Mercantile Law UST Golden notes

UST GOLDEN NOTES 2010

Q: What is a corporation?

A: An artificial being created by operation of law having the right of succession, and the powers,attributes and properties expressly authorized by law and incident to its existence. (Sec. 2)

Q: What are the distinctions between partnership and corporation?

Stockholder has the right to transfer his shares withoutconsent of the other stockholders unless the right of first

is embodied in the articles of incar

GR: May exercise any power authe partn ers.XPN: Acts which are contrary to: law,morals, good customs, public order, public

May exercise only such powers as may be granted by lawand its articles of incorporation, implied therefrom or

incidental thereto.

When management is not agreed upon,every partner is an agent of the partnership

Power to do business and manage its affairs is vested in theBOD/BOT

Stockholders are liable only to the extent of the sharessubscribed by them whether paid or not.

UNIVERSITY OF SANTO TOMAS

Pacu(tad de Der ech o CiviC 1

CORPORATION CODE

Q: What are the advantages anddisadvantages of a business corporation?

A:1. Advantages

a. Limited liability;b. Shareholders are not general

agents of the business;c. Easy transferability of shares;d. Continuity of existence;e. Its credit is strengthened by such

continuity of existence;f. Standardized methods for the

creation, organization,management and dissolutionunder Corporation Code;

g. Centralized management in theBOD/BOT;

h. Feasibility of great undertakings;i. The corporation has legal

capacity to act as a legal unit.

2. Disadvantagesa. Relatively complicated in

formation and management;b. Entails high cost of formation and

operation;c. Limited liability of shareholder

serves as a limitation tocorporate creditor becauseshareholders are not personallyliable;

d. There is ordinarily lack ofpersonal element in view of thetransferability of shares;

e. There is greater degree ofgovernmental control andsupervision that in anyother forms of businessorganizations;

f. In large corporations, holdingrights have become largelytheoretical because of the use ofproxies and widespreadownership;

g. Stockholders have little voice inthe conduct of the business;

h. In large group, management andcontrol has been separated fromownership;

i. Double taxation on corporatesystem.

2

Q: Give the similarities between apartnership and a corporation.

A:1. Has juridical personality separate arid

distinct from that of the individualscomposing it;

2. Can act only through agents;

3. GR: Organization composed of anaggregate of individuals;XPN: corporation sole;

4. GR: Distributes its profits to those whocontribute capital;XPN: The case of an industrial partnerwho also shares ill partnership profits;

5. Can only be organized where there isa law authorizing its organization;

6. Both are taxable as corporation,subject to income taxation.

Q: ~ay, a corporation enter into a contractof partllership?

A:GR: Corporations have no power to enterinto partnership.

Reason: Public policy. In a partnership, thecorporation would be bound by the acts ofthe persons who are not its duly appointedand authorized agents and officers, whichwould be entirely inconsistent with thepolicy of the law that the corporation shallmanage its own .affairs separately andexclusively.

XPN: The SEC allowed corporations toenter into partnerships with othercorporations and individuals provided:

1. The authority to enter into partnershiprelation is expressly conferred by theCharter or the AOI and the nature ofthe business venture to beundertaken by the partnership is inline with the business authorized bythe charter or the AOI. (SECOpinions, Feb. 29, 1980, Dec. 1,1993, and Feb. 23, 1994.); .

2. The partnership' must be a limitedpartnership and the corporation mustbe a limited partner;

3. If it is a foreign corporation, it mustobtain a license to transact businessin the country.


Q: Does a defective Incorporation resultinto a partnership?

A: The answer depends on whether or notthere is a clear intent to participate in themanagement of the business affairs on thepart of the investor. Parties who intends toparticipate or has actually participated in thebusiness affairs of the proposed corporationwould be considered as partners under a defacto partnership. On the other hand, partieswho took no part notwithstanding theirsubscriptions do not become partners with'other subscribers. (Pioneer Insurance v. CA,G.R. No. 84197, July 28, 1989)

Q: May a corporation enter into a jointventure?

A: Yes. It may enter into a joint venture withanother where the nature of that venture is inline with the business authorized by its charter.(Aurbach v. Sanitary Wares ManufacturingCorporation, G.R. No. 75875, Oec. 15, 1989)

Q: What are the distinctions between jointaccount and partnership?

A:JOINT ACCOUNT PARTNERSHIp· .,

Has no firm name andis conducted In the . Has a firm name.

name of the ostensiblepartner.

Has no juridical Has juridicalpersonality and can

sue or be sued only inpersonality and may

sue or be suedthe name of the under its firm name

ostensible partner.Has no common fund. Has a common fund.The ostensible partner All general partnersmanages its business have the right of

operations. management.

Liquidation thereof canLiquidation may, by

only be done by theagreement, beentrusted to a

ostensible partner. partner or partners.

Q: What are the attributes of a corporation?

A:1. It is an artificial being;2. It is created by operation of law;3. It enjoys the right of succession; and4. It has the powers, attributes and

properties expressly authorized bylaw or incident to its existence.

Q: What are the theories on the fonnationof a corporation?

.A:1. Concession theory or fiat theory -

Means that a corporation wasconceived as an artificial personowing existence through creation by aforeign power. It has without anyexistence until it has received theimprimatur of the state actingaccording to law, through the SEC.(Tayag V. Benguet Consolidated, Inc.,G.R. No. L-23276, Nov. 29, 1968)

Note: Philippine jurisprudence adoptedthis theory as the underlying basis forthe existence and powers of corporateentities.

2. Theory of corporate enterprise oreconomic unit - The corporation isnot merely an artificial being, butmore of an aggregation of personsdoing business, or an underlyingbusiness unit. (However, this doctrineis being used in support of otherdoctrines.)

Note: Recognizes the existence of abusiness enterprise as the bases ofseveral contracts and transactions apartfrom the issue of whether there wasduly constituted a juridical person.

3.. Genossenschaft theory - Treats acorporation as. "the reality of thegroup as a social and legal entity,independent of State recognition andconcession". (Tayag V. BenguetConsolidated, Inc., G.R. No. L-23276,Nov 29, 1968) .

Q: What are the two kinds of franchise?

A:1. Corporate or general franchise -

grant given to exist as a corporation;2. Special or secondary franchise -

certain rights and privileges conferredupon existing as a corporation (e.g.right to use the streets of amunicipality to lay pipes of tracks,erect poles, or string wires).

UNIVERSITY OF SANTO TOMAS ~~)

Pacu(tad de ([)erecfio CiviC '•. 3

CoRP 0 RATIO CODEat is the doctrine of separate (legal)

personality?

A: It is a well-settled doctrine that acorporation has a personality distinct andseparate from its individual stockholders ormembers. (Cruz vs. Oalisay, A.M. No. R-181-P, July 31, 1987)

Q: What are the significances of thedoctrine of separate personality?

A:1. Liabilfty for acts or contracts - the

acts of the stockholders do not bindthe corporation unless they areproperly authorized. The obligationsincurred by a corporation, actingthrough its authorized agents are itssale liabilities. The obligations of thecorporation are not the obligations ofits shareholders and members andvice-versa. (Cease v. CA,G.R. No. L-33172, Oct. 18, 1979)

2. Right to bring actions - may bringcivil and criminal actions in its ownname in the same manner as naturalpersons. (Art. 46, Civil Code)

3. Right to acquire and possessproperty - property conveyed to oracquired by the corporation is in lawthe property of the corporation itselfas a distinct legal entity and not thatof the stockholders or members. (Art.44[3], Civil Code)

Note: The interest of the shareholder inthe properties of the corporation isinchoate only. The interest of theshareholder on a particular propertybecomes actual, direct and existing onlyupon the liquidation of the assets of thecorporation and the same property isassigned to the shareholder concerned.

4. Acquisftion of court of jurisdiction -service of summons may be made onthe president, general manager,corporate secretary, treasurer or in-house counsel. (Sec. 11, Rule 14,Rules of Court).

5. Changes in individual membership _corporation remains unchanged andunaffected in its identity by changesin its individual membership.

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Q: Nine individuals formed a privatecorporation. Incorporator Mr. Armando waselected director and president-generalmanager. Part of his emolument is a FordExpedition, which the corporation owns.After a few years, .Mr. Armando lost hiscorporate positions but he refused toreturn the motor vehicle claiming that as astockholder with a substantial equity share,he owns that portion of the corporateassets now in his possession. Is thecontention of Mr. Armando valid? Explain.

A: No. The contention of Mr. Armando is notvalid. The Ford Expedition is owned by thecorporation. The corporation has a legalpersonality separate and distinct from that ofits stockholder. What the corporation owns isits own property and not the property of anystockholder even how substantial the equityshares that stockholder owns. (2000 BarQuestion)

Q: What are the constitutional guarahteesto which a corporation is entitled?

A:1. Due process - It cannot be deprived

of life and property without dueprocess of law.

Note: Failure to implead a corporationas defendants and merely annexing alist of such corporations to thecomplaints is a violation of their right todue process for it would in effect bedisregarding their separate personalitywithout a hearing. (PCGG v.Sandiganbayan, G.R. No. 140615, Feb.19, 2001)

2. Equal protection of the law

3. Protection against unreasonablesearches and seizures.

Note: A corporation is not entitled to invoke theright against self-incrimination. (Balaan Shipyardv. PCGG, G.R. No. L-75885, May 27, 1987)

Q: Is a corporation entitled to moraldamages?

A:GR: A corporation is not entitled to moraldamages because it has no feelings, noemotions, no senses. (ABS-CBNBroadcasting Corporation v. CA, G.R. No.128690 Jan 21, 1999 and Phillip BrothersOceanic, Inc, G. R. No. 126204, Nov. 20,2001)


XPN:1. The corporation may recover moral

damages under item 7 of Article 2219of the New Civil Code because saidprovision expressly authorizes therecovery of moral damages in casesof libel, slander, or any other form ofdefamation. Article 2219(7) does notqualify whether the injured party is anatural or juridical person. Therefore,a corporation, as a juridical person,can validly complain for libel or anyother form of defamation and claimfor moral damages. (FilipinasBroadcasting Network, Inc. v. AMEC-BCCM, G.R. No. 141994, Jan 17,2005)

2. When the corporation has areputation that is debased, resultingin its humiliation in the businessrealm. (Manila Electric Company v.TEA.M. Electronics Corporation, et.al., G.R. No. 131723, Dec. 13, 2007)

Q: Is a corporation liable for torts?

A: Yes whenever a tortuous act is committedby an officer or agent under the expressdirection or authority of the stockholders ormembers acting as a body, or, generally, fromthe directors as the governing body. (PNB v.CA, GR. No. L-27155, May 18, 1978)

Q: Is a corporation liable for crimes?

A:GR: No. Since a corporation is a merelegal fiction, it cannot be held liable for acrime committed by its officers, since itdoes not have the essential element ofmalice; in such case the responsibleofficers would be criminally liable. (Peoplev. Tan Boon Kong, G.R. No. L-32066. Mar.15, 1930)

Note: An officer of a corporation can be heldcriminally liable for acts or omissions done inbehalf of the corporation only where the lawdirectly makes the person who fails to performthe act in the prescribed manner expresslyliable criminally. (Sia v. People of thePhilippines, L-30896, Apr. 28, 1983)

XPN: If the penalty of the crime is only fineor forfeiture of license or franchise. (Chingv Secretary of Justice, G. R. No. 164317,Feb. 6, 2006)

Q: What is the doctrine of piercing the veilof corporate fiction?

A: It is the doctrine that allows the State todisregard the notion of separate personality ofa corporation for justifiable reason/so

Q: What are the effects of piercing the veil?

A: Courts will look at the corporation as anaggregation of persons undertaking thebusiness as a group.

Note: When the veil of corporate fiction is piercedin proper cases, the corporate character is notnecessarily abrogated. It continues for legitimateobjectives. The decision applies only for thatparticular case. (Reynoso IV v. CA, G.R. Nos.116124-25, Nov 22, 2000)

Q: What are the tests in piercing thecorporate veil?

A:1. Fraud test (When corporate fiction

used to justify a wrong, protect fraudof defend crime)

2. Control test3. Alter-ego or instrumentality test (or

conduit cases)4. Public convenience or objective test5. Equity cases/test

Q: What are the requisites of the controltest?

A:1. Control, not mere majority or

complete stock control, but completedomination, not only of finances butof policy and business practice inrespect to the transaction attackedsuch that the corporate entity as tothis transaction had at that time noseparate mind, will or existence of itsown;

2. Such control must have been used bythe defendant to commit fraud orwrong, to perpetuate the violation of astatutory or other positive legal duty,or dishonest or unjust act incontravention of plaintiffs legal right;and

3. The control and breach of duty mustproximately cause the injury or unjustloss . complained of. (Velarde v.Lopez, tnc., G.R. No. 153886, Jan.14, 2004; Heirs of Ramon Durano, Sr.v. Uy, G.R. No. 136456, Oct. 24,2000)

UNIVERSITY OF SANTO TOMAS ~"r'PacuCtaa de (})ereclio CifJiC .•. 5

CORPORATION CODE

a. Stock corporation - a corporation which has capital stock divided into shares and is authorizedto distribute to holders thereof of such shares dividends or allotments of the surplus profits onthe basis of the shares held. (Sec. 3) .

b. Non-stock corporation - a corporatioh which does not issue stocks nor distribute dividends totheir members. (Sec. 87) .

Q: What circumstances the mere existenceof which does not. necessarily entitlepiercing the veil?

