related interests?

• Two or more corporations owned or

controlled by the same group of persons or

family group are related interests.

What is required?

• The family group or related interests MUST

disclose such fact in all their transactions

with the bank.

o Foreign individuals and foreignnon-bankcorporations can only

own up to 40% of total voting shares of a local bank.

The restriction here refers to TOTAL equity

participation of foreigners in the bank

What is the test of foreign citizenship under this

rule?

• Control test of majority stockholders, and not

place of incorporation

o Filipino individuals and domestic non-bank corporations can

only own up to 40% of the voting stock of a local bank.

The restriction here refers to individual equity

participation of non-bank domestic corporations

o Foreign banks

Up to 60% equity of domestic banks (see discussion

immediately below)

q y

enterprises:

o Universal bank can own up to 100% equity of a thrift bank,

rural bank, or financial allied enterprise

o Universal or commercial bank can own up to 100% voting stock

ofonly one other universal or commercial bank.

Type of shareholder Limitation on shares

Family groups, related interests Unlimited, but must disclose

Foreign individuals and non-bank

foreign corporations

40% of total voting shares of local

bank

Filipino individuals and domestic

non-ban k corporations

40% individual equity

Foreign banks 60% equity of domestic banks

Universal bank 100% equity of thrift bank, rural

bank, or financial allied enterprise

100% equity ofonly one otheruniversal or commercial bank

Commercial bank 100% equity ofonly one other

universal or commercial bank

• What are the three modes of entry for foreign banks in the

Philippines?

o 1. Acquiring up to 60% of an existing domestic bank

o 2. Investing up to 60% of a new banking subsidiary

incorporated under Philippine laws

o 3. Establishing branches with full banking authority

o What is common among the three?

Need MB approval

o What is the extent of their powers?

Same functions and privileges as a Philippine bank of

the same category

o When is a “head office guarantee” required?

Only for establishment of branches (mode 3)

110

• Requirements on directors? • Universal banks:



q

o 5-15

o At least 2 must be independent – not connected with the bank,

its subsidiaries, or affiliates

o What if there are bank mergers?

Can have up to 21.

• Appointive or elective official – limits?o Cannot work in a bank, whether part or full time.

o Exceptions?

1.Incidental to financial assistance (ex. PDIC gave

financial assistance; can require that an officer sit as

trustee in that company’s law)

2. Provided by existing laws (ex. DBP is required to

invest in all rural banks, so they can have people sit in

the boards)

• How can meetings be conducted?

o Can conduct meetings by teleconference or video conference.• Rule on banks and their branches:

o Universal and commercial banks may open branches in the

Philippines or abroad with prior approval by the CB.

o A bank and its branches shall be treated as one unit.

Powers of banks

• Special powers of commercial banks (and universal)?

o Commercial banks automatically have the power to engage in

quasi-banking.

o Can automatically accept opening of current accounts

Unlike other banks (e.g. saving and mortgage or thrift

banks) which can accept current accounts, only with

special authorization from Monetary Board.

o Commercial banks can invest in allied enterprises, subject to

MB approval.

N.B.For universal, even non-allied enterprises

o Universal banks may act as an investment house

o But universal banks HAVE TO list shares in the stock market

• What is the nature of deposits?

o They are in the nature of simple loans. Thus, the bank is the

debtor, and the depositor is the creditor.

o Thus, the bank can make use as its own the money deposited.

The money is not held in trust or for safekeeping.

o Third persons may not have a right to the money deposited

unless there is court order for garnishment. The debtor-

creditor relationship is between the bank and the depositor, and

not third persons.

o Officers are not liable for estafa if they used the money

deposited or failed to return the amount.

o Does right to compensation exist?

Yes. The bank can set-off indebtedness of the

depositor with deposits, if the requisites apply.

BUT the bank must inform the depositor prior to such

set-off.

• What is the degree of diligence required to be exercised by banks?

o Extraordinary diligence in the handling of deposits

o What about deposit substitutes (ex. money market

placements)?

Just ordinary diligence

o What are essential for a bank to be a mortgagee in GF?

1. Ascertain mortgagor’s title or ownership of the

property mortgaged 2. Check both duplicate original title of the property

and the title in the ROD

3. Conduct ocular inspection of the property if there is

something which would arouse suspicion and require

an ocular inspection

111

• Single Borrower’s Limit (SBL) – the law limits this to 20% of net worth • c) a bank in which controlling proportion of



g

of the bank to a single borrower

o The MB has discretion to raise this

o In computing this, if the loan is secured with treasury bills or

CB bills, bills of lading, trust receipts, and other readily-

marketable goods – the ceiling can be increased by 10%

o Who are included in the calculated of SBL?

Loan to corporation where the SB has majority

interest, subsidiaries of a corporation, members of a

partnership/association

o What is not included?

1. Loans that are secured by obligations of the BSP or

the government

2. Loans covered by assignment of deposits

maintained in the lending bank and held in the

Philippines

3. Loans under LOC to extent covered by the margin

deposits (security deposit by a customer with a broker

for futures or option contracts)

4. Other non-risk items as specified by the MB

• DOSRI loans (bank exposure to Directors, Officers, Stockholders and

Related Interests)

o What are requisites to be covered under the DOSRI rule?

1. Borrower is a director, officer, stockholder, or has

related interest

2. He contracts a loan or any form of financial

accommodation

3. The loan or accommodation is from:

• a) his bank,

• b) a bank that is a subsidiary of a bank

holding company [and both his bank and

lending bank are subsidiaries],

shares is owned by the same interest that

owns a controlling proportion of shares of his

bank

4. The loan or financial accommodation is in excess of

5% of capital and surplus of the lending bank or in the

maximum amount allowed by law, whichever is lower

o Generally, DOSRI transactions are allowed, however, what

restrictions must be complied with?

1. Procedural:Approved by majority of the directors

excluding the director concerned

2. Terms must be arms-length

3. Limits on amount that would be lent

• Loan must be limited also to amount

equivalent to his encumbered deposits and

book value of their paid-in capital

contribution to the bank

o N.B. so, not just his deposits but

also his paid-in capital contribution

• When does an individual ceiling not

apply?

o 1. Fringe benefits extended by the

bank to officers

o 2. Loans by cooperative banks to

members

o 3. Secured by collateral which MB

considers as non-risk items

4. Aggregate ceiling

• The MB may regulate amount of loans,

credits, accommodations extended to

DOSRIs, including bank investment in their

enterprises.

112

• Current Manual for Regulation of Banks o This is void. This is a bailment and this is part of the nature of



provision sets ceilings:

o 15% of total loan portfolio of bank

o 100% of combined capital accounts

o Whichever is lower

5. Reportorial requirement: approval of the loan must

be entered in bank records and a copy of the entry

transmitted to the Supervising and Examination

Sector of the BSP

• Value of collaterals?

o If secured by REM – up to 75% of value of property

o 60% of the improvements

o CM – 75%

• Statement of purpose:

o When a borrower loans money from a bank, he must state his

purpose for doing so

o If he diverts it for some other reason, the bank may demandimmediate payment

• Foreclosure:

o Check special laws on banks foreclosure [already know this]

Note that the purchaser in the auction sale, whether

judicial or extra-judicial shall have the right to enter

upon and take possession of the property immediately

after the date of the confirmation of the auction sale

o If the property will be redeemed, the mortgagor must pay

amounts due on the mortgage. Ex. there are two loans

secured by the REM, and the 2nd loan became due during

redemption period, he must pay both.

• Total investment in real estate, including equipment for use by the

bank:

o 1. Cannot exceed 50% of capital

o 2. If it acquires real property it must be disposed within 5 years

• Is it valid to stipulate that the bank will not be liable for losses of

property in the safety deposit box?

the obligation.

o Stipulation that a bank is not liable for delay in wire-transfer is

similarly void.

• Can a bank engage in insurance?

o No.

o But the bank can sell insurance policies if the insurance

company is a subsidiary or affiliate of the bank.

Prohibitions

• Prohibitions against officers or employees:

o 1. Making false records of transactions affecting the operations

of the bank

o 2. Disclosing bank deposits to unauthorized persons without

prior court authorization

o

3. Overvaluing securitieso 4. Accept gifts or fees to approve a loan

o 5. Outsourcing inherent bank functions

Ex. lending and accepting deposits

o 6. Employing employees with lengthy probationary periods

Cannot do the usual S.M. practice for bank tellers

(replacing them every 5 months or so)

o 7. Engaging in unsafe or unsound banking practice:

A. material loss/damage or abnormal risk/danger to

institution

B. same, to depositors, creditors, investors, SH, public

in general

C. undue injury or unwarranted benefits through

manifest partiality, evident BF, or gross negligence

D. manifestly and grossly disadvantageous to the

bank (w/n the officer or director profits)

o 8. Declaring dividends:

A. that are greater than accumulated net profits

113

B. if its clearing account with BSP is overdrawn commercial papers of Camella homes. But Ayala did not push through



C. deficient in required liquidity floor for government

deposits for 5 days or more

D. does not comply with liquidity standards/ratios

E. committed major violation as prescribed by BSP

• An urban bank was closed, and that some favored clientele

received advance warning so they could take out their loans. Is

there a violation?

o Yes, this was an act that caused unwarranted benefit to parties

due to partiality, bad faith, etc.

• Head office guarantees prompt payment by its Philippine branches.

• Banco Filipino: SC appointed judge Cosico to receive evidence and he

made a finding that Banco Filipino (BF) must be closed. The sc issued

a resolution that these hearings were not thorough, so they appointed

Judge Ynares. Ynares said BF was solvent and had 1B in assets. The

closure violated due process because the bank was closed before the

investigation was finished. The law was then changed saying that a

bank may be closed before completing examination.

• BPI family bank had three depositors. A deposited a check issued by B.

The money inside B’s account came from an authorization allegedly

signed by C to debit his account and transfer the amount to B.

Depositor C claimed it was forged so the bank debited the account of A,

because the money was eventually credited to him.HELD: Wrong,

because money was the medium of exchange. Money is money, and no

evidence of title is required to transfer.

o Ex. A robber held up passengers in a jeepney and went to adepartment store to buy clothes using the money. The victims

cannot claim the money back from the store. This the analogy

of the SC’s reasoning.

• Senator Villar floated bonds abroad in dollars and started Camella

Homes. There were talks that Ayala will start a joint venture with

Camella. A customer asked to invest her funds in the long term

with the JV. The long term papers plunged in value, so the customer

lost money. The customer sued the bank. HELD: The customer bears

the risks because she gave the instructions to the bank. She cannot

blame the bank for her bad investment decision.

Central Bank Act (RA 7653)

• What are the State policies?

o 1. State maintains a central monetary authority that functions

and operates as an independent and accountable body

corporate in discharging mandated responsibilities re: money,

banking, and credit.

o 2. BSP is a GOCC that enjoys fiscal and administrative

autonomy.