A:1. Controlling ownership of the

corporation's share2. 2 corporations have common

; directors13. SUbstantial identity of the

incorporators or 2 corporations andidentity of its business

Q: ~Iaintiffs filed a collection action againstX Corporation. Upon execution of thecourt's decision, X Corporation was foundto be without assets. Thereafter, plaintiffsfiled an action against its present and paststockholder Y Corporation which ownedsubstantially all of the stocks of Xcorporation. The two corporations have thesame board of directors and Y Corporationfinanced the operations of X corporation.May Y Corporation be held liable for thedebts of X Corporation? Why?

A: Yes, Y Corporation may be held liable forthe debts of X Corporation. The doctrine ofpiercing the veil of corporation fiction applies tothis case. The two corporations have the sameboard of directors and Y Corporation ownedsubstantially all of the stocks of X Corporation,which facts justify the conclusion that the latteris merely an extension of the personality of theformer, and that the former controls the

Q: What are the classifications of corporations?

A:

a. Aggregate - consisting at least 5 members.b. Corporation sale - consisting of 1 person or member only.

policies of the latter. Added to this is the factthat Y Corporation controls the finances of XCorporation which is merely an adjunct,business conduit or alter ego of Y Corporation.(Commissioner of Internal Revenue v. Norton& Harrison Company, G.R. No. L-17618, Aug.31, 1964)(2001 Bar Question)

Q: What is alter ego or instrumentalityrule?

A: Where the corporation is so organized andcontrolled and its affairs are so conducted asto make it merely an instrumentality, agency,conduit or adjunct of another person. Fraud isnot an element in these cases. What is beingconsidered is that the stockholders or thosewho compose the corporation did not treat thecorporatioh as such and considered andoperated the same not as a separate entity butonly as part of the property or business of anindividual or group of individuals or anothercorporation.

Q: Can the doctrine of piercing the veil ofcorporate fiction be applied on the basis ofequity?

A: Yes, the doctrine can be applied when it isnecessary to achieve equity or for theprotection of the creditors. It may be called as"dumping ground" where no fraud or alter egocircumstances can be culled to warrant thepiercing. (Martinez v. Court of Appeals, G.R.No. 131673,Sept. 10, 2004)

a. Public - organized for the government of a portion of a State for general good and welfare. (e.g.cities and municipalities)

b. Private - formed for sorne private purpose, benefit or end; it cannot be created by a legislativeact.i. Government-owned or controlled corporation - created by the government or of which the

government is the majority stockholder (e.g. GSIS, NAPOCOR, PNR).ii. Quasi-public corporation - private corporations which have accepted from the State the

grant of franchise or contract involving the performance of public duties but which areorganized for profits (e.g. electric, water, transportation companies).

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a.b.

by created by throughote: Governed primarily by the charter creating them and the provisions of the Code

applies only suppletorily. .Corporation created under a general law - created under the Corporation Code, or the old Corp.law.Corporation by prescription - not formally organized as such but has been duly recognized by

immemorial as a Roman Catholic jiElIiillJlJllIjBlilJBlllll1with requirements law.

De facto - There exist a flaw in its incorporation but there is colorable compliance with therequirements of law.Note: The only difference between a de jure and a de factor corporation is that the former cansuccessfully resist a suit brought by the State challenging its existence, while the latter cannot sustainits right to exist as against the State.

c. Corporation by estoppel- A group of persons assumes to act as a corporation knowing it to bewithout authority to do so, and enters into a transaction with a third person on the strength ofsuch appearance. They are liable as general partners for all debts, liabilities and damagesincurred or arising as a result thereof. It cannot be permitted to deny its existence in an actionunder said transaction. (Sec.21)Note: It has no real existence in law. It exists only between the persons who misrepresented theirstatus and the parties who relied on their misrepresentation. Its existence may be attacked by anythird party except where the attacking party is estopped to treat the entity other than the corporation.A third party who, knowing an association to be unincorporated, nonetheless treated it as corporationand received benefits from it, may be barred from denying its corporate existence in a suit broughtagainst the alleged corporation (Lim Tong Lim v. Phil. Fishing Gear Industries, Inc. G.R. No. 136448,Nov. 3, 1999)

d.

a. Domestic - formed, I or existing underb. Foreign corporation - formed, organized or existing under any laws other than those of the

Philippines and whose laws allow Filipino citizens and corporation to do business in its ownor State.

a.

b.

c.d.

':j

a.

b.c.

d.

a.

b.

Parent corporation - has the power irectly or indirectlyelect a majority of the directors of such other corporation.Holding corporation - owns shares in a corporation only for investment purposes; it does notactively participate in its management.Subsidiary - 50% or more of its shares are owned by another corporation.Affiliate - less than 50% of its shares are owned another n-~~tzcciesmsucn, corporation - entirely of spiritual persons bishops, deacons andthe like and are established for the turtherance of religion and for perpetuating the rights of achurch.Lay corporation - All corporations other than ecclesiastical.Eleemosynary or charitable corporation - Created not for private gain or profit but for charitablepurposes for the administration of charitable trustCivil corporation - Not for the purpose of charity but for benefit, pecuniary or otherwise, of itsmembers.

corporation - one which i any person who may wish to ormember theretoClose corporation - those whose shares of stock are held by limited number of persons like thefamily or other group (Sec. 96; The Corporation Code ofthe Philippines, De Leon &De Jr., 2006


PacuCtaa de fDerecho CiviC 7


a. ~~~ ~Note: Governed primarily by the charter creating them and the provisions of the Codeapplies only suppletorily.

b. Corporation created urider a general law - created under the Corporation Code, or the old Corp.law.

c. Corporation by prescription - not formally organized as such but has been duly recognized byimmemorial u Roman Catholic~.De jure - in accordance of a law.De facto - There exist a flaw in its incorporation but there is colorable compliance with therequirements of law.Note: The only difference between a de jure and a de factor corporation is that the former cansuccessfully resist a suit brought by the State challenging its existence, while the latter cannot sustainits right to exist as against the State.

a.b.

c. . Corporation by estoppe/- A group of persons assumes to act as a corporation knowing it to bewithout authority to do so, and enters into a transaction with a third person on the strength ofsuch appearance. They are liable as general partners for all debts, liabilities and damagesincurred or arising as a result thereof. It cannot be permitted to deny its existence in an actionunder said transaction. (Sec.21)Note: It has no real existence in law. It exists only between the persons who misrepresented theirstatus and the parties who relied on their misrepresentation. Its existence may be attacked by anythird party except where the attacking party is estopped to treat the entity other than the corporation.A third party who, knowing an association to be unincorporated, nonetheless treated it as corporationand received benefits from it, may be barred from denying its corporate existence in a suit broughtagainst the alleged corporation (Lim Tong Lim v. Phil. Fishing Gear Industries, Inc. G.R. No. 136448,

Nov. 3, 1999)

d.

a. Parent corporation - has power irectly or another corporation, toelect a majority of the directors of such other corporation.

b. Holding corporation - owns shares in a corporation only for investment purposes; it does notactively participate in its management.

c. Subsidiary - 50% or more of its shares are owned by another corporation.d. Affiliate - less than 50% of its shares are owned another i--~---~a. persons shops, ns and

the like and are established for the furtherance of religion and for perpetuating the rights of achurch.

b. Lay corporation - All corporations other than ecclesiastical.c. Eleemosynary or charitable corporation - Created not for private gain or profit but for charitable

purposes for the administration of charitable trustd. Civil corporation - Not for the purpose of charity but for benefit, pecuniary or otherwise, of its

members.

a. Open corporation - one is open to any person ormember thereto

b. Close corporation - those whose shares of stock are held by limited number of persons like thefamily or other closely-knit group (Sec. 96; The Corporation Code of the Philippines, De Leon &De L Jr., 2006

U N I V E R SIT Y a F SAN T 0 To M AS ~'-'t",Pacu(tad de CfJereclio Civif '9- 7

..CORPORATION CODE

Q: What are the requisites of a de factocorporation?

A:1. Organized under a valid law.

2. Attempt in good faith to form acorporation according to therequirements of the la'IV.

Note: The Supreme Court requires thatArticles of Incorporation have alreadybeen filed with the SEC and' thecorresponding certificate ofincorporation is obtained.

3. Use of corporate powers.

Note: The corporation must haveperformed the acts which are peculiar toa corporation like entering into asubscription. agreement, adopting by-laws, and electing directors.

Q: How is the status of a de factocorporation attacked?

A: The existence of a de facto corporationshall not be inquired into collaterally in anyprivate suit to which such corporation may bea party. Such inquiry may be made by theSolicitor General in a quo warrantoproceeding. (Sec. 20)

Note: However, as long as it exists, a de factocorporation enjoys all attributes of a corporationuntil the State questions its existence.

In comparison with a corporation by estoppelwhere the stockholders are liable as generalpartners, stockholders in a de facto corporationare liable as a de jure corporation. Hence, up tothe extent of their share holdings.

Q: Distinguish de facto corporation fromcorporation by estoppel.

A:, . DE FACTO CORPORATION BYI CORPORATION . ESTOPPEL

There is existence in There is no existencelaw in law

The dealings among The dealings amongthe parties on a the parties on a

corporate basis is not corporate basis isrequired required

When requisites are It will be considered alacking, it can be corporation in any

corporation byestoppel

shape or form

8iI

Q: What is the concept of "going public"and "going private"?

A: A corporation is deemed to be "goingpublic" when it decides to list its shares in thestock exchange. These include corporationsthat will make initial public offering of itsshares. A corporation is said to be "goingprivate" when it would strict the shareholdersto a certain group. In a sense, these includeclose and closely held corporation (Aquino,Philippine Corporate Law Compendium,2006).

Q: What are the tests in detemlining thenationality of corporations?

A:1. Incorporation test - Determined by the

state of incorporation, regardless ofthe nationality of the stockholders.

2. Domiciliary test - Detemlined by theprincipal place of business of thecorporation.

3. Control test - Determined by thenationality of the controllingstockholders or members. This test isapplied in times of war.

4. Grandfather rule - Nationality isattributed to the percentage of equityin the corporation used in nationalizedor partly nationalized area.

Q: Who are considered "PhilippineNational" under Foreign Investment Act of1991 (RA. No. 7042)?

A:1. Corporations organized under

Philippine laws of which 60% of thecapital stock outstanding and entitledto vote is owned and held by Filipinocitizens;

2. Corporations organized abroad andregistered as doing business in thePhilippines under the CorporationCode of which 100% of the capitalstock entitled to vote belong toFilipinos.

Note: However, it provides that where acorporation and its non-Filipino stockholders ownstocks in a SEC-registered enterprise, at least60% of the capital stock outstanding and entitledto vote of both corporations and at least 60% ofthe members of the board of directors of bothcorporations must be Filipino citizens (DOUBLE60% RULE). .


Q: What is the nationality of a corporationorganized and incorporated under the lawsof a foreign country, but owned 100% byFilipinos?

A: Under the control test of corporatenationality, this foreign corporation is of Filipinonationality. Where there are grounds forpiercing the veil of corporate entity, that is,disregarding the fiction, the corporation willfollow the nationality of the controllingmembers or stockholders, since thecorporation will then be considered as one andthe same. (1998 Bar Question)

Q. What are the components of acorporation?

A:1. Corporators - Those who compose a

corporation, whether as stockholdersor members

2. Incorporators - They are thosementioned in the Articles ofIncorporation as originally formingand composing the corporation andwho are signatories thereof.

3. Directors and trustees - The Board ofDirectors is the governing body in astock corporation while the Board ofTrustees is the governing body in anon-stock corporation.

4. Corporate officers - they are theofficers who are identified as such inthe Corporation Code, the Articles ofIncorporation, or the By-laws of thecorporation.

5. Stockholders - Owners of shares ofstock in a stock corporation.

6. Members Corporators of acorporation which has no capitalstock. They are not owners of sharesof stocks, and their membershipdepends on terms provided in thearticles of incorporation or by-laws(Sec. 91).

7. Promoter - A person who, actingalone or with others, takes initiative infounding and organizing the businessor enterprise of the issuer andreceives consideration therefor. (Sec.3. 10, R.A. No. 8799, The SecuritiesRegulation Code)

8. Subscriber - persons who haveagreed to take and pay for original,

unissued shares of' a corporationformed or to be formed.

9. Underwriter a person who'guarantees on a firm commitmentand/or declared best effort basis thedistribution and sale of securities ofany kind by another.

Q: What is the doctrine of limited liability?

A: Shields the corporators from corporateliability beyond their agreed contribution to thecapital or shareholding in the corporation.

Q: What are the qualifications ofincorporators?

A:1. Natural person;2. GR: Not less than 5 but not more

than 15;XPN: Corporation sole

3. Of legal age;4. Majority must be residents of the

Philippines;5. Each must own or subscribe to at

least one share. (Sec.10)

Q: Who can be incorporators?

A:GR: Only natural persons can beincorporators.

XPN: When otherwise allowed by law,Rural Banks Act of 1992, whereincorporated cooperatives are allowed tobe incorporators of rural banks.

Note: An incorporator can be corporator. Non-residents may be incorporators because the lawonly requires the majority to be residents of thePhilippines.

An incorporator remains to be an incorporatoreven if he will later on cease to be a corporator orshareholder.


PacuCtal de De recho CiviC ''V' 9

CORPORATION CODE

Q: What are the distinctions betweencorporators and incorporators?

A:INCORPORATORS CORPORATORS

Necessarily a corporatorNot hecessarily an

incorporator

Signatory of the Articles Not signatory ofthe Articles ofof Incorporation Incorporation

Does not cease to be an Cease to be aincorporator upon sale corporator by saleof his shares of his sharesGR: 5 to 15 naturalpersonsXPN: in case of No limitcooperative,incorporator of ruralbank; corporation soleOriginally forms part of Not necessarilythe corporation

GR: Filipino citizenshipis not a requirement.XPN: When engaged ina business which ispartly or whollynationalized wheremajority must beresidents

Q: Are promoters agents of a corporation?

A: No. Promoters are not agents of thecorporation before it comes into existence.Upon incorporation, the practice is for the BODto pass a resolution ratifying the contractsentered into by the incorporators with thepromoter. Then, they become agents of thecorporation.

Q: What are the kinds of underwritingagreement?

A:1. English - the underwriter sells what

. the corporation cannot sell;2. Firm Commitment - the underwriter

purchases outright the securities andthen resells the same; and

3. Best Efforts - the underwriter merelysells for commission.

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Academics CommitteeChairperson: Abraham D. Genuino II

Vice-Cbair for .Academics: Jeannie /\. LaurcntinoVice-Cbairjor Admin & Finan«: Ai,sa Cclinc I-l. Luna

Vice-Cbair for uJjoll1 <1:'" D,.rig1l: Loise Rae G. Naval

Mercantile Law Committee511bj,d Head: Holy T Ampagucy

Aul. SlIbjed Head' Manilyn Rose S. Sotelo

Members:Edwin Marc T. Baldi.

Aircen M. CachoSocrates Benjie L MarbilRon Cherrie S. Mendoza

Edison James F. PagalilauanMaybclline M. Santiago.

CORPORATION CODE: SHARES OF STOCK

Q: What are the limitations on no par valueshares?

A:1. Shares which are no par value,

cannot have an issued price of lessthan P5.00;

2. The entire consideration for itsissuance constitutes capital so thatno part of it should be distributed asdividends;

3. They cannot be issued as preferredstocks;

4. They cannot be issued by banks,trust companies, insurancecompanies, public utilities andbuilding and loan association;

5. The articles of incorporation muststate the fact that it issued no parvalue shares as well as the numberof said shares;

6. Once issued, they are deemed fullypaid and non-assessable. (Sec. 6) .

Q: What are common shares?

A: These are ordinarily and usually issuedstocks without extraordinary rights andprivileges, and entitle the shareholder to a prorata division of profits. It represents theresidual ownership interest in the corporation.The holders of this kind of share havecomplete voting rights and they cannot bedeprived of the said rights except as providedbylaw.

Q: What are preferred shares?

A: These entitle the shareholder to somepriority on distribution of dividends and assetsover those holders of common shares.

Q: Are holders of preferred sharescreditors?

A: No. Holders thereof cannot compel thecorporation to give them .dividends. Thepreference only applies once dividends aredeclared.

Q: What are the kinds of preferred shares?

A:1. Preferred shares as to assets -

Shares which gives the holderpreference in the distribution of theassets of the corporation in case ofliquidation; anda. Participating preferred shares -

Entitled to participate with thecommon shares in excessdistribution.

12

b. Non-participating preferredshares Not entitled toparticipate with the commonshares in excess distribution.

2. Preferred shares as to dividends-Shares which are entitled to receivedividends on said share to the extentagreed upon before any dividends atall are paid to the holders of commonstock.a. Cumulative preferred shares - If

a dividend is omitted in any year,it must be made up in a lateryear before any dividend may bepaid on the common shares inthe later year.

b. Non-cumulative preferred shares- There is no need to make upfor undeclared dividends

Q: What is preferred cumulativeparticipating share of stock?

A: This is a kind of share which gives theholder preference in the payment of dividendsahead of common stockholders and to be paidthe dividends due for prior years and toparticipate further with common stockholdersin dividend declaration.

Q: What are redeemable shares?

A: These are shares of stocks issued by acorporation which said corporation canpurchase or take up from their holders asexpressly provided for in the articles ofincorporation and certificates of stockrepresenting said shares. (Sec. 8)

Q: Can a corporation purchase its ownshares?

A:GR: Corporation cannot purchase its ownshares except out of unrestricted retainedearnings.

XPN: Redeemable shares may beredeemed, regardless of the existence ofunrestricted retained earnings (Sec. 8),provided that the corporation has, aftersuch redemption, sufficient assets in itsbooks to cover debts and liabilitiesinclusive of capital stock.

Note: When redeemable shares arereacquired, the same. shall be consideredretired and no longer issuable unlessotherwise provided for in the Articles ofIncorporation. Corporations issuingredeemable shares with mandatory


redemption features are required to set upand maintain a sinking fund.

Q: What are the limitations on treasuryshares?

Q: What are unrestricted retained earnings(URE)?

A: These are surplus profits not subject toencumbrance.

Q: What are the limitations on redeemableshares?

A:1. Issuance of redeemable shares must

be expressly provided in the articlesof incorporation;

2. The terms and conditions affectingsaid shares must be stated both inthe articles of incorporation and inthe certificates of stock;

3. Redeemable shares may be deprivedof voting rights in the articles ofincorporation, unless otherwiseprovided in the Code (Sec. 6, par. 6).

4. Redemption cannot be made if it willcause insolvency of the corporation.

Q: What are treasury shares?

A: Shares that have been earlier issued asfully paid and have thereafter been acquiredby the corporation by purchase, donation, andredemption or through some lawful means.(Sec. 9)

Note: Treasury shares are not retired shares.They do not revert to the unissued shares of thecorporation but are regarded as propertyacquired by the corporation which may bereissued or resold at a price to be fixed by theBoard of Directors (S€C Rules GoverningRedeemable and Treasury Shares, CCP No. 1-1982).

Q: What are the other means in which acorporation may acquire its own shares?

A:1.. To collect or compromise unpaid

indebtedness to the corporation;2. To eliminate fractional shares;3. To pay dissenting or withdrawing

stockholders entitled to payment fortheir shares;

4. Redemption; and5. Close corporation.

A:1. They may be re-issued or sold again

as long as they are held by thecorporation as treasury shares.

2. Cannot participate in dividends.3. It cannot be represented during

stockholder's meetings.4. The amount of URE equivalent to the

cost of treasury shares being heldshall be restricted from beingdeclared and issued as dlvidends.,

Note: When treasury shares are sold below itspar or issued value, there can be no watering ofstock because such watering contemplates anoriginal issuance of shares.

Q: What are founders' shares?

A: Shares classified as such in the articles ofincorporation which may be given specialpreference in voting rights and dividendpayments. But if an exclusive right to vote andbe voted for as director is granted, thisprivilege is subject to approval by the SEC,and cannot exceed 5 years from the date ofapproval. (Sec. 7)

Q: What are voting shares?

A: Shares with a right to vote. If the stock isoriginally issued as voting stock, it may notthereafter be deprived of the right to votewithout the consent of the holder.

Q: What are non-voting shares?

A: Shares without right to vote.

The law only authorizes the denial of votingrights in the case of redeemable shares andpreferred shares, provided that there shallalways be a class or series of. shares whichhave complete voting rights.

Q: What are the instances when holders ofnon-voting shares are allowed to vote?

A: These redeemable and preferred shares,when such voting rights are denied, shallnevertheless be entitled to vote on thefollowing fundamental matters:

1. Amendment of articles ofincorporation;

2. Adoption and amendment of by-laws;3. Sale,lease, exchange, mortgage,

pledge or other disposition of all orsubstantially all of the corporateproperty;

UNIVERSITY OF SANTO TOMAS ~.~.~

Pacu(taa de CDerecfio Ci'f}if '.. 13

CORPORATION CODE: SHARES OF STOCK

4. Incurring, creating or increasingbonded indebtedness;

5. Increase or decrease of capital stock;6. Merger or consolidation of the

corporation with another corporationor other corporations;

7. Investment .of corporate funds inanother corporation or business inaccordance with this Code; and

8. Dissolution of the corporation. (Sec. 6par. 6)

Q: What are convertible shares?

A: A share that is changeable by thestockholder from one class to another at acertain price and within a certain period.

GR: Stockholder may demand conversionat his pleasure.

XPN: Otherwise restricted by the articlesof incorporation.

Q: What is a watered stock?

A: A stock issued not in exchange for itsequivalent either in cash, property, share,stock dividends, or services. Includes stocks:

1. Issued without consideration (bonusshare);

2. Issued for a consideration other thancash, the fair valuation of which isless than its par or issued value(discount share);

3. Issued as stock dividend when thereare no sufficient retained earnings tojustify it;

4. Issued as fully paid when thecorporation has received a lessersum of money than its par or issuedvalue.

Note: "Water" in the .stock represents thedifference between the fair market value at thetime of the issuance of the stock and the par orissued value f said stock. Both par and no parstocks can thus be watered stocks.

Watered stocks refer only to original issue ofstocks but not to a subsequent transfer of suchstocks by the corporation.

Q: What is a fractional share?

A: A share with a value of less than one fullshare.

14

Q: What are shares in escrow?

A: Subject to an agreement by virtue of whichthe share is deposited by the grantor or hisagent with a third person to be kept by thedepositary until the performance of certaincondition or the happening of a certain eventcontained in the agreement.

Q: What is an over-issued stock?

A: It is a stock issued in excess of theauthorized capital stock; it is null and void.

Q: What is a street certificate?

A: It is a stock certificate endorsed by theregistered holder in blank and the transfereecan command its transfer to his name fromissuing corporation.

Q: What is promotional share?

A: This is a share issued by promoters orthose in some way interested in the company,for incorporating the company, or for servicesrendered in launching or promoting the welfareof the company.

Q: Are classes of shares infinite?

A: Yes. There can be other classifications aslong as they are indicated in the AOI, stockcertificate and not contrary to law.

Q: Who may classify shares?

A:1. Incorporators - the classes and

number of shares which a corporationshall issue are first determined by theincorporators as stated in the articlesof incorporation filed with the SEC.

2. Board of directors and stockholders -after the corporation comes intoexistence; they may be altered by theboard of directors and thestockholders by amending the articlesof incorporation pursuant to Sec. 16.

Q: What is the doctrine of equality ofshares?

A: Where the articles of incorporation do notprovide for any distinction of the shares ofstock, all shares issued by the corporation arepresumed to be equal and enjoy the samerights and privileges and are also subject. tothe same liabilities. (Sec. 6)


Q: What is incorporation?

A: It is the performance of conditions, acts,deeds, and writings by incorporators, and theofficial acts, certification or records, which givethe corporation its existence.

Q: What is the term of corporate existence?

A:GR: A corporation shall exist for a periodnot exceeding fifty (50) years from the dateof incorporation

XPN: Unless sooner dissolved or unlesssaid period is extended.

Note: Extension may be made for periods notexceeding (50) years in any single instanceby an amendment of the articles ofincorporation.

Q: What are the limitations on extension ofcorporate term?

A:1. Should not be made earlier than 5

years prior to the original orsubsequent expiry dates unless thereare justifiable reasons for earlierextension to be determined by SEC.

2. Should be made before the expirydate.

3. Extension shall not exceed 50 years.4. Extension . must comply with

procedural requirements foramendment of AO!.

Q: What is the doctrine of relation orrelating back doctrine?

A: Generally, the filing and recording of acertificate of extension after the term cannotrelate back to the date of the passage of theresolution of the stockholders to extend the lifeof the corporation. However, the doctrine ofrelation applies if the failure to file theapplication for extension within the term of thecorporation is due to the neglect of the officerwith whom the certificate is required to be filedor to a wrongful refusal on his part to receive it.(Aquino, Philippine Corporate LawCompendium, 2006)

Q: What is a corporate charter?

A: It is an instrument or authority from thesovereign power bestowing the right orprivilege to be and act as a corporation.

Q: What is the three-fold nature of thecorporate charter?

A:1. It is a contract between the State and

the corporation;2. It is a contract between the

corporation and its stockholder;3. It is a contract between the

stockholder inter se.

Q: What are the capital stockrequirements?

A:GR: There is no minimum authorizedcapital stock as long as the paid-up capitalis not less than P5,OOO.OO

XPN:-1-.- As provided by special law

2. As provided by the Corporation Code- at least 25% of the authorizedcapital stock has been subscribedand at least .25% of the totalsubscription must be paid.

Q: Is it required that each subscriber pay25% of each subscribed share?

A: No. It is only required that at least 25% ofthe subscribed capital must be paid.


PacuCtad de (])ereclio Ci'Vi{ 15

CORPORATION CODE: INCORPORATION

Nationalized and Partly Natioalized Businesses

a. Mass media except recording;b. Practice of all professions

i. Lawii. Medicine and allied professionsiii. Accountancy, etc.

c. Retail trade enterprises with paid-up capital of less than US$2.5 M (Sec. 5, R.A. 8762);d. Cooperatives (Ch. III, Art. 26, R.A. 6938);e.. Private security agencies (Sec. 4, R.A. 5487);f. Small-scale mining (Sec. 3, R.A. 7076);g. Utilization of marine resources (Art. XII, Sec. 2, Constitution);h. Cockpits (Sec. 5, P.O. 449);i. Manufacture, repair, stockpiling and/or distribution of nuclear weapons (Art. II, Sec. 8,

Constitution);j. Manufacture, repair, stockpiling and/or distribution of biological, chemical and radiological

weapons and anti-personnel mines (Various treaties to which the Philippines is a signatory andconventions supported by the Philippines);

k. Manufacture of firecrackers and other pyrotechnic devices (Sec. 5, R.A. 7183).

a.. Financing companies regulated by the SEC (Sec. 6, R.A. 5980 as amended byRA. 8556);b. Investment houses regulated ~ the SEC (Sec. 5, P'D. 129 as amended by R.A. 8366).

a. Exploration, development and utilization of natural resources (Art. XII, Sec. 2, Constitution);b. Ownership of private lands (Art. XII, Sec. 7, Constitution; Ch. 5, Sec. 22, CA 141; Sec. 4, R.A.