• Creation of the Bangko Sentral ng Pilipinas (BSP):

o It is the central monetary authority mentioned above

• What is the responsibility and primary objective of the BSP?

o 1. Provide policy directions in areas of money, banking, and

credit.

o 2. Supervise operations of banks

o 3. Exercise regulatory powers over finance companies and

quasi-banks and those performing quasi-banking functions

• What is the Monetary Board (MB)?

o It exercises the powers and functions of the BSPo It is composed of 7 members, appointed by the President for 6-

year terms:

1. Governor of BSP (treated as department head

subject to CONA confirmation)

2. Cabinet member designated by President

3. 5 from private sector (staggered terms)

• How does the Monetary Board (MB) act?

114

o It needs 4 votes to approve any decision move on to receivership/liquidation (see next



o In case of emergency, the governor – with 2 concurring

members of the board – can act on any matter requiring MB

decision

But have to report to the President and Congress

within 72 hours

• What steps can the MB take when the bank is under distress?

o 1. Place it under conservatorship

When the bank is having liquidity problems

What are the powers of the conservator?

• 1. Take charge of assets, liabilities, and

management thereof

• 2. Reorganize the management of the bank

• 3. Collect all monies and debts due the bank

• 4. Exercise all powers necessary to restore

viability

• 5. Can overrule the decisions of the bankofficers/directors when it will prejudice the

bank

o To what power does this apply?

Only to defective contracts

o Can it apply to valid contracts?

No. This will impair

freedom of contracts

How long can conservatorship last?

• 1 year. Afterwards, it will be determined if it

can survive When is conservatorship terminated?

• 1. MB is satisfied the institution can operate

on its own and conservatorship is no longer

necessary

• 2. Continuance of business will involve

probable loss to depositors or creditors –

part)

o 2. Receivership

Must there be prior conservatorship?

• No.

What is the difference?

• The bank must be in insolvent here When can you declare receivership?

• 1. Unable to pay liabilities as they become

due in the ordinary course of business

o Does not include inability to pay due

to extraordinary demands

o Ex. Equitable bank run after

impeachment trial

• 2. Insufficient realizable assets to meet

liabilities

• 3. Cannot continue without probable loss todepositors or creditors

• 4. Willfully violated cease and desist order

that has become final, or dissipation of

assets of the bank

o In this case, forbidding from doing

business and appointment of PDIC

as receiver is summary

Who is the statutory receiver?

• The PDIC is the statutory receiver

• But if quasi-bank, any person of recognizedcompetence in banking or finance

Duties of the receiver?

• 1. Gather and take charge of all assets and

liabilities, and administer these for the

creditors

• 2. General powers of receiver in ROC

115

o Cannot pay or dissipate any of the rehabilitated it. The old orders to close it were



assets UNLESS it is for

administrative expenditures

• 3. May deposit or place funds of the

institution in non-speculative interests

Case: Manila Banking was placed under receivership.

The officers sold real property belonging to Manila

Banking and the receiver approved it.

• HELD: Invalid. The moment the bank was

placed under receivership, the officers lost

their authority to dispose its properties

because they now pass under the control of

the receiver. The receiver cannot approve

the sale because his powers are limited to

acts of administration.

What must the receiver decide within 90 daysfrom taking over?

• 1. Whether the institution may be

rehabilitated or is in a condition that it may

resume business (with safety to general

public and creditors).

o MB must approve this determination

of resumption

• 2. Otherwise, proceed to liquidation

o 3. Liquidation

What is the close now, hear later scheme?

• No prior hearing needed to appoint a

receiver and close the bank. It is enough

that subsequent judicial review is given. To

require prior hearing would defeat purpose of

closure.

General Bank: It was closed and nobody was willing

to invest fresh capital. Allied Bank bought and

questioned. They claimed there was an unusual bank

run. But the court found that there was bankruptcy

because they extended unlimited credit facilities

What happens in liquidation?

• 1. Receiver files ex parte in the RTC petition

for assistance in liquidation

o According to liquidation plan by

PDIC (or MB, if quasi-bank)

• 2. RTC adjudicates disputed claims against

the institution, liabilities of officers and

employees, and issues re: liquidation plan

• 3. Convert assets to cash and pay claims

according to concurrence and preference of

credits

Effect of receivershipor liquidation?

• 1. Assets of institution cannot be garnished,

attached, levied, executed

o Because they are deemed in

custodia legis when in the hands of

the receiver

• 2. No preference even if the claimant-

depositor obtained a writ of preliminary

attachment

o Remedy is to join in liquidation

proceedings.

• 3. Appointment of receiver does not dissolve

corporation. It does not eliminate legal

personality of bank. It can sue and be sued,

but all actions pass through the

receiver/liquidator.

Can the BSP forbid the bank to do business?

116

• Yes, but when the BSP decides this, the • Only the CB can issue currency and all notes issued by the CB are



bank can still foreclose mortgages and the

prescriptive period to foreclose is not tolled.

Is an insolvent bank closed by the BSP liable to

pay interests on deposits of clients?

• No. A bank cannot pay interest when it is not

operating.

• But interests on loans extended by the BSP

are still demandable.

• What is the character of all these remedies?

o No prior hearing required

o Final and executory

o What is the remedy?

Within 10 days, file a petition for certiorari

o From when do you count the 10 days?

Count from receipt of order by the BOD

Filing must be authorized by majority of SHs interest• MB may impose sanctions including liquidation of a bank when:

o [violations]

o 1. There are violations of articles and by-laws

o 2. Willful failure to comply with banking law/regulation of Mb

o 3. Conducting business with irregularities

o [re: information and supervision]

o 4. Failure to submit reports

o 5. Refusal of examination

o 6. Willfully making false statements to MB

• What is the provisional remedy against erring officers?

o 1. MB may place under preventive suspension any officer of

the bank pending investigation – up to 120 days

o 2. If the officers continue with the violation, can issue a cease

and desist order

Officers can request for a hearing within 5 days from

order to question the cease and desist order, or else it

becomes final

legal currency:

o Coins, denominations of 25c, 10c, and 5c are legal tender up

to 100 pesos.

o Denominations of 1, 5, and 10 are legal tender up to 1000

pesos.

o N.B. The old rates were 25 and 50 pesos, but they have been

changed to these rates in 2006 by CB Circular 537

o Someone went shopping in the supermarket and paid

coins to the cashier, total more than 1000 pesos. The

cashier said it is not legal tender. Is she correct?

Yes.

o What is its powers regarding money function?

May prevent circulation of foreign currency or of

currency substitutes, or of reproduction of facsimiles

of BSP notes

Investigate, make arrests, conduct search and seizure

in accordance with law to maintain integrity of

currency

• What is the responsibility and primary objective of the BSP?

o Maintain price stability conducive to a balanced and

sustainable growth of the economy. Promote and maintain

monetary stability and the convertibility of the peso.

• There are different tools held by the MB for this purpose:

o 1. CB maintains international reserves. The CB maintains an

account with the Federal Reserve system in the US. The CB

thus can buy and sell foreign currency.

o 2. With concurrence of MB and with president, the MB can

restrict sales of foreign currency. Back in the 60’s the MB

ordered all banks to surrender all their foreign currency to the

CB.

o 3. Require exchange obtained by anyone to be sold to the

bank.

117

There are laws on paper saying that upon earning State policy and SEC



money in dollars, you have to sell them to the bank

within 5 days. But because of our commitment to the

IMF, this is not implemented anymore.

• The MB can:

o 1. Determine exchange policy,

o 2. Require banks to sell excess foreign exchange,

o 3. Buy and sell credit instruments from banks (Discount

policy)

Extend loans and advances (w/ charges and interests)

to banking institutions to influence volume of credit

o 4. Extend loans to banks for up to 7 dayswithout collateralfor

the sake of liquidity

This can influence the volume of credit, consistent

with the objective of price stability

o 5. In national emergency, by vote of at least 5 members, the

MB can approve ofextraordinary loans

Amount must not exceed 50% of the bank’s total

deposits and deposit substitutes

Loans released in two tranches (“installments”)

o 6. Can buy and sell debt instruments (Open Market

Operations)

BSP may buy and sell in the open market evidence of

indebtedness directly issued by the government or by

a government instrumentality (and guaranteed by the

Government)

o 7. Reserve requirements – can increase this (to decrease the

amount available for loans by the banks) vis-à-vis deposit

liabilities

Securities Regulations Code

• What is the purpose and scheme of the Securities Regulations

Code?

o 1. Protect public investors from fraudulent schemes

o 2. Encourage public investments by regulating sale and

disposition of securitieso 3. Establish a socially conscious free market that self-

regulates, encourages widest participation of ownership in

enterprises, enhance democratization of wealth, and promote

development of capital market

o 4. Protect investors, ensure full and fair disclosure of securities,

minimize/eliminate insider trading and fraudulent/manipulative

devices that distort the free market

• Composition of SEC:

o 1 chairperson, 4 commissioners

o Collegial bodyo 7 year terms each

• What are the powers and functions of the SEC?

o [Registration and supervisory]

o 1. Jurisdiction and supervision over business organizations

o 2. Approve, reject, suspend, revoke, require amendments to

registration statements, and registration/licensing applications

o 3. Supervise, monitor, suspend, take over exchanges, clearing

agencies, and SROs

o [Regulation]

o 1. Regulate, investigate, supervise activities of persons to

ensure compliance with SRC

o 2. Compel officers of registered corporations or association to

call meetings of SHs or members

o 3. Issue subpoenas duces tecum or summon witnesses in

proceedings, or procure books

o [quasi-legislative]

118

o 1. Formulate policies and recommendations on issues re: o 2. In a common enterprise

NBth h itblititti t d



securities market and make recommendations to Congress

o 2. Issue rules and regulations and opinions

o [compliance and punishment]

o 1. Impose sanctions for violation of rules and regulations

o 2. Enlist aid and support of government agencies to implement

its powers and functionso 3. Issue cease and desist orders to prevent fraud/injury to

public

o 4. Punish for contempt according to ROC

o 5. Suspend or revoke the franchises or certificates of

registration

o 6. Exercise necessary or incidental powers

• Which cases have been transferred to RTC jurisdiction from the

SEC?

o 1. Investors and corporate affairs

Particularly fraudulent devices and schemesemployed by directors detrimental to public

interest/other firms

Ex. insider trading, etc.

o 2. State and corporate affairs

In relation to legal existence of corporations,

partnerships, and associations

o 3. Intra-corporate and partnership relations

e.g. Controversies in election, appointment or

directors or trustees

o 4. Petitions for suspension of payment corporate rehabilitation

Registration of securities

• What is an investment contract – requisites?

o 1. Investment of money

N.B. a “no money out” transaction is not an

investment

N.B. thus charitable institutions are not covered

o 3. With expectation of profits

o 4. To be derived primarily from efforts of others

N.B.So if the “investor” contributes actual work, it’s

not an investment contract

• What are securities?o Shares, participation, or interestsin a corporation/commercial

enterprise/profit-making venture, and evidenced by a

certificate, contract, instrument (written or electronic)

o In particular:

1. Shares of stock, bonds, debentures, notes,

evidence of indebtedness, asset-backed securities

2. Investment Ks, certificates of interest or

participation in profit-sharing agreement, certificates

of deposit for future subscription

• Investment K – a person seeks to use the

money of others on the promise of profits

3. Fractional undivided interests in oil, gas, or other

mineral rights

4. Derivatives (options and warrants)

• Options – contracts that give the buyer the

right to buy/sell an underlying security at a

predetermined price on or before an expiry

date

o Call options – rights to buy

o Put options – rights to sell• Warrants– right to subscribe/purchase new

shares or existing shares in a company on or

before an expiry date

5. Certificates of assignments, certificates of

participation, trust certificates, voting trust certificates,

and the like

119

6. Proprietary or non-proprietary membership o 1. No securities can be sold or offered without registration

S C



certificates in corporations; other instruments

o XYZ borrows money from persons and in exchange issues

postdated checks in an amount equivalent to their value +

interest, maturing after 2 months. The lenders can re-lend

these amounts after and even increase contribution when

the checks mature. The SEC found out and issued a cease

and desist order for selling unregistered securities. Is the

SEC right?