9182);c. Operation and management of public utilities (Art. XII, Sec. 11, Const.; Sec. 16 of CA 146);d. Ownership/establishment and administration of educational institutions (Art. XlV, Sec. 4,

Constitution);e. Culture, production, milling, processing, trading excepting retailing, of rice and corn and

acquiring, by barter, purchase or otherwise, rice and corn and the by-products thereof (Sec. 5,P.O. 194;Sec. 15, R.A. 8762);

f. Contracts for the supply of materials, goods and commodities to GOCC, agency or municipalcorporation (Sec. 1, R.A. 5183)

g. Project Proponent and Facility Operator of a BOT project requiring a public utilities franchise(Art. XII, Sec. 11, Constitution; Sec. 2a, R.A. 7718);

h. Ownership of condominium units where the common areas in the condominium project are co-owned by the owners of the separate units or owned by a corporation (Sec. 5, R.A. 4726).

i. Adjustment Companies (Sec. 323, PD. 613)j. Manufacture, repair, storage and! or distribution of productsl ingredients requiring PNP

clearance (R.A. 7042 as amended by R.A. 8179)k. Operation of deep sea commercial fishing vessel (Sec. 27 R.A. 8550)

~a., Advertisiji (Art. XVI, Constitution).

a. Private recruitment, whether for local or overseas employment (Art. 27, P.O. 442);b. Contracts for the construction and repair of locally-funded public works (Sec. 1, CA 541,

LOI 630) except:i.. infrastructure/development projects covered in R.A. 7718; andii. projects which are foreign funded or assisted and required to undergo international

competitive bidding (Sec. 2[aJ, R.A. 7718,'c. Contracts for the construction of~e-related structures (Sec.l CA 541).

a. Private radio communications network (R.A. 3846).

16


ARTICLES OF INCORPORATION

Q: Define articles of incorporation.

A: Articles of Incorporation (AOI) is one thatdefines the charter of the corporation and thecontractual relationships between the Stateand the corporation, the stockholders and theState, and between the corporation and itsstockholders.

Q: What are the contents of ADI?

A: NaP- PlaTINum-ASONO1. Name of corporation;2. Eurpose/s, indicating the primary and

secondary purposes;3. Place of principal office;

Note: To determine proper venue infiling of an action

4. Ierm of existence;5. Names, nationalities and residences

of incorporators; .6. Number of directors or trustees,

which shall not be less than 5 normore than 15, except for corporationsole;

7. Names, nationalities, and residencesof the persons who shall ~ct asdirectors or trustees until the firstregular ones are elected andqualified;

8. If a §,tock corporation, the amount ofits authorized capital stock, number ofshares and in case the shares are parvalue shares, the par value of eachshare;

9. Names, nationalities, number ofshares, and the amounts subscribedand paid by each of the Qriginalsubscribers which shall not be lessthan 25% of authorized capital stock;

10. If Non-stock, the amount of capital,the names, residences, and amountpaid by each contributor, which shallnot be less than 25% of' totalsubscription; name of treasurerelected by subscribers; and

11. Qther matters as are not inconsistentwith law and which the incorporatorsmay deem necessary andconvenient. (Sec. 14)

Q: What are the limitations in adoptingcorporate name?

A:1. The proposed name is identical or

deceptively or confusingly similar tothat of any existing corporation;

2. Any other name protected by law; or3. Patently deceptive, confusing or

contrary to existing laws. (Sec. 18)4. The corporate name shall contain the

word "Corporation" or its abbreviation"Corp." or "Incorporated", or "Inc."

5. The partnership name shall containthe word "Company" or ..Co.".

6. For limited partnership, the word"Limited" or ..Ltd." Shall be included.

7. If the name or surname of a person isused as part of a corporate orpartnership name, the consent of saidperson or his heirs must be submittedexcept if that person is a stockholder,member, partner or a declarednational hero.

8. The name of a dissolved firm shallnot be allowed to be used by otherfirms within 3 years after the approvalof the dissolution of the corporationby SEC, unless allowed by the laststockholders representing at leastmajority of the outstanding capitalstock of the dissolved firm. (SCMemorandum Circular 14)

Q: If a corporation changes its corporatename, is it considered a new corporation?

A: No, it is the same corporation with adifferent name, and its character is in norespect changed. (Republic Planter's Bank v.

. CA, G.R. No. 93073, Dec 21, 1992)

Q: What are the basic requirements for astock corporation?

A:1. Name verification slip;2. AOI and by-laws;3. Treasurer's affidavit;4. Registration data sheet;5. Proof of payment of subscription like

Bank Certificate of Deposit if the paid-up capital is in cash;

6. Favorable endorsement from propergovernment agency in case of specialcorporations.


PacuCtaa 4t; (})ereclio Cioi! 17

CORPORATION CODE: INCORPORATION

Q: What is the content of a treasurer'saffidavit? Q: What is the doctrine of corporate entity?

A: That at least 25% of the authorized capitalstock of the corporation has been subscribed,and at least 25% of the total subscription hasbeen fully paid in actual cash and/or property;such paid-lip capital being not less thanP5,OOO.

Q: What are the limitations in theamendment of AOI?

A:1. The amendment must be for

legitimate purposes and must not becontrary to other provisions of theCorporation Code and Special laws;

2. Approved by majority of BOD/BOT;3. Vote or written assent of stockholders

I

I representing 2/3 of the outstandingcapital stock or 2/3 of members;

4. The original and amended articlestogether shall contain all provisionsrequired by law to be set out in thearticles of incorporation. Sucharticles, as amended, shall beindicated by underscoring thechange/s made;

5. Certification under oath by corporatesecretary and a majority of theBOD/BOT stating the fact that saidamendmentls have been dulyapproved by the required vote of thestockholders or members, shall besubmitted to the SEC;

6. Must be approved by SEC. (Sec. 16);7. Must be accompanied by a favorable

recommendation of the appropriategovernment agency in cases of:a. Banks;b. Banking and quasi-banking

institutions;c. Building and loan associations;d. Trust companies and other

financial intermediaries;e. Insurance companies;f. Public utilities;g. Educational institutions; andh. Other corporations governed by

special laws (Sec. 17 [2])

18

A:GR: A corporation comes into existenceupon the issuance of the certificate ofincorporation. Then and only then will itacquire a juridical personality.XPN: Sec. 112 clearly states that fromand after the filing with the SEC of thearticles of incorporation, the chiefarchbishop shall become corporation sole.

Q: When does amendment of AOI takeeffect?

A: Upon approval by the SEC. THat is uponissuance of amended certificate ofincorporation.

Q: Is it necessary that the approval of SECbe express?

A: No, implied approval of SEC is also 'I.

allowed. Thus amendment may also takeeffect from the date of filing with SEC if notacted upon within 6 months from the date offiling for a cause not attributable to thecorporation.

Q: What are the provrsrons of AOI thatcannot be amended?

A: Those matters referring to accomplishedfacts, except to correct mistakes.

E.g.1.2.

Names of incorporators;Names of original subscribers to thecapital stock of the corporation andtheir SUbscribed and paid up capital;Names of the original directors;Treasurer elected by the originalsubscribers;Members who contributed to theinitial capital of the non-stockcorporation; andWitnesses 'to and acknowledgementwith AOI.

3.4.

5.

6.

Q: What are the grounds for the rejection ordlsapproval of AOI or amendment theretoby the SEC?

A:1. If such is not substantially in

accordance with the form prescribed;2. The purpose/s of the corporation are

patently unconstitutional, illegal,immoral, or contrary to governmentrules and regulations;


3. The treasurer's affidavit concerningthe amount of capital stocksubscribed and/or paid is false

4.. The required percentage ofownership of the capital stock to beowned by Filipino citizens has notbeen complied with. (Sec. 17)

Note: The above grounds are not exclusive. Thegrounds according to P.O. No. 902-A are:

1. Fraud in procuring its certificate ofincorporation;

2. Serious misrepresentation as to whatthe corporation can do or its doing tothe great prejudice of, or damage to,the general public;

3. Refusal to comply with, or defiance or alawful order of the SEC restraining thecommission of acts which' wouldamount to a grave violation of itsfranchise;

4. Continuous inoperation for a period ofat least five (5) years after commencingthe transaction of its business (Sec. 22);

5. Failure to file the by-laws within therequired period;

6. Failure to file required reports.

Q: Is there an automatic rejection of theAOI or any amendment thereto?

A: No, the SEC shall give the incorporators areasonable time within which to correct ormodify the objectionable portions of the AOI oramendment. (Sec. 17[1J)

Q: What is the effect of non-use ofcorporate charter and continuousinoperation of a corporation?

A:1. Failure to organize and commence

business within 2 years fromincorporation - its corporate powersceases- and the corporation shall bedeemed dissolve.

2. Continuous inoperation for at least 5years - ground for the suspension orrevocation of corporate franchise orcertificate of incorporation. (Sec. 22)

Note: The above shall not be applicable if it isdue to causes beyond the control of thecorporation as determined by SEC.

Q: Is the dissolution or revocation due tofailure to operate or inoperation automatic?

A: No, SEC is of the opinion that there shouldbe proper proceedings for the revocation ofAOI in compliance with due process.

":'~.~'~""

Academics CommitteeChairperson: Abraham D. Genuine II

'Via-Chair for Al"lu1emit:i; Jeannit: A. LaurentinoVi,,-Chairfor Admin ee- Finan«: Aissa Celine H. Luna

Vice-Chair Jar LlJoJl/ & De.rzgll: Loise Rae G. Naval

Mercantile Law CommitteeSubjcd Head: Holy T. Ampaguel'

A.o/. Sub;cd Hcatl: Manilyn Rose S. Sotelo


Aireen M. CachoSocrates Benjie L MathilRon Cherrie S. Mendoza

Edison James F. Pagalilauanlvlaybelline M. Santiago


Pacu(taa de (j)ereclio Ci'f}iC 19

CORPORA TION CODE: DIRECTORS, TRUSTEES AND OFFICERS

Q: Who shall exercise corporate powers?

A:GR: The Board of Directors or the Boardof Trustees. (Sec. 23)

XPN:-1-.- In case of an Executive Committee

duly authorized in the by-laws;2. In case of a contracted manager

which may be an individual, apartnership, or another corporation.

Note: In case the contractedmanager is another corporation, thespecial rule in Sec. 44 applies.

3. In case of close corporations, thestockholders may manage thebusiness of the corporation insteadby a board of directors, if the articlesof incorporation so provide.

Q: What are the qualifications of adirector/trustee?

A:1. Director -

a. Must own at least 1 share of thecapital stock;

b. Must be a natural person;c. Ownership of stock shall stand in

his name on the books of thecorporation.Note: What is material is the legaltitle, not beneficial ownership of thestock as appearing on the books ofthe corporation.

d. A person who does not own astock at the time of his electionor appointment does notdisqualify him as director if hebecomes a shareholder beforeassuming the duties of his office.(SEC Opinions, Nov. 9, 1987 &Apr. 5, 1990)

2. Trustee - must be a member of thenon-stock corporation.

20

Q: What are the common requirements of adirector and trustee?

A:1. Majority of the directors/trustees must

be residents of the Philippines (Sec.23);

2. He must not have been convicted byfinal judgment of an offensepunishable by imprisonment forperiod exceeding 6 years or aviolation of the Corporation Code,committed within 5 years prior to thedate of his election (Sec. 27);

3. He must be of legal age;4. Other qualifications as may be

prescribed in special laws orregulations or in the by-laws of thecorporation.

Q: What are the disqualifications?

A:1. Conviction by final judgment of an

offense punishable by imprisonmentexceeding 6 years;

2. Violation of the Corporation Codecommitted Within 5 years prior to hiselection or appointment.

Q: What is the term of office of BOD/BOT?

A:GR: The regular director shall hold officefor 1 year.

XPN: If no election is held, the directorsand officers shall hold over until theirsuccessors are elected and qualified. Thisis applicable to a going concern wherethere is no break in the exercise of theduties of the officers and directors. (SECOpinion, Dec. 15, 1989).

Q: What are the different methods ofvoting?

A:1. Straight voting - every stockholder

may vote such number of shares foras many persons as there aredirectors to be elected.

2. Cumulative voting for one candidate -a stockholder is allowed toconcentrate his votes and give onecandidate, as many votes as 'thenumber of directors to be electedmultiplied by the number of hisshares shall equal.


3. Cumulative voting by distribution - astockholder may cumulate his sharesby multiplying the number of hisshares by the number of directors tobe elected and distribute the sameamong as many candidates as heshall see fit.

Note: Cumulative voting in case of non-stock corporations only if it is provided in theAOI. The members of non-stockcorporations may cast as many votes asthere are trustees to be elected but may castnot more than one vote for one candidate.

Q: Is permanent representation allowed inthe BOD?

A: No, the board of directors of corporationsmust be elected from among the stockholdersor members directors every year. Estoppeldoes not set in to legitimize what is wrongful.(Grace Christian High School v. CA, G.R. No.108905, Oct. 23, 1997)

Q: What are the limitations on the electionof directorsl trustees?

A:1. At a meeting of stockholders or

members called for the election ofdirectors or trustees, there must bepresent either in person or byrepresentative authorized to act bywritten proxy, the owners of themajority of the outstanding capitalstock or majority of the membersentitled to vote.

2. The election must be by ballot ifrequested;

3. A stockholder cannot be deprived inthe articles of incorporation or in theby-laws of his statutory right to useany of the methods of voting in theelection of directors;

4. No delinquent stock shall be voted;5. The candidates receiving the highest

number of votes shall be declaredelected. (Sec. 24)

Q: Who is an independent director?

A: Shall mean a person other than an officeror employee of the corporation, its parent orsubsidiaries, or any other individual having arelationship with the corporation, which wouldinterfere with the exercise of independentjudgment in carrying out the responsibilities ofa director. (Sec 38, SRC) .