Yes, it is. It is one thing to issue checks for isolated

transactions, but another for an elaborate scheme that

turns postdated checks as instruments for pseudo-

investment. “Securities” also include commercial

papers evidencing indebtedness of any person or

entity.

•

What are specific examples of securities?o A foreign exchange trading transaction is an investment

contract

o Pyramiding scheme is an investment contract

Because there is expectation of profit from the efforts

of other people (you get commissions)

o Someone with exploration contracts for oil or gas can sell

participation rights

o Derivatives – limitless (depends on creativity of the human

mind)

Different from spot trading. Spot trading is where Xbought $1000 (where exchange rate is 43 pesos to a

dollar), but the seller gives credit: 10 days to pay.

Here, you are not speculating, you have already

agreed to a price, you are just given credit.

Whereas in derivatives, you must have a license from

the MB.

• Rules on registration?

statement filed with and approved by the SEC

o 2. Prior to sale, information on securities made available to

each prospective purchaser

• Which securities need not be registered?

o 1. Security issued or guaranteed by the Phil. Government,

political subdivision or agency, or instrumentality of government

o 2. Security issued or guaranteed by government of any country

with which Philippines maintains diplomatic relations (or

subdivision) – on the basis of reciprocity

o 3. Certificates issued by receiver/trustee in bankruptcy

approved by proper adjudicatory body

o 4. Security or derivatives which sale or transfer is under

supervision of Insurance Comm, HLURB, BIR

o 5. Security issued by a bank except its own shares of stock

o N.B. Usually these are issued by the government or

regulated by another agency. For instance, certificates

issued in bankruptcy proceedings, lots, condominiums,

securities issued by banks.

o Why are they exempt securities?

These are non-speculative in nature. The return on

investment is somewhat assured.

• What transactions are exempt from registration?

o [A. isolated and minor transactions]

o 1. Isolated transactions

Not in repeated and successive transactions

o 2. Sale of securities to less than 20 persons within 12 months(deemed isolated)

o [B. with existing underlying relationships]

o 1. Stock dividends (to existing SHs)

o 2. Sale of shares to existing SHs

o 3. Issue and delivery of security in exchange for any other

security of the same issuer pursuant to right of conversion

120

If a corporation floated bonds and there is an option to

h if k

o [violations]

o 2ViolationofSRC



exchange it for stocks

o 4. Pre-incorporation subscription or pursuant to increase in

A.C.S. – without compensation or remuneration for the

transaction – and where purpose of solitication is to comply

with legal requirements

o 5. Exchange of securities by the issuer with its existing security

holders exclusively, where no remuneration is paid

o [C. secured by mortgage and the like]

o 1. Sale by pledgee or mortgagee foreclosing

o 2. Issuance of bonds secured by mortgage, where the entire

mortgage + all the bonds/notes secured thereby sold to one

buyer (who is the underwriter)

Ex. Meralco will float $500M bonds secured by

mortgage on its assets. One bank bought all that.

This is exempt.

o [D. sophisticated transactions]

o 1. Judicial sale or any extra-judicial sale/execution sale by

admin/guardian/receiver/trustee in insolvency or bankruptcy

o 2. Broker’s transactions, executed upon customer’s orders, on

any registered exchange or trading market

o 3. Sale to banks, etc. and other sophisticated investors not

needing protection from the SEC

Bank

Regulated investment house

Insurance company

Pension fund/retirement plan maintained by the RP

government or those authorized by government

Investment company

Others, as deemed by the SEC

• Grounds for disapproving application for registration of

securities?

o 1. If corporation is insolvent

o 2. Violation of SRC

o 3. Engaged in fraudulent transactions or about to engage in

such

o 4. Issuing officer/SH convicted of moral turpitude or fraud

o [misinformation or lack thereof]

o 5. False or misleading annotations as to material factso 6. Failed to comply with conditions for registration

o 7. Registration is inaccurate or incomplete

Protection of investors

• What is the shift of the Philippine securities registration system?

o It has shifted from a merit-based system to a disclosure-based

system. So even if securities are potentially valueless (ex.

issued by a company on the brink of insolvency), as long as

these facts are properly disclosed, the SEC will not deny

registration.

• What is a tender offer?

o Publicly announced intention by a person or group of persons

to acquire equity securities of a public company (a type of

“takeover bid”).

It is a public, open offer to all stockholders of the

corporation.

It is an offer for them to tender their shares on the

terms specified in the offer.

o Purpose:To protect minority SHs from any scheme to dilute

their shares. It gives them the chance to exit the company

under reasonable terms and the chance to sell their shares at

the same price as those of majority SHs.

• When is a tender offer required?

o If a person or group intends to acquire:

1. At least 35% equity of a listed corporation

121

2. At least 35% equity of an unlisted corporation, if it

h tl t50M t d200SH ith tl t

• 2. Not yet been accepted by the offeror, and

• 3After60daysfromthedateoftheoriginal



has at least 50M+ assets and 200 SHs with at least

100 shares each

3. At least 35% of equity of a listed corporation over a

period of 12 months

o NOTE: in the codal this was 15% and 30% but the SEC rules

changed these to 35%

o N.B.This requirement applies even to indirect means of

acquiring control

Ex. Shares of mother corp. which owns a subsidiary

will be sold

• What are not covered by the tender offer rule?

o [New stocks]

o 1. Purchase from unissued capital

o 2. Purchase of shares from increase in ACS

o [In relation to proceedings]

o 1. Purchases in connection with privatization undertaken by thegovernment

o 2. Purchases in connection with corporate rehabilitation under

court supervision

o 3. Merger or consolidation

o [Public sales]

o 1. Purchases through open market at prevailing market price

o 2. Purchase in connection with foreclosure proceedings

involving a pledge/security arrangement

• What is the procedure for making a tender offer?

o

1. File a declaration with SEC of intent to make tender offero 2. Furnish the issuer of securities the necessary info

o 3. Publish and send out requests/invitation to tender shares

o 4. SHs deposit securities pursuant to the offer or request

Requisites if the depositor wants to withdraw the

securities deposited?

• 1. Done throughout period the offer remains

open, and

• 3. After 60 days from the date of the original

tender offer or request

o except as the SEC may otherwise

prescribe

o What if the securities offered exceeded what the

person/group intend to purchase?

The offered securities are purchased pro rata,

disregarding fractions

This rule also covers: securities depositedwithin 10

daysfrom increased consideration offer

N.B. if the person/group offers higher consideration to

attract more offers, the initial depositors must also be

given the higher consideration

• What is proxy solicitation?

o A request that a corporate shareholder authorize another

person to cast the shareholder’s vote at a corporate meeting.

• What is the rule on proxy solicitation?

o No broker or dealer can give any proxy in respect to any

security carried for the account of the customer to a person

other than the customer, if without express written authorization

of the customer

o A broker or dealer who holds or acquires proxy for at least 10%

of the shares must identify who the beneficial owner is, within

10 days of acquisition, in a report given to:

1. SEC,

2. Issuer of the security, and

3. The exchange where the security is traded

Prohibited and Fraudulent Acts

• What are prohibited acts?

o [Market manipulations]

122

o 1. Manipulation of security prices, false transactions, where to

falselyshowactivetradingtherearemultipletransactions

1. If the securities were acquired in good faith in

connectionwithadebtcontractedprior



falsely show active trading, there are multiple transactions

Wash sales (transaction that involves no change in

beneficial ownership thereof)

Matched orders

Market rigging or jiggling

o 2. Effecting alone or with others a series of transactions in

securities that:

Raise price to induce purchase

Depress price to induce sale

Create active trading to induce purchase/sale through

manipulative devices

o 3. Series of transactions for purchase/sale of security to peg,

fix, or stabilize its price

o 4. Manipulative or deceptive devices or contrivance in

purchase or sale of security

o [Deception]o 1. Circulate or disseminate information that the price of a

security will rise or fall because of manipulative market

operations

o 2. Make false/misleading statement with respect to material

facts, which he knew or had ground to believe was

false/misleading to induce purchase or sale of any security

• What are covered by the short-swing profit rule?

o Directors, officers, and principal stockholders (owns more than

10% of a particular class of securities)(i.e. corporate

insiders)who enter into a purchase-and-sale or sale-and-

purchase transaction within a gap of 6 months

o What is the effect?

The corporate insider must return any profits derived

to the securities-issuer

o What transactions are exempted from forfeiture of profits?

connection with a debt contracted prior

2. If the beneficial owner was not such both at the

time of purchase and sale

o When is suit filed?

2 years from when profit was realized, in the RTC

Brought by the issuer, or the owner of the securities

issued by the issuer if after 60 days from request to

prosecute, the issuer fails to do so

• What is a short sale?

o It is the sale of a security that the seller doesn’t own. A short

seller often borrows shares from a broker and sells them to a

third person, hoping the price will drop. He then buys back

from the public, at a lower price, the same number and type of

shares he borrowed from the broker and returns them, profiting

from the lower value of shares.

o N.B. This is perfectly legal. Contrast this with the short-swing

profit sale (which the code actually calls “short sales”)

• What are fraudulent transactions?

o Obtain money or property through untrue statements

o Involves deceit

• What is insider trading? (Usually asked in the Bar)

o Illegal for an insider to buy or sell security while in possession

of material information not available to the public

Unless that insider proves that the information was not

obtained from insider relationship

Or if he had reason to believe the other party knew of

this information or he himself made it known

o Who is an insider?

1. Issuer

2. Officer of issuer

3. Person whose relationship gives him access to

material information

123

4. Government employee, director, etc. (of SEC) with

accesstothisinformation

fraudulent, but the seller cannot decide to invoke that

itisvoid



access to this information

5. Person who learns this info from the foregoing

persons

• N.B.not if it wasn’t communicated to the

person (ex. just randomly stumbled upon a

letter containing such information)

o When is information material?

If it will affect the price

Or important in the decision to buy, sell, or hold the

security

• Civil liabilities:

o Any person acquiring a security may sue if the registration or

statement is untrue as to a material fact

o Who:

1. Issuer and every person who signed the

registration statement 2. [See enumeration in the Code] – prospectus,

fraudulent transactions, insider trading, etc.

• Time sharing:

o Can offer staying in cottages, clubs, etc. to non-members

because sometimes they are empty. These are securities that

must be registered.

• What is the effect of contracts made in violation of the SRC?

o 1. Void as regards the rights of any person who, in violation of

any such provision, shall have made or engaged in the

performance of the contract Ex. Company who knowingly issued unregistered

securities (the infirmity of which the buyer wasn’t

aware of) cannot file action for specific performance to

compel payment

N.B.It is unilaterally void – only as for the violator. So

the buyer can void it because the seller was

it is void.

o 2. Void as regards a non-party to the contract who was aware

of the violation

Transportation Law

Distinguish common carrier from private carrier:

Common carrier Private carrier

Holds self out in common to all

persons who choose to employ him

Agrees to carry persons/goods for

hire in a special agreement

Bound to all who offer such goods as

it is accustomed to carry and tender

reasonable compensation

Only by virtue of special agreement

Subject to regulation; as a public

service

Not subject to regulation to same

regulations

Extraordinary diligence Diligence of GFF

Cannot stipulate exemption from

liability for negligence (void against

PP)

May validly stipulate such

• What are common carriers?

o Hold themselves out to the public as ready to engage in

carrying goods or passengers or both for compensation aspublic employment.

Even if that’s not his primary business

Does not need to have a regular schedule, and can

have limited service (ex. school bus)

o What about transportation of oil through a pipeline?

Still a common carrier – it does not have to be a

vehicle.

124

o Is a travel agency a common carrier?

No,itonlymakesarrangementsforthepassenger.

o 2. Acts of public enemy in war

o 3.Actsoromissionsoftheshipperorowner



No, it only makes arrangements for the passenger.

• What is the level of diligence for a common carrier?

o Extraordinary diligence, as opposed to GFF for a private carrier

o Both in transportation of persons and custody of goods

o Can a common carrier invoke the last clear chance

defense? No, it is a defense in quasi-delict, but does not apply

to liability of passengers.

o What about diligence in selection and supervision of

employees?

No, it’s just a defense in quasi-delict but not breach of

transportation contract.

o What about defects in the parts, even if brand new?

It’s still not a defense. Even if it’s brand new, the

common carrier cannot be complacent. Defect in

components or car part is not a good defense.• What are the defenses available to the carrier?

o 1. Fortuitous event

When is fortuitous event not allowed to be

invoked?

• If there is negligence or delay

When is extraordinary diligence required, even

during a fortuitous event?

• Before, during, and even after the event

(fortuitous event does not justify major delays

after the event)• If there is failure to comply with this there is

concurrent negligence by the transporter

Is fire a fortuitous event?

• As a rule, no, except if caused by lightning.

It’s traceable to human negligence.

What about robbery?

• Robbers must be acting with irresistible force

o 3. Acts or omissions of the shipper or owner

o 4. Character of the goods or faulty packaging

Character of goods:ex. ripening of fruits

Faulty packaging:If obvious from external

appearance that they are not properly packed, and

still the carrier accepted it, it is liable. An owner under-declared the weight of his

package to save money. The carrier accepted it.

This caused the goods to spill from the package.

Held?

• There is shared liability. Extraordinary

diligence includes the carrier examining the

goods and noticing that they are obviously

under-declared.

o 5. Order of competent public authority

o 6. Exercise of extraordinary diligence

If the goods are damaged or lost, what is

presumed?

• The carrier is presumed to have been in fault

Burden of proof is on the carrier to prove exercise of

extraordinary diligence

• When does responsibility of the carrier begin?

o From the time the goods were placed in its possession until the

goods are actually delivered

o Carrier was delivering hemp, but it cannot approach the wharf

because the water was shallow. It sent a lighter to send the

hemp, but it sank.

HELD: The carrier is liable. The transportation

through the lighter was a preparatory act to delivery,

and so was within the K of transportation.

o Carrier was delivering oil, and when it got to the wharf, it was

pumping oil into a tank. The hose was severed, without the

125

carrier noticing, and the oil placed in the tanks spilled into the

waterCaltextheshippersued

• The carrier becomes a depositary, and

diligenceisreducedtoGFF



water. Caltex, the shipper, sued.

HELD: No final delivery yet because the oil spilled

back. Carrier was liable.

o X was waiting for the LRT on the platform, after buying a token

and entering the turnstile. He got into an altercation with the

guard who assaulted him. X fell onto the tracks and got hit by

the train.Is LRT liable?

Yes, because he was there in pursuit of boarding the

LRT.

o After alighting a bus, but waiting to pick up luggage, the same

bus hit one of the passengers. Is the bus liable?

Yes, responsibility only ends after passage of

reasonable time and opportunity to leave the

destination.

The contract of carriage does not automatically end

upon alighting. Contract of carriage includes chance

to get the baggage.

• Upon landing on the dock, and the goods were placed in a

warehouse, but there was no consignee was there delivery?

o No.

o What are the defenses?

1. There was delivery

• Notice given to consignee re: the arrival of

the goods

• Given reasonable opportunity to remove

them or dispose of them

2. There was exercise of extraordinary diligence

• When does the K of transportation terminate?

o 1. When the goods are actually received

o 2. When there is unreasonable delay in receiving the goods

What is the implication?

diligence is reduced to GFF.

o What if the goods were placed in a bonded warehouse

prior to loading or in transit?

The common carrier is still liable, because it has

control and responsibility over the goods

• How could the carrier avoid liability?o Through stoppage in transitu

This is exercised by the seller/owner, before it has

reached the consignee. It’s as if the owner never

parted with ownership of the goods.

o Legal effect: the contract of carriage is terminated; the shipper

becomes akin to a warehouseman/bailee

• What is the nature of services of an arrastre operator?

o The legal relationship between the arrastre operator and the

consignee is akin to that of warehouseman/depositary and

depositor

o Maritime law does not apply to govern the arrastre operator’s

responsibility

• When is a stipulation limiting carrier liability valid?

o It must be reasonable to be valid.

o What are unreasonable?

1. No liability at all

2. Limited liability up to a certain amount

3. Goods transported at risk of owner

4. Exercise of diligence less than GFF

•

N.B.so this is the minimum 5. That the common carrier is not liable for acts of its

employees

o What is valid:

1. Limiting carrier liability in case of strikes or riots

2. Limiting liability up to a certain amount UNLESS

the shipper declares the actual damage

126

o N.B. if the carrier is a private carrier, such stipulations

otherwisedeemedunreasonablearevalid

o A bus was cruising along the highway. One passenger ran

amuckandstartedhurtingthepassengerswithaknife The



otherwise deemed unreasonable are valid.

• Which country’s laws govern the transshipment of goods between

countries?

o The law of the country wherein the goods will be shipped

governs.

o Ex. If there are two carriers (A and B) with a transshipment

agreement and A’s transportation ends in Davao, its liability is

governed by Philippine law even if B proceeds to deliver to

USA.

• What specific laws will govern under Philippine law?

o Primary: New Civil Code provision on common carriers

o Secondary: Code of Commerce and other special laws: Public

Service Act, Customs and Tariff Code, Civil Aeronautics Act

o Tertiary: Carriage of Goods by Sea Act

o Can the parties deviate from this hierarchy?

Yes. Stipulate in contract of carriage what lawsshould govern (“Paramount Clause”). It applies by

reason of contract, as long as it is not against public

policy.

• What are the rules governing baggage of passengers?

o If it is checked in, liable as common carrier

o If it is hand carried, it is considered necessary deposit – only

required to exercise diligence of GFF

• How does gratuitous transportation affect stipulation limiting

liability?

o It becomes valido But not for willful acts and gross negligence

• Contributory negligence of passenger –will not exculpate carrier but

minimize liability

o Ex. Passenger left his elbow hanging out the bus window, got

hit and severed. His contributory negligence reduced the

carrier’s liability.

amuck and started hurting the passengers with a knife. The

other passengers panicked and ran out, and fell, died.

HELD: The bus company was liable because a

passenger ran amuck and the employees did not do

anything, stop the bus, or whatever.

o A bystander threw a stone at a bus and it struck a passenger.

Carrier liable?

HELD:No. It has no control over this occurrence. It

is required to exercise extraordinary diligence but is

not an absolute insurer.

• What is the rule re: explosives, etc?

o Airline companies – liable because they are authorized to

search bags

o Bus – not authorized to search bags, so not liable.

• If the carrier ends up in an accident, what are the remedies of the

passenger?

o A passenger can sue under breach of contract or quasi-delict.

o N.B.Breach of contract is easier to prove because there is

presumption and the defense of diligence in

selection/supervision is not available.

o Why would you sue under quasi-delict then?

There are more damages recoverable, but the case is

tougher. But you can recover moral damages from

physical injuries here.

• What damages can be recovered in breach of contract?

o 1. Passenger was injured:

Medical expenses

Loss of income if incapacitated to work

Attorney’s fees, if the carrier unjustifiably resisted the

claim

If the driver was negligent, you cannot impose

exemplary damages on the employer unless there is

127

something that makes the employer liable (ex.

awarenessofthedriver’srecklessness)

• Can this liability be eliminated by stipulation, posted notices,

statementsontickets,orotherwise?



awareness of the drivers recklessness)

Moral damages?

• General rule: not demandable

• Exceptions:

o Obligor acted in bad faith or fraud

o Gross negligence tantamount tobad faith

o 2. Passenger died

Medical expenses

Funeral expenses

• Where there is no proof of funeral expenses,

award of 25K as temperate damages

Moral damages

Exemplary damages – apply same doctrine above

Lost income

• (80 – actual age) (annual income) (2/3) =

indemnity

• What bout injuries caused by acts or omissions of employees of

the common carrier?

o The CC is liable EVEN IF the act was done in violation of

orders, or beyond scope of the employee’s authority

(Respondeat superior)

o Must be in the course of his employment

Ex. If the liability is for damages caused to another

automobile, then diligence of GFF is a defense.

Ex. But if at the same time, there is liability for injuries

caused to passenger, diligence of GFF is not a

defense.

• What if the passenger was caused by co-passenger or stranger?

o If the act of the stranger could have been prevented or stopped

by the personnel using GFF, there is liability.

o If not, it is a fortuitous event.

statements on tickets, or otherwise?

o No.

Warsaw Convention

•

When does the Warsaw Convention apply?o To transport of persons, baggage, goods in international air

transport

o Although domestic flights may apply it in a Paramount clause

• When is there international transport?

o 1. Point of departure and point of destination are in two high

contracting States to the convention

o 2. Point of departure and point of destination is within one high

contracting State, and there is an intermediate point, which is a

State that may or may not be a high contracting party

o What is the single operation rule?