Q: Is a provision in the by-laws of thecorporation declaring a person engaged ina competing business ineligible fornomination for elections to the board ofdirectors valid?

A: Yes, provided that before such nominee isdisqualified, he should be given due process toshow that he is not covered by thedisqualification. (Gokongwei v. SEC, G.R. No.L-45911, Apr. 11, 1979)

Note: The disqualification of a competitionfrom being elected to . the board is areasonable exercise of corporate authority.

Q: Who has jurisdiction over electioncontests in stock and non-stockcorporation?

A: As amended by R.A. 8799 (The SecuritiesRegulation Code), the jurisdiction of the SECunder Sec. 5 P.O. No. 902-A (SECReorganization Act) is now transferred toCourts of general Jurisdiction (Regional TrialCourt). Thus, RTC now has jurisdiction overelection contest.

Q: In case where there are 2 lists of BODsubmitted to SEC, which one iscontrolling?

A: It is the list of directors in the latest generalinformation sheet as filed with the SEC whichis controlling. (Premium Marble Resources,Inc. v. CA, G.R. No. 96551, Nov. 4, 1996)

Q: What is the next step after the electionof directors?

,A: The directors must formally organize by theelection of corporate officers. (Sec. 25)

Q: Who are corporate officers?

A:1. President - Must be a director at the

time the assumes office, not at thetime of appointment;

2. Treasurer - Mayor may not be adirector; as a matter of soundcorporate practice, must be a resident

3. Secretary - Need not be a directorunless required by the by-laws; mustbe a resident and citizen of thePhilippines; (Sec. 25); and

4. Such other officers as may beprovided in the by-laws.

Note: An officer is also considered acorporate officer if he has been appointed bythe board of directors. (Easycal/

UNIVERSITY OF SANTO TOMAS ~i~21'Facu{taa ae Dersch» Ci'Pi{' -

CORPORATION CODE: DIRECTORS, TRUSTEES AND OFFICERS

Communications Phils., Inc. v. Edward King,G.R. No. 145901, Dec. 15, 2005)

Any two or more positions may be heldconcurrently by the same person, exceptthat no one shall act as president andsecretary or as president and treasurer atthe same time. (Sec. 25)

Q: What are the distinctions between acorporate officer and a corporateemployee?

A:'CORPORATE CORPORATE·

;/ . . OFFICER " .' v EMPLOYEEPosition is providedfor in the by-laws or

under theCorporation Code.

Employed by theaction of the

managing officer ofthe corporation.

RTC acting as aspecial commercial

court has jurisdictionover intra-corporate

controversies.

LA has jurisdiction incase of labor

disputes.

Q: What is the required number ofBOD/BOT to constitute quorum?

A:GR: Majority of the number of directors ortrustees.

XPN: If AOI or the by-laws provide for agreater number.

Note:GR: Every decision of at least a majority ofthe directors or trustees present at a meetingat which there is quorum shall be valid as acorporate act.

XPN:-1-.- The election of officers which shall

require the vote of a majority of a/l themembers of the board. (Sec. 25 [2])

2. No board approval is necessary wherethere is custom, usage and practice inthe corporation not requiring prior boardapproval or where subsequent approvalis sufficient. (Board of Liquidators v.Kalaw, G.R. No. L-18805, Aug. 14,1967)

Q: Who may remove directors or trustees?

A: The power to remove belongs to thestockholders exclusively. (Sec. 28)

22

Q: What are the requisites for removal of'directors or trustees?

A:1. It must take place either at a regular

meeting or special meeting of thestockholders or members called forthe purpose;

2. Previous notice to the stockholders ormembers of the intention to remove adirector;

3. A vote of the stockholdersrepresenting 2/3 of outstandingcapital stock or 2/3 of members

4. Generally, removal may be with orwithout cause; however, ifthe directorwas elected by the minority, theremust be cause for removal becausethe minority may not be deprived ofthe right to representation to whichthey may be entitled under Sec. 24 ofthe Code; (Sec. 28) ,

Q: In 1999, Corporation A passed a boardresolution removing X from his position asmanager of said corporation. The by-lawsof A corporation provide that the officersare the president, vice-president, treasurerand secretary. Upon complaint filed withthe SEC, it held that a manager could beremoved by mere resolution of the board ofdirectors. On motion for reconsideration, Xalleged that he could only be removed bythe affirmative vote of the stockholdersrepresenting 2/3 of the outstanding capitalstock. Is X's contention legally tenable.Why?

A: No. Stockholders' approval is necessaryonly for the removal of the members of theBoard. For the removal of a corporate officeror employee, the vote of the Board of Directorsis SUfficient for the purpose. (2001 BarQuestion)Q: What are the ways of filling up thevacancies in the board?

A:1. Vacancies filled up by stockholders or

members, if it is due toa. removal;b. expiration of term;c. grounds other than removal or

expiration of term, e.g. death,resignation, abandonment, ordisqualification where theremaining directors do notconstitute a quorum for thepurpose of filling the vacancy;

d. if the vacancy may be filled bythe remaining directors ortrustees but the board refers the


matter to stockholders ormembers; or (e) increase in thenumber of directors;

2. Vacancies filled up by the remainingdirectors constituting a quorum or bythe members of the board if stillconstituting a quorum, at least amajority of them are empowered to fillany vacancy occurring in the boardother than by removal by thestockholders or members, expirationof term or increase in the number ofboard seats. (Sec. 29)

Note: A director elected to fill vacancy shallserve the unexpired term. (Sec. 29)

Q: How are directors compensated?

A:GR: Directors, in their capacity as such,are not entitled to receive anycompensation except for reasonable perdiems.

XPN:1. When their compensation is fixed in

the by-laws; .2. When granted by the vote of

stockholders representing at least amajority of the outstanding capitalstock at a regular or special meeting;

3. When they are also officers of thecorporation.

XPN to XPN: In no case shall the totalyearly compensation of directors, as suchdirectors exceed 10% of the net incomebefore income tax of the corporation duringthe preceding year. (Sec. 30)

Q: What is business judgment rule?

A: Under this rule, the will of the majoritycontrols in corporate affairs, and contractsintra vires entered into by the board ofdirectors are binding on the corporation andcourts will not interfere unless such contractsare so unconscionable and oppressive as toamount to a wanton destruction of rights of theminority. (Ingersoll v. Malabon Sugar Co., G.R.No. L-16977, Apr. 21, 1922)

Q: What are the consequences of businessjudgment rule?

A:1. Resolutions and transactions entered

into by the Board within the powers ofthe corporation cannot be reversedby the courts not even on the behestof the stockholders.

2. Directors and officers acting withinsuch business judgment cannot beheld personally liable for such acts.

Q: What are the instances whendirectors/trustees/officers are personallyliable?

A:GR: Directors, trustees or officers are notsolidarily liable with the corporation.

XPN: AGIWAL-1-.- Willfully and knowingly voting for and

8ssenting to patently unlawful acts ofthe corporation; (Sec. 31)

2. Qross negligence or bad faith indirecting the affairs of the corporation;(Sec. 31)

3. Acquiring any personal or pecuniary[nterest in conflict of duty; (Sec. 31)

4. Consenting to the issuance ofWatered stocks, or, havingknowledge thereof, failing to fileobjections with the secretary;(Sec.65)

5. 8greeing or stipulating in a contractto hold himself liable with thecorporation; or

6. By virtue of a specific provision of.baw.

Note: When the officers of the corporationexceeded their authority, their actions are notbinding upon the corporation unless ratified bythe corporation or is estopped from disclaimingthem (Reyes v. RCPI Credit Employees Union,G.R.No. 146535, Aug 18, 200~.

Q: What is doctrine of corporateopportunity?

A: Where a director, by virtue of his office,acquires for himself a business opportunitywhich should belong to the corporation,thereby obtaining profits to the prejudice ofsuch corporation:

GR: A director shall refund to thecorporation all the profits he realizes on abusiness opportunity (Sec. 34) which:

1. The corporation is financially able toundertake;

UNIVERSITY OF SANTO TOMAS ~~~.

P'acu{tati tie (j)erecno Civil '.'23

CORPORATION CODE: DIRECTORS, TRUSTEES AND OFFICERS

2. From its nature, is in line withcorporations business and is ofpractical advantage to it; and

3. The corporation has an interest or areasonable expectancy.

Note: The rule shall be appliednotwithstanding the fact that the directorriskedhis ownfunds in the venture.

XPN: If such act is ratified by a vote of thestockholders representing at least 213 ofthe outstanding capital stock, the director isexcused from remitting the profit realized.

Q: Malyn, Schiera and Jaz are the directorsof Patio Investments, a close corporationformed to run the Patio Cafe, an al frescocoffee shop in Makati City. In 2000, PatioCafe began experiencing financialreverses, consequently, sdme of thechecks it issued to its beveragedistributors and employees bounced.

In October 2003, Schiera informed Malynthat she found a location for a second cafein Taguig City. Malyn objected because ofthe dire financial condition of thecorporation.

!Sometime in April 2004, Malyn learnedabout Fort Patio Cafe located in Taguig Cityand that its development was undertakenby a new corporation known as Fort Patio,Inc., where both Schiera and Jaz aredirectors. Malyn also found that Schieraand Jaz, on behalf of Patio Investments,had obtained a Ioan of P500, 000.00, fromPBCom Bank, for the purpose of openingFort Patio Cafe. This loan was secured ·bythe assets of Patio Investments andpersonally guaranteed by Schiera and Jaz.

Malyn then filed a corporate derivativeaction before the Regional Trial Court ofMakati City against Schiera and Jaz,alleging that the two directors hadbreached their fiduciary duties bymisappropriating money and assets ofPatio Investments in the operation of FortPatio Cafe.

Did Schiera and Jaz violate the principle ofcorporate opportunity? Explain.

A: Shciera and Jaz violated the principle ofcorporate opportunity; because they usedPatio Investments to obtain a loan, mortgagedits assets and used the proceeds of the loan toacquire a coffee shop through a corporationthey formed. (Sec. 34) (2005 Bar Question)

24

Q: Give the rules on contracts entered intoby directors/trustees of or officers.

A:1. Contracts which are entered into by

the corporation with one or more of itsown directors/trustees, or officers(Sec. 32) - Voidable at the option ofthe corporation, unless:a. The presence of such

director/trustee in the boardmeeting approving the contractwas not necessary to constitute aquorum;

b. The vote of such director/trusteein the board meeting approvingthe contract was not necessaryfor the approval of the contract;

c. The contract is fair andreasonable under thecircumstances;

d. In the case of an officer, therewas previous authorization bythe board of directors.

Note: Even if stockholdersrepresenting 2/3 of the outstandingcapital stock authorizes the contract,the 3rd element (contract is fair andreasonable) cannot be dispensedwith if the transaction is to be validand enforceable.

2: Contracts entereii : into betweencorporations with interlockingdirectors (Sec. 33) - Valid, providedthat:a. The contract is not fraudulent;

andb. The contract is fair and

reasonable under thecircumstances.

Q: What is the effect if the interlockingdirector's interest in nominal in onecorporation and substantial in another?

A: If the interlocking director's interest in onecorporation or corporations is "nominal" (notexceeding 20% of the outstanding capitalstock) and in the other substantial, then all thefirst 3 conditions prescribed in Sec. 32 must b·epresent with respect to the corporation inwhich he has nominal interest.

Where any of the first two conditions is absent,said contract must be ratified by the vote of thestockholders representing at least 213 of theoutstanding capital stock or 2/3 of themembers in a meeting called for the purpose,provided:


1. That full disclosure of the adverseinterest of the director/ trusteeinvolved is made at such meeting;

2. The contract is fair and reasonableunder the circumstances.

Q: Suppose that the by-laws of XCorporation, a mining firm, provides that"The directors shall be relieved from allliability for any contract entered into by thecorporation with any firm in which thedirectors may be interested." Thus, directorA acquired claims which overlapped withX's claims and were necessary for. thedevelopment and operation of X's miningproperties. Is the by-law provision valid?Why?

A: No. It is in violation of Sec. 32 of theCorporation Code,

Q: What happens if director "A" is able toconsummate his mining claims over andabove that of the corporation's claims?

A: "A" should account to the corporation forthe profits which he realized from thetransaction. He grabbed the businessopportunity from the corporation. (Sec. 34)(2001 Bar Question)

Q: What is an executive committee(execom)?

A: A body created by the by-laws andcomposed of some members of the boardwhich, subject to the statutory limitations, hasall the authority of the board to the extentprovided in the board resolution or by-laws.

The creation of executive committee must beprovided for in the by laws and composed ofnot less than 3 members of the boardappointed by the board. The committee mayact by a majority vote of all of its members.

Note: An executive committee can only becreated by virtue of a provision in the by-laws andthat in the absence of such by-law provision, theboard of directors cannot simply create or appointan executive committee to perform some of its

. functions. (SEC Opinion, Sept. 27, 1993)

A person not a director can be a member.of theexecutive committee but only in arecommendatory or advisory capacity.

Q: Are the decisions of the executivecommittee subject to appeal to the board?

A: No, however, if the resolution of theExecutive Committee is invalid, i.e. not one ofthe powers conferred to it, it may be ratified bythe board (SEC Opinion, July 29, 1995).

Q: What are the limitations on the powersof the executive committee?

A: It cannot act on the following:1. Matters needing stockholder

approval;2. Filling up of board vacancies;3. Amendment, repeal or adoption of by-

laws;4. Amendment or repeal of any

resolution of the Board which by itsexpress terms is not amendable orrepealable; and

5. Cash dividend declaration. (Sec. 35)

Academics CommitteeClJairperJolI:Abraham D. Genuino II

Vi,,·Cooir(or A",tk11liLJ: Jeannie A. LaurentinoVia·C.ooirlor .Admin e;- Filion",: Aissa Celine H. Luna

Via·ClJair/or Loyo«: i" DeJigll: Loise Rae G. Naval

Mercantile Law ComrnitteeSub/cd Head: IIoly T. J\mpaguey

.Asst. S u&jed Head: Manilyn Rose S. Sotelo

Members:Edwin Marc T. Baldia

Aireen M. CachoSocrates Benjie L MarqilRon Cherrie S. Mendoza

Edison James F. PagalilauanMaybelline M. Santiago


Pacu{tati tie <Dereclio Cioil 'V' 25

CORPORATION CODE: PO\IV'ERS OF jORPORATIONS

Q: What are the kinds of powers ofcorporation?

A:11

iExpress powers - Granted by law,Corporation Code, and its Articles ofIncorporation or Charter, andadministrative regulations

2: Inherent/incidental powers - Notexpressly stated but are deemed tobe within the capacity of corporateentities.

3. Implied/necessary powers - Exists asa necessary consequence of theexercise of the express powers of thecorporation or the pursuit of itspurposes as provided for in theCharter

Q: What are the general powers of acorporation?

A: SuSuCo-ABSP-MEDPO1. To SUe and be sued;2. Of SUccession;3. To adopt and use of Corporate seal;4. To amend its Articles of

Incorporation; -5. To adopt its ~y-Iaws;6. For §.tock corporations: issue and sell

stocks to subscribers and treasurystocks; for non-stock corporations:admit members

7. To Eurchase, receive, take or grant,hold, convey, sell, lease, pledge,mortgage and deal with real andpersonal property, securities andbonds;

8. To gnter into merger or consolidation;9. To Make reasonable Donations for

pubiiC welfare, hospitai, charitable,cultural, scientific, civic or similarpurposes, provided that no donationis given to anya. political party,b. candidate andc. partisan political activity.

10. To establish Eension, retirement, andother plans for the benefit of itsdirectors, trustees, officers andemployees - basis of which is thelabor code

11. To exercise Qther powers essentialor necessary to carry out itspurposes.

26

Q: When does the power to sue and besued commence?

A: Upon issuance by SEC of Certificate ofIncorporation.

Q: What are the limitations of thecorporation in dealing with property?

A:1. In dealing with any kind of property, it

must be in the furtherance of thepurpose for which the corporation wasorganized.

2. Constitutional limitations - cannotacquire public lands except by lease.

With regard to private land, 60% of thecorporation must be owned by theFilipinos, same with the acquisition ofa condo unit.

Note: No law disqualifies a person frompurchasing shares in a landholdingcorporation even if the 'latter will exceedthe allowed foreign equity, what the lawdisqualifies is the corporation fromowning land.

3. Special law - subject to the provisionsof the Bulk Sales Law

Q: What are the requisites for a validdonation?

A:1. Donation must be reasonable;2. Must be for valid purposes including

public welfare, hospital, charitable,cultural, scientific, civic or similarpurposes;

3. Must not be an aid in anya. political party,b. candidate andc. partisan political activity;

4. Donation must bear a reasonablerelation to the corporation's interestand not be so remote and fanciful.

Q: Can a corporation act as surety orguarantor?

A:GR: No.

XPN: Such guaranty may be given in theaccomplishment of any object for which thecorporation was created, or when theparticular transaction is reasonablynecessary or proper in the conduct of itsbusiness.


What are the specific powers of a-paration?

Power to extend or shorten corporateterm (Sec. 37);

2. Increase or decrease corporate stock(Sec. 38);

3. Incur, create, or increase bondedindebtedness (Sec. 38);

4. Deny pre-emptive right (Sec. 39);5. Sell, dispose, lease, encumber all or

substantially all of corporate assets(Sec. 40);

6. Purchase or acquire shares (Sec.41);

7. Invest corporate funds in anothercorporation or business for otherpurpose other than primary purpose(Sec. 42);

8. Declare dividends out of unrestrictedretained earnings (Sec. 43);

9. Enter into management contract withanother corporation (not with anindividual or a partnership - withingeneral powers) whereby onecorporation undertakes to manage allor substantially all of the business ofthe other corporation for a period notlonger than five (5) years for anyoneterm (Sec. 44);

10. Amend Articles of Incorporation (Sec.16).

Note: May be used as means to voluntarilydissolve a corporation

Q: What are the procedural requirements inextending/shortening corporate term?

A:1. Majority vote of the BOD or BOT;2. Ratification by 213 of the SH

representing outstanding capital stockor by at least 2/3 of the members incase of non-stock corporation;

3. Written notice of the proposed actionand of the time and place of themeeting shall be addressed to eachstockholder or member at his place ofresidence as shown on the books ofthe corporation and deposited to theaddressee in the post office withpostage prepaid, or servedpersonally;

4. Copy of the amended AOI shall besubmitted to the SEC for its approval;

5. In case of special corporation, afavorable recommendation ofappropriate government agency.(Sec. 37)

Note: The extension must be done during thelifetime of the corporation not earlier than 5 yearsprior to the expiry date unless exempted. Theextension must not exceed 50 years.

After the term had expired without extension, thecorporation is dissolved. The remedy of thestockholders is reincorporation. .

Any dissenting stockholder may exercise hisappraisal right in case of shortening or extendingcorporate term (Sec. 37).

Q: What are the procedural requirements inincreasing or decreasing capital stock?

A:1. Majority vote of the BOD;2. Ratification by stockholders

representing 2/3 of theoutstanding capital stock;

3. Written notice of the proposedincrease or diminution of the capitalstock and of the time and place of thestockholder's meeting at which theproposed increase or diminution ofthe capital stock must be addressedto each stockholder at his place ofresidence as shown on the books ofthe corporation and deposited to theadqressee in the post office withpostage prepaid, or servedpersonally;

4. A certificate in duplicate must besigned by a majority vote of thedirectors of the corporation andcountersigned by the chairman andthe secretary of the stockholder'smeeting, setting forth:a. That the foregoing requirements

have been complied with;b. The amount of increase or

diminution of the capital stock;c. If an increase of the capital

stock, the amount of capital stockor number of shares of no parstock actually subscribed, thenames, nationalities andresidences of the personssubscribing, the amount ofcapital stock or number of no parstock subscribed by each, andthe amount paid by each on hissubscription in cash or property,

UN I V E R SIT Y 0 F SAN ToT ci MAS ~"'-'t". 27PacuCtad de Derecho CidC .•.

CORPORATION CODE: POWERS OF §:ORPORATIONS

or the amount of capital stock ornumber of shares of no par stockallotted to each stockholder ifsuch increase is for the purposeof making effective stockdividend authorized;

d. The amount of stock representedat the meeting; and

e. The vote authorizing the increaseor diminution of the capital stock

Note: The increase or decrease in the capitalstock or the incurring, creating or increasingbonded indebtedness shall require prior approvalof the SEC.

Q: What is the additional requirement Withrespect to the increase of capital stock?

A: The application to be filed with the SECshall be accompanied by the sworn statementof the treasurer of the corporation, showingthat at least 25% of the amount subscribedhas been paid either in cash or property or thatthere has been transferred to the corporationproperty the valuation of which is equal to 25%of the subscription.

Q: What shall be the basis of the required25% subscription?

A: It shall be based on the additional amountby which the capital stock increased and noton the total capital stock as increased.

Note: There will be no treasurer's affidavit incase of decrease in capital stock. Corporationneed i not exhaust its original capital beforeincreasing capital stock.

IQ: What is the additional requirement Withrespect to the decrease of capital stock?

A: The same must not prejudice the right ofthe creditors.

Q: What are the ways of Increasing ordecreasing the capital stock?'

A: By increasing or decreasing the: .1. number of shares and retaining the

par value;2. par value of existing shares without

increasing or decreasing the numberof shares;

3. number of shares and increasing ordecreasing the par value.

Q: The stockholders of People Power, Inc.(PPI) approved two resolutions in a specialstockholders'meeting:

28 Iteam:B

a) Resolution increasing theauthorized capital stock of PPI;and

b) Resolution authorizing the Boardof Directors to issue, for cashpayment, the new shares from theproposed capital stock increase infavor of outside investors who arenon-stockholders.

The foregoing resolutions Were approvedby stockholders representing 99% of thetotal outstanding capital stock. The soledissenter was Jimmy Morato who owned1% of the stock.

Are the resolutions binding on thecorporation and its stockholders includingJimmy Morato, the dissenting stockholder?

A: No. The resolutions are not binding on thecorporation and its stockholders includingJimmy Morato. While these resolutions wereapproved by the stockholders, the directors'approval, which is required by law in suchcase, does not exist. (1998 Bar Question)

Q: What remedies, if any, are available toMorato?

'A: Jimmy Morato can petition the Securitiesand Exchange Commission to declare the two(2) resolutions, as well as any and all actionstaken by the Board of Directors thereunder,null and void. (1998 Bar Question)

Note: The requirements for the power to incur,create or increase bonded indebtedness is alsothe same with the power to increase or decreasecapital stock.

Q: What is bonded indebtedness?

A: It is a long term indebtedness secured byreal or personal property (corporate assets).

Note: Not all borrowings of the corporation needstockholders' approval. Only bondedindebtedness requires such approval.


, Flower to deny'pre-emptive right

Q: What is pre-emptive right?

A: It is the preferential right of shareholders tosubscribe to all issues or disposition of sharesof any class in proportion to their presentshareholdings. (Sec. 39)

Q: What is the purpose of pre-emptiveright?

A: To enable the shareholder to retain hisproportionate control in the corporation and toretain his equity in the surplus.

Q: Is there pre-emptive right on the re-issuance of treasury shares?

A: Yes. When a corporation reacquires its ownshares which .thereby become treasury shares,all shareholders are entitled to pre-emptiveright when the corporation reissues or sellsthese treasury shares. The re-issuance oftreasury shares is not among the exceptionprovided by Sec. 39 when pre-emptive rightdoes not exist.

Q: May pre-emptive right be waived by thestockholder?

A: Yes when the stockholder fails to exercisehis pre-emptive right after being notified andgiven an opportunity to avail of such right.

Q: Is the pre-emptive right of a stockholdertransferable?

A: Yes, unless there is an express restrictionin the AOI.

Q: Suppose that X Corporation has alreadyissued the 1000 originally authorizedshares of the corporation so that its Boardof Directors and stockholders wish to'increase X's authorized capital stock. Aftercomplying with the requirements of the lawon increase of capital stock, X issued anadditional 1000 shares of the same value.

Assume that stockholder A presently holds200 out of the 1000 original shares. WouldA have a pre-emptive right to 200 of thenew issue of 1000 shares? Why?

A: Yes, A would have a pre-emptive right to200 of the new issue of 1000 shares. A is astockholder of record holding 200 shares in XCorporation. According to the CorporationCode, each stockholder has' the pre-emptiveright to all issues of shares made by the

corporation in proportion to the number ofshares he holds on record in the corporation.

Q: When should stockholder A exercise thepre-emptive right?

A: Pre-emptive right must be exercised inaccordance with the Articles' of Incorporationor the By-Laws. When the Articles ofIncorporation and the By-Laws are silent, theBoard may fix a reasonable time within whichthe stockholders may exercise the right.

Q: Assuming a stockholder disagrees withthe issuance of new shares and the pricingfor the shares, may the stockholder invokehis appraisal rights and demand paymentfor his shareholdings?

A: No, the stockholder may not exerciseappraisal right because the matter that hedissented from is not one of those where rightof appraisal is available under the CorporationCode. (1999 Bar Question)

Q: When can the corporation deny pre-emptive right?

A: The corporation can deny pre-emptive rightif the articles of incorporation or amendmentthereto denies such right.

Q: Distinguish pre-emptive right from rightof first refusal.

A:

Arises only by virtueof contractual

stipulations but isalso granted underthe provisions onclose corporation

May be exercised evenwhen there is no

express provision oflaw

Pertains tounsubscribed portion ofthe authorized capitalstock. A right that maybe claimed against thecorporation. It includes

treasury shares.

Exercisable againstanother stockholderof the corporation ofhis shares of stock


Pacu[taa ae fDerecho Ci'f!if 29

CORPORATION CODE: POWERS OF CORPORATIONS

Q: What are the instances when pre-emptive right is not available?

A:1. Shares to be issued to comply with

laws. requiring stock offering orminimum stock ownership by thepublic;Shares issued in good faith with theapproval of the stockholdersrepresenting 2/3 of the outstandingcapital stock in exchange for propertyneeded for corporate purposes;Shares issued in payment ofpreviously contracted debts;In case the right is denied in theArticles of Incorporatioh;Waiver of the right by the stockholder.

2.

3.II

4.I

5.

Sell, lease, tixchange, .lportgage, pledge or'. other dispqsition (SLEMPO) of al/ or: .substantially all-of COli orate assets

Q: What are the procedural requirements?

A:1. Majority vote of the BOD or BOT;2. Ratification by stockholders

representing at least 2/3 of theoutstanding capital stock or by atleast 2/3 of the members in case ofnon-stock corporation;

3. Written notice of the proposed actionand of the time and place of themeeting addressed to eachstockholder or member at his place ofresidence as shown On the books ofthe corporation and deposited to theaddressee in the post office withpostage prepaid, or servedpersonally. (Sec. 40)

Note: The sale of the assets shall be subjectto the provisions of existing laws on illegalcombinations and monopolies.

After such authorization or approval by thestockholders the board may, nevertheless, inits discretion, abandon such SLEMPO. (Sec.40)

Any dissenting stockholder shall have theoption to exercise his appraisal right.

Q: What is meant by substantially all ofcorporate assets?

A: If the corporation would be:1. rendered incapable of continuing the

business, or

30

2. accomplishing the purpose for whichit was incorporated.