The moment a person is covered by the WC, then it

also covers even domestic portions of the itinerary

Ex. ML Amsterdam MadridBarcelona

o KLM issues a ticket from ML to Amsterdam. Then it helps

the passenger secure a ticket from Amsterdam to Paris,

but flown through Air France. Is KLM liable for problems

in the flight to Paris?

NO. It is a mere agent of the other airline company.

• What documents are involved in international transport by air?

o Passenger ticket

o Baggage check

o Airway bill

• Is the issuance of an airway bill necessary in order to establish

contract of carriage?

o Yes, because an airway bill is a document that would establish

a contract of carriage between the carrier and the owner of

128

goods. It establishes receipt of goods and the condition of the

goods loaded on board.

Further action by the consignee is barred (similar to

the rule in the Code of Commerce and unlike COGSA)



g

• Can the carrier accept the goods without issuing an airway bill?

o Yes, but it would be liable to the shipper, had it delivered the

goods to the consignee without asking for surrender of the

airway bill.

o The carrier will be liable to shipper for misdelivery.o Also liable to real person with lawful right over the goods who

holds the airway bill.

• When does the right of the shipper to dispose the goods cease?

o From the time when the right of the consignee begins (when

the goods are delivered to the latter)

o He couldn’t recall the goods anymore or stop delivery in transit.

• If the consignee refuses to exercise his rights as consignee, what

happens?

o The shipper resumes right over the goods and can exercise

rights and obligations over goods under Warsaw Convention• Rights of consignee upon arrival of goods at port of destination:

o 1. Right to demand from the carrier to deliver the airway bill

and the goods to him

o 2. Pay transportation costs to carrier if stipulated

• When is the consignee allowed to enforce provisions of contract

(airway bill)?

o 1. Goods not delivered before expiry of 7 days from the time

they were supposed to arrive

o 2. Goods are missing

o

N.B. Consignee will have right to enforce rights under contractof carriage

• When must claim notice be given to the carrier?

o Baggage loss: 3 days from receipt of baggage

o Goods loss: 7 days from receipt of goods

o Delay in delivery of baggage or goods: 14 days from delivery

o What if the consignee does not give such claim notice to

the carrier?

C C COGS)

o See directly below for period to file claims in cour

• What is the period to file claims for damages in court?

o 2 years from arrival at the destination, or when arrival should

have happened, or stoppage of carriage

o What is the exception for period to file claims? Action based on passenger being humiliated (follow

tort law) – 4 years

o Where can you sue the airline company?

1. Where you bought the ticket

2. Where the airline company was incorporated

3. Where the airline company has its principal office

4. Point of destination

o In a roundtrip flight (ex. SF ML SF), can you sue in

ML?

No, because in a roundtrip flight, your point of

departure is the same as your point of destination.

When can you sue in ML?

• If the return date is left open. Meaning, ML

is the point of destination.

• Who is the defendant?

o 1. As regards passengers:

In case of successive carriers, the carrier in which the

accident or delay occurred

Unless by express agreement, the first carrier

assumed liability for the whole journey

o 2. As regards baggage or goods:

Passenger or consignor can sue first carrier,

Passenger or consignee can sue last carrier, or

Against carrier I which destruction, damage, or loss

occurred

N.B. all carriers are jointly and severally liable

• What is the liability of carriers to passengers?

129

o Liable for death or injury if caused on board, during

embarkation, or disembarkation

Except if by special contract, the carrier and

passenger agree to a higher limit



,

• What is the period of responsibility for the air carrier?

o As soon as the carrier has possession and custody over the

baggage and goods

• What are the defenses available to the carrier?

o 1. Carrier/agents took all necessary measures to avoiddamage or it was impossible to take these measures

o 2. Error in piloting and the carrier/agents had taken all

necessary measures to prevent the accident or it was

impossible to take these measures

Ex. pilot mistakenly identified one airport as another

o 3. Error in handling of aircraft and the carrier/agents had taken

all necessary measures to prevent the accident or it was


o 4. Error in navigating and the carrier/agents had taken all

necessary measures to prevent the accident or it was


o 5. Contributory negligence

Liability reduced appropriately by the degree of

negligence contributed by the shipper/consignees

• What is the concept of limited liability?

o Liability to passengers (injury on board, injury during

embarkation or disembarkation, or delay) or goods (damage or

delay) is limited to the stated amounts.

• When does limited liability NOT apply?

o Limited liability does not apply when there is “dol” or willfulmisconduct

Ex. the PAL situation where bags were unloaded so it

could take in more freight

Ex. Recklessness in handling luggage

• What is the limitation of liability?

o 1. Carriage of passengers – 250K francs

p g g g

o 2. Carriage of registered baggage and cargo – 250 francs per

kg (of the baggage concerned, not total baggage)

Except if the passenger or consignor has made a

special declaration of interest in the delivery and has

paid a supplementary sum if it is required

In this case, what happens to the liability?

• The limit will be the declared amount

• Unless it is proven the actual value is higher

o 3. Hand-carried baggage – 5K francs per passenger

o What is the effect of the Guatemala Protocol?

Increased limits to $100K for passenger and $1K for

baggage, but it’s not yet effective

• Do you apply Warsaw Convention when suing on a tort? (Ex.

humiliation)

o No.• When a passenger is downgraded, can he recover damages?

o Yes.

• How much are airlines allowed to overbook?

o Up to 10%.

o If everybody shows up, then the airline company asks for

volunteers to be transferred to the next flight.

o If no one wants to be transferred, the last ones to check in will

be left behind.

o N.B.But our SC does not accept this reasoning.

• X and his wife went to HK with another couple, with their friends. When

they were returning, X was informed that he was being transferred to

first class, against his wishes. He sued.

o HELD:He won. There was still a breach of contract, in spite of

the upgrade.

• X was a soprano who was scheduled to perform in KL. X booked with

Sing Air a flight from Frankfurt to ML, and then ML to KL. Because of

the bad weather, Sing Air wasn’t able to fly her to ML on time to reach

130

KL. So X just flew directly to KL with another flight and wasn’t able to

practice, and performed badly.

• What if the carrier suspects the goods as misdeclared?

o It can open the package. If the carrier is right, the owner



p p y

o HELD: Sing Air was liable; it was not beyond remedy.

Could’ve booked another flight to make it possible.

• A Northwest flight was aborted so the passengers were all rebooked in

different NW flights. A family was rebooked in an itinerary that was

more roundabout and longer compared to other passengers.

o HELD: NW was liable.

• PAL in a stopover unloaded pieces of baggage of its passengers to take

in additional cargo and freight.

o HELD: this was bad faith, leading to moral damages.

• Unloading baggage to prevent airplane from being overweight, for safety

considerations

o HELD: not liable

• JAL was unable to land in MLA for two weeks because Pinatubo erupted

and the runway had lahar.

o HELD: It is a fortuitous event. JAL not liable foraccommodations, food, etc.

• Immigration refuses to let a passenger leave due to defects in

passport/travel documents.

o HELD:This is not the airline’s fault.

Maritime law

• What is the 3-fold character of a BOL?

o 1. Contract

o 2. Receipt for goods

o 3. Symbol of the goods

• What does a clean bill of lading bar?

o Any argument by the shipper that the goods were damaged

when it received them. The clean BOL shows that they were in

good condition when received.

• What if the package appears unfit for transportation?

o The carrier can refuse to accept the goods

shoulders costs of inspection. If the carrier is wrong, it bears

the costs.

• When can the consignee of the goods refuse to take delivery of the

goods and just claim damages?

o 1. When the partial loss makes the entire thing uselesso 2. When the damage makes the goods useless for the purpose

for which they were intended

o 3. Delay through fault of carrier

o 4. Damage apparent from external appearance of package

When must claim be made?

• Immediately, or else barred

What if the damage is not apparent?

• Within 24 hours from receipt, or else barred

When does this provision not apply?

• For international shipping, the COGSA

applies

• If goods are transshipped, who is liable?

o The ultimate carrier

o What if the goods were actually damaged during the first

leg?

The ultimate carrier is still liable

It can just sue the prior carrier for reimbursement

o Against whom does the shipper or consignee have right of

action?

Carrier who executed the transportation contract, or

other carriers who received the goods without

reservation

When does a reservation have no effect in

relieving responsibility?

• When the carrier who made the reservation

is responsible

• When must the consignee pay for freight and expenses?

131

o Within 24 hours of receipt

o Otherwise, the carrier may ask that the goods be dissolved

o 2. Contracts signed by the captain to repair, provision, or equip

the vessel



until enough to pay arrears

• The contract between buyer and seller stated that there should be

no transshipment. The shipping company issued a BOL which

stated on its face that there will be transshipment. When the

goods arrived, the buyer refused to receive the goods. The seller

sued the vessel. HELD?

o The seller lost. The BOL clearly stated that there will be

transshipment but the seller agreed.

• The goods which arrived to the buyer did not meet specifications

so the buyer refused to receive the goods. The carriage piled up.

Who is liable?

o The consignee. The contract of sale and the contract of

shipment are two different contracts. The consignee should

have just received the goods and sued the seller.

• The goods were shipped from ML to Davao by one shipper, then

Davao to SF by another. The goods were damaged upon arrival in

Davao, but suit was made upon arrival in SF. HELD?

o Period for filing the claim was barred. Should have claimed in

Davao.

• Registration of vessels with the Maritime Industry Authority

o Where the sale was not registered, the sale does not bind third

persons

• Goods arrived at the pier. Then the vessel hired a harbor pilot,

which crashed and damaged the goods. Claim was against the

vessel. Vessel claimed it was not liable because the harbor pilot

was not part of the crew. HELD?

o Vessel liable. The captain still retained control over the vessel.

When he saw that the harbor pilot was about to crash the ship,

he should have intervened.

• Responsibilities of ship owners and ship agents?

o 1. Acts of the captain

o 3. For indemnities due to third persons due to conduct in the

care of the goods

o 4. Quasi-delict in case of negligence in selection/supervision of

employees

o 5. Collision due to the fault of the captain• Real and hypothecary nature of maritime commerce:

o If liability is incurred, it is not the owner that incurs – the liability

attaches to the thing. So if the vessel sinks, the liability is

extinguished.

The liability of the ship owner is limited to the value of

the vessel, earned freightage, and proceeds of

insurance. No vessel, no liability.

What is the effect of abandonment?

• Abandonment of the vessel and all her

equipment and freight leads to exemption

from liability.

o What are the exceptions (usually asked)?

1. If the ship owner is at fault (i.e. the vessel is not

seaworthy)

• Ex. the ship did not have enough lifeboats

2. The vessel was insured – the proceeds of the

insurance will take the place of the vessel

3. Even if the vessel sinks, the ship owner will be

liable for repairs and provisioning of the vessel

undertaken before its loss N.B.: workman’s compensation is not anymore an

exception the sinking of the ship is irrelevant for

claims for injury, sickness, or death in the course of

employment. File claim with ECC

• What are Charter parties?

o In essence, a lease of the vessel

132

o What are the basic types of CPs?

1. Bareboat charter

o Items mentioned in Art. 809 and 811 are merely illustrative. It

is not exhaustive.



• The ship owner turns over the possession of

the vessel to the charterer

• The charterer undertakes to provide the

officers, supplies, provisions during the

voyage• What is owner pro hac vice?

o “Owner for this occasion”

o If it is a public carrier, it temporarily

becomes a private carrier (diligence

becomes GFF)

2. Time charter

• Contract for the use of the vessel for a

specific duration or voyages

3. Voyage charter/contract of affreightment

•

Contract for carriage of goods from one ormore ports of loading to one or more ports of

unloading

o What is the nature of the time/vessel charter?

The owner of the ship retains ownership and control

If the charterer does not pay, there is a lien by the ship

owner over the goods

• In a bareboat charter, there is no such lien if

the charterer does not pay the ship owner

The vessel remains a common carrier

o

In a charter party with a private carrier, a stipulation that theship owner will not be liable for damages is valid, or a

stipulation that the owner will not be liable for damages due to

fault of the captain is valid.

• Averages

o Averages may be particular or general

General averages Particular averages

Common danger to vessel and cargo None

Deliberate sacrifice of part of the

vessel or cargo, with authority

Accidental damage

Inured to common benefit No such common benefit

All persons with interest in the vessel

and cargo saved must contribute in

the indemnity

Owner of the thing damaged bears

damage alone

• General average samples:

o [Enemies and bad people!]

o 1. Goods or cash invested in redemption of the vessel or cargo

captured by pirates/enemies, etc. or expenses for repair

o 2. Curing and maintaining members of the crew who were

wounded in defending the vessel or saving it

o 3. Wages of member of the crew detained as hostage

o [Too heavy, brother]

o 1. Goods jettisoned to lighten the vessel

o 2. Removing or transferring portion of cargo to lighten the

vessel

o 3. Loss suffered in value of goods sold at arrivals under stress

to lighten load

o [Emo solutions]

o 1. Cables or masts cut or anchors and chains abandonedo 2. Damages suffered by goods through opening made in vessel

for draining (to avoid sinking)

o 3. Floating a vessel intentionally stranded to save it

o 4. Damage to the vessel which had to be opened, scuttled, or

broken to save cargo

o [Expenses pursuant to average]

o 1. Expenses to liquidate average

133

o 2. Wages of crew of a vessel chartered by the month during the

time vessel was detained by force majeure

Solidarily liable for the damaged goods onboard both

vessels



• When are there particular averages?

o The damage did not benefit persons interested in the cargo

o Ex. fruits became rotten

o Ex. pirates intercepted the vessel, so the captain threw money

overboard• What are the requisites of general averages?

o 1. There is common danger

There is no common danger when the damage was

due to fault of the captain

o 2. For common safety part of the vessel/cargo is sacrificed

foundation of general averages

o 3. It was successful

o 4. Legal steps should have been taken before general average

is made

i.e. the captain conferred with the officers, the cargoowner, entered in log book, marine protest made

Protest must be made within 24 hours (unless the

captain is injured, or is unable to do so for some

reason)

• What are the rules on apportionment of liability in collisions?

(Maritime tort)

o The provisions on civil tort do not apply

– ex. last clear chance, rule of comparative fault, due

diligence in selection/supervision of employee

o

If two vessels collided and it is the fault of one: Latter bears it own costs

Bears the other vessel’s costs

Bears cost of goods damaged

o If both are at fault:

Each one will bear its loss

• Do not consider LCC, comparative fault, etc.

o If you cannot tell which one is at fault:

Same rules as if both are at fault

“Rule of inscrutable fault”

o If a third vessel is at fault:

The third vessel is liable for losses and damageso If collision was due to fortuitous event:

Each shall bear their own damage

• What is the doctrine of error in extremis in collisions?

o There are three zones in collision:

First – time up to the moment when risk of collision

begins

Second – when risk of collision begins until the

moment it becomes a practical certainty

Third – when collision is certain up to the time of

impact

o Thus, even when a ship with right of way suddenly changes its

course during third zone, in an effort to avoid collision due to

the other vessel’s fault, the act is “in extremis” and cannot

create responsibility on the part of the former (meaning, since

it’s a useless effort, the ship with right of way must not be

penalized for it).

Carriage of goods by sea act/COC

• When does the COGSA apply?

o Shipment from foreign country to the Philippines

o It is valid for parties in inter-island shipping to stipulate that the

COGSA applies

• Even if the cargo owner did not file a claim, it can still sue. Filing a claim

is not a condition precedent.

• 1 year period to file a case

134

o Count the one year from the last day delivery was made (if

unloaded Mon-Wed, count from Wed)

o For both cases, the claim must be

made before the payment of the



o If the goods were not delivered, count it from the last day the

vessel was here and could have delivered the goods

o Does the provision in the civil code that the filing of the

claim interrupts the prescriptive period apply?

No, it does not. Public policy dictates expeditious

disposition of the cases under COGSA.

o Can the consignee-insured sue the insurer instead?

No. This is a circumvention of the rule. The insurer

will step into his shoes and will find himself barred

from recovery.

o When does the one year prescription not apply?

1. Agreement by parties to extend the period

2. In case of misdelivery – delivered to wrong party

• Apply NCC: 10 years under a written K, 5

years if suing under tort 3. Delay in the delivery of the goods

o IMPT: COGSA doesn’t apply to misdelivery and delayed

delivery. COGSA only applies tonon-delivery anddamaged

goods.

• $500/carton limit

o BUT if the nature and value of the goods are stated in the bill of

lading and the BOL indicates this greater amount, the ship

owner is liable for that greater amount

It must apply on the BOLitself, not a mere reference

to another document• Compare the prescriptive periods:

o Code of commerce:

Period to file a claim:

• Immediately if damage is apparent

• Within 24 hours if damage is not apparent

• What is the caveat?

transportation charge

Prescription for court claim

• Claim is a condition precedent

• For non-delivery or misdelivery:

o Within 6 years if there is no BOLo Within 10 years if there is a BOL

o COGSA:

Claim is not a condition precedent. But periods are

here anyway:

• Immediately if damage is apparent

• Within 3 days from delivery if damages is not

apparent

Prescription for court claim

• Within 1 year form delivery or when the

goods should have been delivered

Public service law

• What are not public utilities:

o In the old law, ice plants were regulated as public utility, but

when the PSC was abolished, there is no more body regulating

them.

o In case of tricycles, it is now the municipalities/cities who issue

certificates of public convenience

o A shipyard is not a public utility, because you have to render

services to the public. A shipyard does not.

• The law mentions entities that are not public utilities:

o Warehouses

o Vehicles drawn by animals

o Bancas, tugboats, lighters

o Tricycles

o Pedal-driven pedicabs

135

o Public utilities operated by national or local government

Ex. PNR, Olongapo City power plant

Btth ltdb it lt

Not all competition is ruinous competition, but the

returns in income should drastically lower the income



But these are regulated by appropriate regulatory

agency

• Can foreigners own public utility properties?

o Mere ownership of the properties used by public utilities does

not make one a public utility. So a foreign entity can own theLRT facilities and lease it out.

• In case of radio and telecommunication companies, what is

required?

o A legislative franchise. What is granted is a certificate of

necessity and public convenience.

o If legislative franchise is not required, it’s just a certificate of

public convenience.

o So: if the legislative grants a franchise, it’s a CNPC. If no

legislative franchise is needed and what is just needed is

authorization given by the regulatory body, it’s a CPC.• When can a CPC be revoked?

o 1. Violation or refusal to comply with order, rule or regulation of

the authority

o 2. Holder is just a dummy

o 3. Holder ceases operations or abandons services

• Requirements to get a Certificate of Public convenience?

o 1. Applicant must be Filipino or corp/association organized in

the Philippines and 60% Filipino

o 2. Applicant must prove public service and interest is promoted

o

3. Applicant is financially capable• What is the prior operator rule?

o Before allowing a new applicant to come in, a prior operator

must first be given the chance to expand his service

o Provided that his service is efficient, to prevent ruinous

competition

of the prior operator that he loses a lot of money

o Exceptions?

1. Prior operator is operating less units than

authorized

2. Operator denies there is a need to expand his

service

3. The old operator did not apply until a new applicant

emerged

4. Service of the prior operator must be deficient

5. Prior operator given a chance to expand but failed

to do so

6. Abandoned his service

7. Routes are different, although partially overlapping

• Who has the burden of proof to establish need for public

transportation service?o Always the applicant

• Unlawful acts:

o 1. Provide unsafe or inadequate service

o 2. Charge rates not authorized

• Up to how long is suspension allowed?

o Director can suspend up to 30 days the certificate of authority.

• Acts requiring commission approval:

o 1. Fixing rates

BUT Usually regulatory agencies are allowed to issue

provisional rate increases

This needs no hearing. Reason: they are temporary

by nature and subject to adjustment after final

hearing.

o 2. Construct, maintain, operate new units to extend facilities

Somebody had a certificate of public convenience for

inter-island shipping and had one vessel which was

indicated. It became unseaworthy, and he sold the

136

CPC. The sale is void because there was no valid

subject matter of the sale.

NOTE h CPCidi h i illb d If

o Same – file with the court if you want to question how Meralco

arrived at its calculations and to ask for an explanation on the



NOTE: the CPC indicates what units will be used. If

you replace the unit you have to get approval.

o 3. Increase capitalization

o 4. Sell, mortgage, lease, encumber its CPC and properties

o Sale of units covered by a CPC without commissionapproval – valid?

Yes, but only between the parties and not to third

persons.

• What is the standard that should be used when an admin body

fixes rates of public utilities?

o The only standard is that it must be reasonable and just.

o Factors considered:

1. Rate of return (usually 12%)

2. Rate base

3. Return itself or computed revenue to be earned bythe public utility

• There is a circular saying that provincial buses can charge more or less

with allowed variance of up to 15% in costs.Is this valid?

o No, because this is undue delegation.

• What is the fair rate of return for investment?

o 12% - citing US jurisprudence

o But the SC also approved using present value of properties

used to render public service as basis

o Meralco case: Court adopted the present value of the assets

used to render services as basis to determine rate of return.

Now and then, this is why power plants can submit adjusted

rates because they just had their assets reappraised, and

these increased in value.

• If a customer claims he was overcharged, where does he file?

o With the courts

o NOT with regulatory agency, because this does not involve

rate-fixing.

particulars.

• If a customer claims that his service of electricity was improperly

disconnected, where does he file?

o With the ERC, which has the power to direct the power

companies to reconnect the service• Generally: need 72 hour notice prior to disconnection of service

o EPIRA provision –

If a customer was caught in flagrante delicto using a

jumper, the service can be disconnected immediately.

o Requisites?