Q: When may the corporation forgo theratification by SH I members?

A:1. If sale is necessary in the usual and

regular course of business;2. If the proceeds of the sale or other

disposition of such property andassets are to be appropriated for theconduct of the remaining business;

3. If the transaction does not cover all orsubstantially all of the assets.

Q: What is the effect of transfer of all orsubstantially all of assets of onecorporation to another corporation?

A:GR: The transferee corporation of all orsubstantially all of the assets of thetransferor corporation shall not be liable forthe debts of the transferor corporation.

XPN:1. Express or implied assumption of

liabilities;2. Merger or consolidation;3. If the purchase was in fraud of

creditors;4. If the purchaser becomes a

continuation of the seller;5. If there is violation of the Bulk Sales

Law.

Power to acquire own shares.

Q: Can a corporation acquire its ownshares?

A:GR: In the absence of statutory authority,the corporation cannot acquire its ownshares

XPN: SEC Opinion, Oct. 12, 1992,imposed the following conditions on itsexercise:

1. The capital of the corporation mustnot be impaired;

2. Legitimate and proper corporateobjective is advanced;

3. Condition of the corporate affairswarrants it;

4. Transaction is designed and carriedout in good faith

5. Interest of creditors not impaired, thatis, not violative of the trust funddoctrine.


te: Sec. 41 of the Code requires that:1. the acquisition should be for a

legitimate corporate purpose; and2. there should be unrestricted retained

earnings [URE].

Q: What are the instances wherecorporation may acquire its own shares?

A:1. To eliminate fractional shares out of

stock dividends;2. To collect or compromise an

indebtedness to the corporation,arising out of unpaid subscription, in adelinquency sale and to purchasedelinquent shares sold during saidsale;

3. To pay dissenting or withdrawingstockholders (in the exercise of thestockholder's appraisal right);

4. To acquire treasury shares;5. Redeemable shares regardless of

existence of retained earnings;6. To effect a decrease of capital stock;7. In close corporations, when there is a

deadlock in the management of thebusiness

Q: What are the requirements?

A:1. Approval by the majority vote of the

BOD or BOT;2. Ratification by stockholders

representing at least 213 of theoutstanding capital stock or by atleast 2/3 of the members in case ofnon-stock corporation

3. Ratification must be made at ameeting duly called for the purposes,and

4. Prior written notice of the proposedinvestment and the time and place ofthe meeting shall be made addressedto each stockholder or member bymail or by personal service.

Note: Investment of a corporation in a businesswhich is in line with its primary purpose requiresonly the approval of the board.

Any dissenting stockholder shall have appraisalright.

Q: What are the requirements?

A:1. Existence of unrestricted retained

earnings;2. Resolution of the board;3. In case of stock dividend, resolution

of the board with the concurrence ofvotes representing 2/3 of outstandingcapital.

Q: What are unrestricted retainedearnings?

A: These are retained earnings which have notbeen reserved or set aside by the board ofdirectors for some corporate purpose.

Q: Who are entitled to receive dividends?

A: The stockholders of record date in so far asthe corporation is concerned; if there is norecord date, the stockholders at the time ofdeclaration of dividends (not at the time ofpayment).

Note: In case of transfer, dividends declaredbefore the transfer of shares belong to thetransferor and those declared after the transferbelongs to the transferee.

Q: Who are entitled to receive dividends incase of mortgaged or pledged shares?

A:GR: The mortgagor or the pledgor has theright to receive the dividends.

XPN: When the mortage or pledge isrecorded in the books of the corporation,in such a case then the mortgagee orpledgee is entitled to receive thedividends.

Q: What are the forms of dividends?

A:1. Cash

Note: Cash dividends due on delinquentstock shall first be applied to the unpaidbalance on the subscription plus cost andexpenses.

2. Stock

Note: Stock dividends are withheld fromthe delinquent stockholder until his unpaidsubscription is fully paid.


Pacu{tati tie Derecho Cioil 31


3. Property

Note: Stockholders are entitled todividends PRO-RATA based on the totalnumber of shares and not on the amountpaid on shares.

Q: When may corporation declaredividends?

A:GR: Even if there are existing profits, BODhas discretion to determine whetherdividends are to be declared.

XPN: Stock corporations are prohibitedfrom retaining surplus profits in excess of100% of their paid-in capital stock.

XPN toXPN:1. Definite corporate expansion projects

approved by the board of directors;2. Corporation is prohibited under any

loan agreement with any financialinstitution or creditor from declaringdividends without itslhis consent andsuch consent has not yet beensecured;

3. The retention is necessary underspecial circumstances obtaining inthe corporation, such as when thereis a need for special reserve forprobable contingencies.

Q: What if there is a wrongful or illegaldeclaration of dividends?

Q: What are the sources of retainedearnings? Is it available for dividends?

A:i SOURCES OF AVAILABILITY FOR'I

RETAINED DIVIDENDS'. . .:I .-EARNINGS I

Paid-in surplus - It is It cannot bethe difference between declared as cashthe par value and the dividend but can beissued value or selling declared only as

price of the shares stock dividendsRevaluation surplus -Increase in the value Cannot be declaredof a fixed asset as a as dividends

result of its because there is noappreciation. They are actual gain (gain in

by nature subject to paper only).fluctuations.

Reduction surplus - It cannot bethe surplus arises from declared as cashthe reduction of the par dividend but can bevalue ofthe issued declared only asshares of stocks. stock dividends

Gain from Sale of Real Available asProperty dividends

Cannot be declaredas stock or cash

Treasury Shares dividends but it maybe declared as

property dividendOperational Income Available as

Income dividends

Q: Distinguish cash and stock dividends.A: The Board of Directors is liable. Thestockholders should return the dividends to the A:corporation (solutio indebiti).

Q: What are the sources of dividends?

A:GR: Dividends can only be declared out ofactual and bona fide unrestricted retainedearnings.

XPN: Dividends can be declared out ofcapital in the following instances:

1. Dividends from investments wastingassets corporation;

2. Liquidating dividendsI

32

CASH DIVIDENDS STOCK; DIVIDENDS -IPart of general fund Part of capital

Results in cash No cash outlayoutlayOnce issued, can be

Not subject to levy levied by corporateby corporate creditors because

creditors they're part ofcorporate capital

Declared only by Declared by the boardthe board ofdirectors at its with the concurrence of

the stockholdersdiscretion representing at least(majority of the 2/3 of the outstandingquorum only, not capital stock at amajority of all theboard) regular/special meeting

Does not increase Corporate capital isthe corporate

capital increased

Its declaration No debt is created bycreates a debt fromthe corporation to its declaration


each of itsstockholdersIf received by

individual: subject Not subject to tax eitherto tax;

If received byreceived by individual

corporation: notor a corporation

subiect to tax

Cannot be revokedCan be revoked despite

after announcementannouncement but

before issuance

Applied to theCan be withheld until

unpaid balance ofpayment of unpaid

delinquent sharesbalance of delinquent

shares

Note: For the purposes of this distinction,property dividends are considered as cashdividends.

Q: May stock dividends be issued to aperson who is not a stockholder inpayment of services rendered?

A: No. Only stockholders are entitled topayment of stock dividends. (Nielson & Co.,Inc. v. Lepanto Consolidated Mining Co., GR.No. 21763, Dec. 17, 1966).Q: What is the trust fund doctrine?

A: The subscribed capital stock of thecorporation is a trust fund for the payment ofdebts of the corporation which the creditorshave the right to look up to satisfy their credits,and which the corporation may not dissipate.The creditors may sue the stockholdersdirectly for the latter's unpaid subscription.

Q: What are the exceptions to the trustfund doctrine?

A: The Code allows distribution of corporatecapital only in these instances:

1. Amendment of the AOI to reduceauthorized capital stock;

2. Purchase of redeemable shares bythe corporation regardless ofexistence of unrestricted retainedearnings;

3. Dissolution and eventual liquidation ofthe corporation.

Q: What is a management contract?

A: It is any contract whereby a corporationJ dertakes to manage or operate all or

ibstantially all of the business of anotherrporation, whether such contracts are called

service contracts, operating agreements orotherwise. (Sec. 44)

Note: Sec. 44 refers only to a managementcontract with another corporation. Hence, it doesnot apply to management contracts entered intoby a corporation with natural persons.

. Q: What are the requirements?

A:1. Contract must be approved by the

majority of the BOD or BOT of bothmanaging and managed corporation;

2. Ratified by the stockholders owningat least the majority of theoutstanding capital stock, ormembers in case of a non-stockcorporation, of both the managingand the managed corporation, at ameeting duly called for the purpose

3. Contract must be approved by thestockholders of the managedcorporation owning at least 2/3 of theoutstanding capital stock entitled tovote, 213 members when:a. Stockholders representing the

same interest in both of themanaging and the managedcorporation own or control morethan 1/3 of the total outstandingcapital stock entitled to vote ofthe managing corporation;

b. Majority of the members of theBOD of the managingcorporation also constitute amajority of the BOD of themanaged corporation.

Q: What is the allowed period for everymanagement contract entered into by thecorporation?

A:GR: Management contract shall be enteredinto for a period not longer than 5 years foranyone term.

XPN: In cases of service contracts oroperating agreements which relate to theexploitation, development, exploration orutilization of natural resources, it may beentered for such periods as may beprovided by the pertinent laws orregulations.


Pacu{taa de (})ereclio CiviC 33


Q: What are ultra vires acts? Q: What are the effects of an ultra viresact?

A: Those powers that are not conferred to thecorporation by law, by its AOI and those thatare not implied or necessary or incidental tothe exercise of the powers so conferred. (Sec45)

Q: What are the types of ultra vires acts?

A:1. Acts done beyond the powers of the

corporation as provided for in the lawor its articles of incorporation;

2. Acts or coritracts entered into inbehalf of the corporation by personswho have no corporate authority; andNote: This is technically ultra vires actsof officers and not of the corporation.

3. Acts or contracts which are per seillegal as being contrary to law.

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

A:

,4.

If it is provided in the by-laws;If authorized by the board;Under the doctrine of apparentauthority;When the act was ratified.

Q: What is the doctrine of apparentauthority?

A: If a corporation knowingly permits one of itsofficers, or any other agent, to act within thescope of an apparent authority, it holds him outto the public possessing the power to do thoseacts; and thus, the corporation will, as againstanyone who has in good faith dealt with itthrough such agent, be estopped from denyingthe agent's authority.

Q: When is the corporation estopped todeny ratification of contracts or actsentered by its officers or agents?

A: Generally, when the corporation hasknowledge that its officers or agents exceedtheir power, it must promptly disaffirm thecontract or act, and allow the other party orthird person to act in the belief that it wasauthorized or has been ratified. Otherwise, if itacquiesces, with knowledge of the facts, or if itfails to disaffirm, ratification will be implied.(Premiere Development Bank vs. CA, G.R. No.159352, Apr. 14, 2004)

34~

A:1. Executed contract - courts will not set

aside or interfere with such contracts;2. Executory contracts no

enforcement even at the suit of eitherparty (void and unenforceable);

3. Partly executed and partly executory- principle of "no unjust enrichment atexpense of another" shall apply; and

4. Executory contracts apparentlyauthorized but ultra vires - theprinciple of estoppel shall apply.

Q: What are the distinctions between ultravires acts and illegal acts?

A:i . ULTRASIIRES ACT . '. ILLEI;;AL ACTS -

Not necessarily Unlawful; againstunlawful, but outside law, morals, public

the powers of the policy, and publiccorporation order

Can be ratified Cannot be ratifiedCan bind the parties if

Cannot bind thewholly or partlypartiesexecuted

Q: What are the remedies in case of ultravires act?

A:1. State

a. Obtain a judgment of forfeiture;or

b. The SEC may suspend or revokethe certificate of registration

2. Stockholdersa. Injunction; orb. Derivative suit

3. Creditors - Nullification of contract infraud of creditors.

I=il!4WO-JQ: What are by-laws?

A: Rules and regulations or private lawsenacted by the corporation to regulate, govemand control its own actions, affairs andconcerns and of its stockholders or membersand directors and officers in relation thereto

. and among themselves in their relation to it.


Q: What are the requisites for the validity ofby-laws?

A:1. Must be consistent with the

Corporation Code, other pertinentlaws and regulations;

2. Must not be contrary to morals andpublic policy;

3. Must not impair obligations andcontracts or property rights ofstockholders;

4. Must be consistent with the charter orarticles of incorporation;

5. Must be reasonable;6. Must be of general application and

not directed against a particularindividual.

Q: In case of conflict between the by-lawsand the articles of incorporation whichprevails?

A: The AOI prevails because the by-laws isintended merely to supplement the former.

Q: What is the binding effect of by-laws?

A:1. As to members and corporation -

They have the force of contractbetween the members themselves.

2. As to third persons - They are notbound to know the by-laws which aremerely provisions for thegovernment of a corporation andnotice to them will not be presumed.

Note: By-laws have no extra-corporateforce and are not in the nature oflegislative enactments so far as thirdpersons are concerned.

Q: Give the procedures in adopting by-laws. .

A: The by-laws may be adopted before or afterincorporation. In all cases, the By-laws shall beeffective only upon the issuance by the SEC ofa certification that the by-laws are notinconsistent with the AOI.

1. Pre - incorporation - It shall beapproved and signed by all theincorporators and submitted to theSEC, together witl: AOI.

2. Post - incorporationa. Vote of the majority of the

stockholders representing theoutstanding capital stock ormembers;

b. By-laws shall be signed by thestockholders or members votingfor them;

c. It shall be kept in the principaloffice of the corporation andsubject to the inspection of thestockholders ore membersduring office hours

d. Copy thereof, duly certified bythe BOD or BOT countersignedby the secretary of thecorporation, shall be filed withthe SEC and shall be attachedwith the original AOI. (Sec. 46)

Q: What is the effect of non-filing of thearticles of incorporation within the requiredperiod?