1. Caught in flagrante delicto

• When the owner was not present and just his

househelper was, there, not in flagrante

2. A representative of the ERC or officer of the law

must be present when the inspection was conducted• When is notice and hearing required?

o 1. Issuance of CPC/CNPC

o 2. Fixing standards and qualifications

o 3. Fixing standards of measuring quantity

o 4. Establishment of rules to secure accuracy of meters and

measuring appliances

o 5. Order to compel operators to furnish proper service

o 6. Allowing extension of facilities

• When is notice and hearing not required?

o 1. Investigation of public utilities

o 2. Valuation of properties of public utilities

o 3. Examination and test of measuring appliances

o 4. Grant of special permits to make extra or special trips in

territories specified in the certificate

o 5. Investigation of accidents

o 6. Compel compliance with law and regulations

• Kabit system – is this legal?

137

o No, because someone not financially capable to render public

service will be able to do so. So to protect the public, the

Philippines, and duly registered with the BSP which shall

assess/appraise the other assets other than foreign exchange

Dfi “di b i ”



actual operator and ostensible operator (grantee of franchise)

are SOLIDARILY liable to victims.

o But the ostensible operator (with the franchise) can sue the

actual operator for indemnity.

o Can the ostensible operator sue the actual operator to

recover units which were the subject of Kabit system?

No. They are in pari delicto. You can’t come to court

with unclean hands.

o “Kabit system” jurisprudence talks about liabilities to third

parties. So if a kabit jeepney is hit by a truck from behind, the

truck is still liable.

• If a taxi was used as a get-away vehicle by robbers, can the CPC be

cancelled?

o No, not unless there is proof of collusion.

Foreign investments act

• What is the policy of the FIA?

o To attract and promote foreign investments in activities that

contribute to national development and socio-economic

development of the country, to the extent allowed by the

Constitution

o In general, no restrictions on foreign investments, except forindustries in the negative list, but foreign firms are encouraged

to undertake measures to gradually improve Philippine

participation in the enterprise

• Define “foreign investment”:

o Equity investment by non-Philippine nationals in the form of

foreign exchange or assets actually transferred to the

• Define “doing business”:

o 1. Soliciting orders

o 2. Service contracts

o 3. Opening offices whether liaison offices or branches

o

4. Appointing representatives staying in the Philippines 180days or more

o 5. Participating in management of domestic business

o 6. Any other act that implies continuity of business dealings for

commercial gain or pursuant to objective of the organization

o Does not include:

1. Mere investment as SH in domestic firm

2. Exercising rights as SH or having nominee

director/officer in that corporation

3. Appointing representative/distributor that acts in its

own name• Define “export enterprise”:

o Enterprise where the manufacturer, processor, or service

(including tourism) enterprise exports at least 60% of its output

o Or purchase-and-export of at least 60% of the products

• Define “domestic market enterprise”:

o Enterprise which produces goods for sale or renders service to

the domestic market entirely, or export fails to consistently

reach at least 60% of its output

• Is there need for prior approval before a non-Philippine enterprise

may invest or do business in the Philippines?

o None. The enterprise just has to register with the SEC or the

BTRCP (for sole proprietorships, the Bureau of Trade

Regulation and Consumer Protection).

o The SEC or BTRCP cannot limit the amount of investment

made by the firm.

Of course, subject to constitutional limitations and the

negative lists.

138

o If they seek incentives, register with the BOI.

• What is the rule on foreign investments in export-oriented

enterprises?

• What is the right of Natural Born Filipinos and naturalized citizens?

o They have the same rights as Filipinos although they have lost

thi iti hi ti t t



enterprises?

o Can be up to 100%, if not on the negative lists

o If the export-oriented enterprise is not a Philippine national,

register with BOI, which will check compliance with the 60%

export requirement, and require reduction of domestic sales ifthey fail to comply, under threat of cancellation of registration

by the SEC/BTRCP.

• What is the rule on foreign investments in domestic market

enterprises?

o Can be up to 100%, if not prohibited or limited in the

Constitution or negative lists

• Negative lists:

o Board of Investments draws up negative list A and B.

o List A: covers business enterprises reserved for Filipinos by

the Constitution and specific laws.o List B: commercial activities which are nationalized and:

1. Defense-related activities due to national security

reasons

• Unless approved by the Sec. of National

Defense

2. Activities which impact public health and morals

• Ex. manufacture and sale of dangerous

drugs (since there are drugs that are

regulated, not totally prohibited)

3. Small and medium sized domestic enterpriseswhere the paid in capital is less than $200,000

• But if it involves highly-advanced

technologies (approved by DOST) or they

employ at least 50 employees – the paid up

capital can be at least $100,000

o Outside of these two lists, it’s open to all foreigners.

their citizenship as to investments.

o Ex. in rural banks

o Natural born Filipinos who lost their citizenships can acquire up

to 3 hectares of rural land or 500 sq. m. of urban land

o Cannot acquire more than 2 lots, which must be in differentmunicipalities or cities

Annex 1: in-depth discussion of presentment,

dishonor, acceptance in NIL

Presentment for payment

• When is presentment for payment necessary? When is it not

necessary?

o Presentment for payment not necessary to charge the primarily

liable person

Maker and acceptor

If the instrument is payable in special place and he is

able and willing to pay there at maturity = such

willingness is equivalent to tender of payment

• What does this imply?

o If the person primarily liable is there

on the place where it is payable on

the stated time, holder loses right to

recover interest due subsequent to

maturity + costs of collection

o BUT he does not lose the right to

get paid

139

o But for those secondarily liable (indorsers and drawer) – there

is need for presentment for payment

Whatiftheholderdoesnotmakepresentmentto

2. Reasonable hour on business day

3. At proper place defined

4Topersonprimarilyliable



What if the holder does not make presentment to

the person primarily liable?

• Those secondarily liable are discharged

• But he can still go after the person primarily

liable• So, the bottomline: the instrument must be

presented for payment on date it is due to

charge the secondarily liable persons –see

Sec. 71 for special rules on when an

instrument must be presented

o What is presentment?

Production of BOE to drawee for acceptance or

payment, or acceptor for payment, or of a PN to the

maker for payment

o What constitutes presentment? 1. Personal demand for payment

2. Readiness to present the note and surrender it if

paid

• Sec 71 –

o Instrument not payable on demand

Make presentment on date due

o instrument payable on demand

Must be presented within reasonable time from issue

If it’s a BOE, you make it after a reasonable time after

last negotiation• What does “negotiation” here cover?

o Negotiation for value, not

negotiation for collection between

banks

• Sec 72 – when presentment is sufficient

o REQUISITES:

1. Made by holder or agent

4. To person primarily liable

• Is absent/inaccessible – to any person found

in place where presentment is made

o There is a wife who presented a negotiable certificate of time

deposit. Bank refused to pay her because they paid thehusband. HELD: it was not presented by the husband, but the

wife. Bank should pay the wife.

• Sec 73 – proper place for presentment

o If there is a stipulation where presentment must be made, it

must be made there.

o If none provided, but address of maker is stated, go there

o If none provided, to usual place of business/residence

o Wherever he may be found/last known place of

business/residence

•

Sec 74o NI must be exhibited to the person from whom payment is

demanded

o So he can check genuineness

o This is why telephone as demand is not allowed

o First Pacific (?) –Check negotiated by car dealer to financing

company. When the instrument not paid, company sued maker

and indorser. Indorser said he was discharged because there

was no proper presentment for payment. HELD: Letter of

demand is not sufficient. Law requires that the instrument be

shown to the maker. Therefore, presentment not valid andindorsement is discharged.

o Failure excused on two grounds:

1) Instrument was lost

2) payment refused on some other ground

• Ex. no funds, and not because it was not

shown

140

• Sec 75

o Presentment where instrument payable at bank – must be

madeduringbankinghours Lawassumesthatthebankwill

o 1. Duly presented for payment and payment is refused or

cannot be obtained

o 2Presentmentisexcusedanditisoverdueandunpaid



made during banking hours. Law assumes that the bank will

be the source of the funds.

o But if presentment is made beyond banking hours, it is valid if

the funds will not come from the bank, as long as it falls on the

date of maturity.• Sec 76-78

o Applies when principal debtors is:

Dead

Liable as partners

Liable as Joint debtors

o If there is an address stipulated, pay there.

o If dead, give to executor/admin

If there is one, and he can be found with reasonable

diligence

o If partners, to any of the partners

Even if dissolved already

o If joint debtors, to all of them

• When presentment is not required to charge those secondarily liable:

o DRAWER – presentment not required to charge the drawer

when there is no reasonable expectation that the drawee or

acceptor will pay the instrument

Ex. knows there are no funds or there is stoppage of

payment

o INDORSER – when instrument was made/accepted for

indorser’s accommodation, and indorser has no reason to

expect it will be paid if presented

• Fortuitous event – excuses delay in presentment

• Presentment for PAYMENT excused if:

o 1. Cannot be done even after reasonable diligence

o 2. Drawee is fictitious person

o 3. Waiver of presentment – express or implied

• When is an instrument dishonored by non-payment?

o 2. Presentment is excused and it is overdue and unpaid

• What is the effect of dishonor by non-payment?

o Under the law, the moment it is dishonored, there is

immediately a right of recourse against those secondarily

liable. NO NEED to go to the primarily liable.• Sec 85

o If payable in a fixed period, it must be paid on that day

o If on a Sunday or holiday, then go to next business day

o If on a Saturday

On next business day. Because even if some offices

hold business on Saturday, they are usually half day.

The law wants a whole business day

Except instruments payable on demand can

present before 12 noon, Saturday, if it is not a holiday

o

Contrast: Ex. Payable on Friday. But it was declared a public

holiday. So it becomes Saturday. But the law says

present it on next business day. So Monday.

Ex. BUT if it is payable on demand – then the

maker/acceptor MUST pay provided it is presented on

working hours of Saturday.

• Sec 86

o Time – exclude first day, include last day

• Sec 87 – when instrument is payable at a bank

o Implied: that it is an order to the bank to pay for account of the

principal debtor

o First National bank: PN payable at FNB. Maker had sufficient

funds. But holder did not show up at day of maturity. Dilly-

dallied – then the maker became insolvent. Had he shown up

by then, he would have been paid. HELD: No. The fact

141

remains that he is the maker, so he is primarily liable, and

should pay.

o NB Rememberfailuretomakeproperpresentmentonly

Party discharged from the instrument

Person primarily liable who dishonored the instrument

• Sec91–



o N.B. Remember, failure to make proper presentment only

discharges those secondarily liable. The primarily liable

person is still liable, although the holder may not claim interest

subsequent to maturity and costs of collection.

• Sec 88 – Payment in due courseo 1. At or after maturity

o 2. To the holder

o 3. By the debtor, in GF and w/o notice that the holder’s title is

defective

Notice of dishonor

• Sec 89 – dishonor

o Give notice of dishonor

o Any party may be compelled to pay it to the holder with right of

reimbursement

o A B C D E

D giving notice to B will benefit E

o Notice given by a holder benefits all subsequent holders and

prior parties that have right of recourse against the one given

notice against

o Notice may be given by holder himself or agent of the holder.

• Sec 90 – Who can give notice of dishonor

o 1. Holder

o 2. Agent of holder

o 3. Party to the instrument who may be compelled to pay the

holder, but only to those other parties he may seek

reimbursement from

o 4. Agent of such party

o What about strangers?

Cannot give notice, except as agents

o Who is considered a stranger?

Sec 91

o Notice may be given by a party or an agent

o Agent need not be authorized by the party

Because this is beneficial

o If the agent wants to give notice, on a instrument dishonored

on Monday, two options:

A) notify principal

• On Tuesday

• Principal has until Wednesday to notify

secondarily liable parties

B) notify parties who are secondarily liable

o If agent receives notice of dishonor, he must be authorized

Because this is prejudicial

• Form of notice:

o In writing or oral

As long as it sufficiently describes the instrument and

indicates that it has been dishonored

Misdescription does not vitiate notice unless the party

to whom it is given is in fact misled

o Personal or through mail

o If written, need not be signed

In sufficient written notice may be supplemented by

verbal/oral communication

• Rule as to jointly liable parties:

o If partners?

Notice to one is notice to allo If joint payees or joint indorsees who indorse?

Sec 68 treats them as solidarily liable

o If joint drawers or joint accommodation indorsers, and

others not covered by 68?

Give notice to all

• Sec 103 and 104 – time within which notice must given

142

o Know the difference in rules where parties reside in the same

place (103) or different places (104)

o SAMEPLACE:

o Can waiver be implied?

Yes.

• Who is affected by a waiver in an instrument?



o SAME PLACE:

1. If given at place of business – before close of

business hours the next day

2. If given at residence – before usual hours of rest

the next day 3. If by mail – sufficient to reach him the next day

o DIFF PLACES:

1. If by post office – in time to go by mail the next day;

if no mail at a convenient hour that day, the next mail

2. If not by post office – within the time it would have

been received in due course had it been sent by post

office

o N.B. This same time is counted again, after a party receives

notice of dishonor, to give that party a chance to give notice to

antecedent parties• What is the effect of miscarriage in mails?

o Sec 105 – if notice was duly addressed and deposited in the

post-office, due notice is deemed given

o What is “deposit in the post office”?

Deposited in any branch of the P.O.

Deposited in any P.O. box

• Sec 108: WHERE notice must be sent –

o 1. Post office nearest to residence or where he is accustomed

to receiving letters

o 2. To place of business or residence

o 3. Place where he is sojourning

o If notice is actually received, although not according to

these provisions, what happens?

It is still valid

• When can there be waiver of notice of dishonor?

o 1. Before actual time for giving it comes

o 2. Or after failure to give it

y

o If written on the instrument – all the parties

o If written over a signature – just that person

• Waiver of protest

o Includes presentment and notice of dishonor (steps to hold a

person secondarily liable)

• When is notice of DH not needed to be given to drawer?



o 3. Drawer is the person to whom instrument was presented for

payment

Ex. C went to the office of X, the drawee, but he was

not there. But R, the drawer, who was the office

manager, was there. And the drawer dishonored.

o 4. Drawer has no right to expect that drawee or acceptor will

honor

Ex.X withdrew her money from her bank account and

issued a check to cover for expected proceeds of

jewelry she had to sell. She failed to sell the jewelry.

The check was in the hands of Y who had ABC

investment house rediscount it. The check bounced.

HELD: X had no right to expect the bank will pay

because she withdrew all her funds.

o 5. Drawer countermanded payment

Meaning, drawer stopped payment.

o N.B. In all these cases, the drawer KNEW that there was or

would be dishonor.

• When is notice of DH not needed to be given to indorser?


and the indorser is aware of this fact upon indorsement

143

o 2. Indorser is the person to whom presentment for payment

was made

o 3Instrumentwasmadeoracceptedforhisaccommodation

• If drawee refused to write and sign, holder

may treat it as dishonored

Whatiftheacceptanceiswrittenonadifferent



o 3. Instrument was made or accepted for his accommodation

Drawer Indorser

Drawer and drawee same person

Drawee fictitious or no capacity Drawee is fictitious or no capacity,and indorser knows

Drawer is to whom instrument was


Indorser is to whom instrument was


Drawer has no right to expect it will

be paid by drawee

Made or accepted for indorser’s

accommodation (same principle: no

right to expect it will be paid)

Drawer countermanded

• If an instrument was not accepted, and notice of dishonor by non-

acceptance is given, is there need to give notice of dishonor by

non-payment?

o No.


If it was accepted in the meantime.

• Failure to give notice of dishonor by non-acceptance does not prejudice

rights of a HIDC subsequent to the omission.

o Ex. A drew a BOE payable to B. B indorsed to C. C presented

the BOE for acceptance to X. X dishonored the instrument. C

did not give notice of dishonor to A or B. C indorsed the

instrument to D, a HIDC. D will not be precluded by C’s failure

to give notice of DH to A and B.

Acceptance

• Acceptance – assent to order of drawer

o Must be in writing and signed by drawee

What if the drawee refuses to sign?

What if the acceptance is written on a different

sheet of paper?

• It does not bind the drawee, except to

someone to whom it is shown and receives

the bill for value upon faith thereof• NB: this applies when the bill exists as of

time of acceptance

What if there is a promise to accept in writing?

• Deemed an actual acceptance in favor of

those who receive the bill for value upon faith

thereof

• NB: this applies for bills that do not exist yet

when the promise is made (Ex. BOE

pursuant to a LOC)

o Cannot be other than payment of money• Must accept within 24 hours from presentment

o Acceptance deemed done on date of presentment

o When is a bill deemed accepted?

Failed to act on it within 24 hours

• Does the drawee have a right to retain the

bill for the whole 24 hours?

o No. The holder can ask for it back.

But the drawee will still have the

rest of the 24 hours to decide.

Destroys the bill

• NB: destruction must be on purpose

o What are the special situations when can the drawee

accept pa rin?

1. Even before it is signed by the drawer

2. Even when it is incomplete

3. When it is overdue

144

4. Dishonored by prior non-acceptance or non-

payment

Whatisthespecialruleifthebillwasdishonored

No need for presentment for acceptance to render any

party to the bill liable

• Whatistheoptionoftheholder?



What is the special rule if the bill was dishonored

by prior non-acceptance, but it was accepted

thereafter?

• The holder can consider the date of first

presentment as date of acceptance• Kinds of acceptance:

o 1. General

Includes local but not confined only at a particular

place

o 2. Qualified

Conditional

Partial

Local (ONLY at a particular place)

As to time

Only some of drawees, but not all

• What is the right of parties as to qualified acceptance?

o Holder can deem it DH by non-acceptance

o If holder allows qualified acceptance, indorser and drawer

discharged

Unless they assent

Failure to dissent is assent

Presentment for acceptance

• When is presentment for acceptance needed?

o 1. Bill payable after sight or acceptance needed to fix maturityof instrument

o 2. Bill expressly requires acceptance

o 3. Bill is payable elsewhere than residence or place of business

of drawee

o What about other cases?

What is the option of the holder?

o Must present the bill for acceptance within reasonable time

o Or negotiate the bill within reasonable time

• What is the consequence of failure to present for acceptance?

o

Discharges those secondarily liable• Time for presentment – same as presentment for payment

• Special rule when there is little time to present for acceptance

before presenting for payment, where presentment for acceptance

is needed?

o Delay caused by prior presentment for acceptance is excused

and does not discharge those secondarily liable

• When is presentment for acceptance excused?

o 1. Drawee is dead, has absconded, fictitious, lacks capacity

o 2. Cannot make presentment even after reasonable diligence

o 3. Although presentment is irregular, acceptance refused on

some other ground

• What if a bill is DH by non-acceptance?

o Immediate recourse to secondarily liable parties avail; no need

for presentment for payment

[Step-by-step guide on presentment for acceptance, dishonor,

payment]

• Step 1: Presentment for acceptance required if –

o 1. BOE is payable after sight, or acceptance is needed to fix

the maturity of the instrumento 2. BOE expressly requires presentment for acceptance

o 3. BOE payable elsewhere apart from residence or place of

business of drawee

• OTHER OPTION – May choose to negotiate it within a reasonable time

• Consequence: will discharge drawer and all other indorsers

• EXCEPTIONS – no need to present if/or treated as dishonored if:

145

o 1. Drawee is dead, has absconded, fictitious, or lacks capacity

to contract

o 2. Presentment cannot be made even after reasonable

Protest

• Protest necessary for DH of a bill that on its face appears to be a foreign



diligence

o 3. Although presentment is irregular, acceptance was refused

on some other ground

• Step 2: Give notice of dishonor by non-acceptance to secondarily liablepersons

o EXCEPT, no need to give notice: if instrument was

made/accepted for his accommodation and he has no reason

to expect the instrument will be paid if presented

o AND will not prejudice rights of HIDC after omission to give

notice of dishonor

o IF foreign bill,

Protest for non-acceptance or protest for non-payment

needed

Except –• 1. If instrument was made/accepted for his

accommodation and he has no reason to

expect the instrument will be paid if

presented

• 2. Delay is excused for fortuitous

circumstances

Except: will not prejudice rights of HIDC after omission

to protest

• Step 3: Give notice of dishonor by non-payment to secondarily liable

persons (if dishonored by non-payment)o See notes above

o EXCEPT: When presentment for payment is excused –

1. Drawee is fictitious person

2. Presentment cannot be made even after

reasonable diligence

3. Waiver of presentment, express or implied

bill

• Made by Notary Public or respectable resident + two or more credible

witnesses

•

When must it be done?o Day of DH

o If bill is noted in the notarial register, protest may be made

anytime

• Where?

o Place of DH

o Except when expressly payable at the residence/business of

another person apart from the drawee

• What is protest for better security?

o If the drawee was adjudged bankrupt or insolvent, or made

assignment for benefit of creditors – even before the bill

matures

o Is this mandatory?

Nope

o What is the purpose?

To inform the drawer/indorsers that the drawee is

insolvent and therefore they should prepare to pay

• When is protest excused or dispensed with?

o Dispensed with – for same grounds notice of DH is dispensed

with

o Excused – for fortuitous event

• When is protest also done?o When bill is lost, destroyed, wrongly detained – protest made

on copy/written particulars of the bill

Bills in set

146

• Main Principle: each part of the bill, numbered and referring to the other

parts, the whole of the parts constitute one bill

o [usually, it is done to ensure that bills can be collected from



[ y,

even if one part is lost in the mail or so]

o [So usually bills in a set are several copies of the same thing,

sent separately]

•What if different parts are negotiated to different HIDCs?

o The one whose title accrues first is the true owner

o But the one who gets acceptance or payment first is the one

who will be able to collect

• Indorser of two different parts is liable on every such part

• How should the drawee accept?

o Accept on any part, and on one part ONLY. If he accepts on

multiple parts and these are severed, he is liable on all parts.

o If he pays and did not get back the part with the acceptance,

and it once again falls in the hands of an HIDC, he can still be

liable• Discharge of one part is discharge of all

Documents

Com Law Tuazon 2011