A: Failure to submit the by-laws within 30 daysfrom incorporation does not automaticallydissolve the corporation. It is merely a groundfor suspension or revocation of its charter afterproper notice and hearing. The corporation is,at the very least, a de facto corporation whoseexistence may not be collaterally attacked.(Sawadjaan v. CA, G.R. No. 142284, June 8,2005)

Q: What are the contents of by-laws?

A:1. Time, place and manner of calling

and conducting regular or specialmeetings of directors or trustees;

2. Time and manner of calling andconducting regular or specialmeetings of the stockholder ormembers;

3. The required quorum in meeting ofstockholders or members and themanner of voting therein;

4. The form for proxies of stockholdersand members and the manner ofvoting them;

5. The qualification, duties andcompensation of directors or trustees,officers and employees;

6. Time for holding the annual electionof directors or trustees and the modeor manner of giving notice thereof;

7. Manner of election or appointmentand the term of office of all officersother than directors or trustees;

8. Penalties for violation of the by-laws9. In case of stock corporations, the

manner of issuing certificates;10. Such other matters as may be

necessary for the proper orconvenient transaction of itscorporate business and affairs. (Sec.47)

UNIVERSITY OF SANTO TOMAS ~•• 35'FacuCtad de CDerecfw CiviC' .


Q: What are the distinctions between AOIand by-laws?

A:. AOI BY·LAWS

Condition Conditioh subsequent;precedent in the its absence merely

acquisltion of furnishes a ground forcorporate the revocation of theexistence franchise

Essentially acontract between For the internal

the corporation and government of thethe stockholders! corporation but has the

members; between force of a contractthe stockholders! between the corporationmember inter se, and the stockholders!and between the members, and between

corporation and the the stockholders andState; members;

May be executed afterincorporation. Sec. 46

Executed before allows the filing of theincorporation by-laws simultaneously

with the Articles ofIncorporation

Amended by amajority of the May be amended by adirectors! trustees

and stockholders majority vote of the BOD

representing 2/3 of and majority vote of

the outstanding outstanding capital

capital stock, or 2/3 stock or a majority of themember in non-stockof the members in corporationcase of non-stock

corporationsPower to Power to amend or

amend!repeal repeal by-laws or adoptarticles cannot be new by-laws may bedelegated by the delegated by the 2!3 of

stockholders! the outstanding capitalmembers to the stock or 2/3 of the

board of directors! members in the case oftrustees non-stock corporation,

36

Q: What are the ways of amending,repealing or adopting new by-laws?

A:1. Amendment may be made by

stockholders together with the Board- by majority vote of directors andowners of at least a majority of theoutstanding capital stock/members;or

2. By the board only after duedelegation by the stockholdersowning 2!3 of the outstanding capitalstock/members. Provided, that suchpower delegated to the board shall beconsidered as revoked wheneverstockholders owning at least majorityof the outstanding capital stock ormembers, shall vote at a regular orspecial meeting. (Sec. 48)

Academics CommitteeCbairperson: Abraham D. Genuino II

Vi,.-Chair for .Academics: Jeannie A. LaurcntinoVicc-Chairjor .Admi» & Finance: Aissa Coline l-l. Luna

Vice-Chair for Layou! & DCJigll: Loise Rae G. Naval

Mercantile Law CommitteeSubjed llead: I-Ioly T. Arnpaguey

A.rJI. Subjcd Head' Manilyn Rose S. Sotelo

Members:Edwin Marc T. Baldi"

Airccn M. CachoSocrates Benjie I. MarbilRon Chcrrie S. Mendoza

Edison J ames I'. l'ag:1lil:1u:1nMaybellinc M. Santiago


Q: What is the required quorum?

Q: When will stockholders/membersmeeting be held?

1. Annually ondate fixed in the 1. Within theby-laws; or

2. If there is no period

date in the by- provided in

laws - any date the by-laws

in April as 2. In theabsence ofdetermined by provision inthe board. the by-laws -

Venue: In the city or 2 weeks prior

municipality where the to the

principal office is meeting.

located

1. Anytime 1. Within the

deemed period

necessary; or provided in

2. As provided in the by-laws

the by-laws 2. If no provisionin the by-laws

Venue: Principal office - 1 week priorto the meeti

Q: When will BOD/BOT meetings be held?

ate Within thein the by-laws; period providedor2. If there is no in the by-laws

date in the by- 2. In the absence

laws - shall of provision in

be held the by-laws - 1

monthly day prior to thescheduledmeeting

Any time upon the

the call of the period provided

president; or in the by-laws

2. As provided in 2. If no provision

the by-laws in the by-Iaws-1 day prior to

Venue: Anywhere the scheduledmeeti

A:

A:1. Quorum in meetings of stockholders

GR: Shall consist of the stockholdersrepresenting majority of theoutstanding capital stock or a majorityof the actual and living members withvoting rights, in the case of non-stockcorporation. (Tan v. Sycip, GR. No.153468, Aug. 17, 2006)

XPN:a. A different quorum may be

provided for in the by-lawsb. The corporation code provides

for certain resolutions that mustbe approved by at least 213 ofthe outstanding capital stock, inwhich case, majority of theoutstanding capital stock isinsufficient to constitute aquorum, presence of thestockholders representing 213 ofthe outstanding capital stock isnecessary for such purpose.

2. Quorum in meetings of Board-GR: Quorum is majority of the totalnumbers of the board as fixed in theAOI.

XPN: A different quorum may beprovided for in the by-laws.

Note: The quorum is the same even if there isvacancy in the board.

A meeting with a quorum remains to be suchthroughout the proceedings even if at any timeduring the proceedings, the required number ofparticipants to constitute a quorum is lessened(walk-out during the meeting).

Q: What are the requirements for a validmeeting whether stockholders/members orthe board?

1. It must be held in the proper place;2. It must be held at the stated date and

at the appointed time or at areasonable time thereafter;

3. It must be called by the properperson:a. The person or persons

designated in the by-laws haveauthority to call stockholders' ormembers'meeting;

b. In the absence of such provisionin the by-laws it may be called bya director or trustee or by an

UNIVEHSITY OF SANTO TO~A.S ~,~ 37Cf'acu[taa de (])erecfio Ctvtf 'V

CORPORATION CODE: MEETINGS

officer entrusted with themanagement of the corporation;

c. A stockholder or member maymake the call on order of theSEC whenever for any causethere is no person authorized tocall a meeting;

d. The special meeting for theremoval of directors or trusteesmay be called by the secretary orby stockholder or member.

4. There must be a previous notice;5. There must be a quorum.

Q: Who shall preside at all meetings?

A: The president shall preside at all meetingsof the directors or trustees as well as ofstockholders or members unless the by-lawsprovide otherwise (Sec. 54).

Note: All proceedings had and any businesstransacted at any meeting of the stockholders ormembers, if within the powers or authority of thecorporation, shall be valid even if the meeting beimproperly held or called, provided all thestockholders or members of the corporation arepresent or duly represented at the meeting.

Q: What are the rules on meetlnq or votingwhich are applicable to certain kinds ofshares?

A:1. Delinquent shares Shall not be

entitled to vote;Treasury shares have no voting rightswhile they remain in the treasury(Sec. 57);Fractional shares shall not be entitledto vote;Escrow shares shall not be entitled tovote before the fulfillment of thecondition imposed thereon;Unpaid shares, if not delinquent, areentitled to all the rights of astockholder including the right to vote;Sequestered sharesGR: to determine whether PCGGmay vote sequestered Shares - Two-Tiered Testa. Whether there is a prima facie

evidence showing that the saidshares are ill-gotten and thusbelong to the State; and

b. Whether there is an immediatedanger of dissipation thusnecessitating their continuedsequestration and voting by thePCGG while the main issue ispending with the Sandiganbayan(Republic vs. Sandiganbayan,G.R. No. 107789, Apr. 30, 2003).

Iteam:IMI·'W .

2.

5.

6.

38

XPN: The two-tiered test does notapply in cases involving funds ofpublic character (public characterexception). In such cases, thegovemment is granted the authorityto vote said shares, namely:a. Where the government shares

are taken over by privatepersons or entities who or whichregistered them in their ownnames; and

b. Where the capitalization ofshares that were acquired withpublic funds somehow landed inprivate hands (ibid).

7. Pledgor, mortgagor, or administratorshares (Sec. 55); pledgor or mortagorhas the right to attend and vote atmeetings unless pledge or morgageeis expressly given such right inwriting, as recorded on the books.

Executor, administrators, receivers,and other legal representatives mayattend and vote in behalf of thestockholder or members without needof any written proxy. In Gochan v.Young, (G.R. No. 131889, Mar. 12,2001), it was held that heirs are notprohibited from representing thedeceased with regard to shares ofstock registered in the name of thelatter, especially when noadministrator has been appointed.

8. Shares jointly owned (Sec. 56) -consent of all ~he co-owners isnecessary, unless there is a writtenproxy signed by all the co-owners. Ifshares are owned in an "and/or"capacity by the holders thereof, anyone of the joint owners can vote orappoint a proxy thereof.

Q: Is teleconferencing or video-conferencing valid?

A: Yes. (R.A. 8792, as implemented by SECMemo. Circular No. 15, Nov 30, 2001)provided:

1. Directors must express their intent onteleconferencing;

2. Proper identification of thoseattending;

3. The corporate secretary mustsafeguard the integrity of the meetingby recording it. There is no violationof the Anti-Wire Tapping Act (R.A.4200) because all the parties to the


board meeting are aware that all thecommunications are recorded.

Note: The basic types of teleconferencing are:1. Video conferencing;2. Computer conferencing;3. Audio conferencing.

Q: What is a proxy?

A: A written authorization given by one personto another so that the second person can actfor the first such as that given by theshareholder to someone else to represent himand vote his shares at a shareholders'meeting.

Q: What are the requirements for a validproxy?

A:1. Proxies shall be in writing and shall

be signed by the stockholders ormembers;

2. The proxy shall be filed before thescheduled meeting with the corporatesecretary;

Note: For public companies, the SECrequires that proxy forms be submittedat least 5 days before the meeting.

3. Unless otherwise provided(continuing in nature) in the proxy, itshall be valid only for the meeting forwhich it is intended; AND

4. No proxy shall be valid and effectivefor a period longer than 5 years atanyone time. (Sec. 58 BP. 68 asamended by Sec. 20, SRC)

Note: Stockholders or members may attend andvote in their meetings by proxy (Sec. 58);directors cannot do so. Directors must always aclin person. (Sec. 25).

Q: Is the power to appoint a proxy apersonal right?

A: Yes. The right to vote is inseparable fromthe right of ownership of stock. Therefore, tobe valid, a proxy must have been given by theperson who is the legal owner of the stock andis entitled to vote. (SEC Opinion, Sept. 9,1991) .

Note: In non-stock corporations the right to voleby proxy, or even the right to vote itself may bedenied to members in the articles of incorporationor the by-laws as long as the denial is notdiscriminatory.

Q: What is the duration of proxy?

A:1. Specific proxy - Refers to one where

the authority granted the proxy holderis merely for a particular meeting on aspecific date.

2. Continuing proxy - Is not limited to aspecific meeting and it continues for acertain period but not more that 5years at anyone time.

Note: By-laws may provide for a shorterduration of a continuing proxy.

Q: What is the extent of authority of aproxy?

A:1. General proxy A general

discretionary power to attend andvote at annual meeting.

2. Limited proxy - Restrict the authorityto vote to specified matters only andmay direct the manner in which thevote shall be cast

Q: When may the right to vote by proxy beexercised?

A:1. Election of the BOD/BOT;2. Voting in case of joint ownership of

stock;3. Voting by trustee under VTA;4. Pledge or mortgage of shares;5. As provided for in the by-laws.

Q: How and when is a proxy revoked?A: A proxy may be revoked in writing, orally orby conduct.

GR: One who has given a proxy the right tovote may revoke the same at anytime.

XPN: Said proxy is coupled with interesteven it may appear by its terms to beirrevocable. .

VOTING TRUST AGREEMENT

Q: What is a voting trust agreement (VTA)?

A: It is an agreement whereby one or morestockholders transfer their shares of stocks toa trustee, who thereby acquires for a period oftime the voting rights (and/or any other rights)over such shares; and in return, trustcertificates are given to the stockholder/s,which are transferable like stock certificates,subject, to the trust agreement.


Pacu{tad de (])erecfio Civi] 39

CORPORATION CODE: MEETINGS

Q: What are the specific limitations onVTA?

A:1. VTA can be entered into for a period

not exceeding 5 years at anyonetime except when it is a condition in aloan agreement but shallautomatically expire upon fullpayment of the loan;

2. It must be in writing and notarized,and shall specify the terms andconditions thereof; (Sec. 59)

Q: What are the procedural requirementsfor VTA to be valid?

A:1. Execution and notarization of the VTA

stating the terms and conditionsthereof;

2. A certified copy of such agreementshall be filed with the corporation andwith the SEC, otherwise, it isineffective and unenforceable;

3. The certificate/s of stock covered bythe VTA shall be cancelled;

4. A new certificate shall be issued inthe name of the trustee/s stating thatthey are issued pursuant to the VTA;

5. The transfer shall be noted in thebooks of the corporation, that it ismade pursuant to said VTA;

6. The trustee/s shall execute anddeliver to the transferors voting trustcertificates, which shall betransferable in the same manner andwith the same effect as certificates ofstock;

7. No VTA shall be entered into for thepurpose of circumventing the lawagainst monopolies and illegalcombinations in restraint of trade orused for purposes of fraud. (Sec. 59)

,Note: I Unless expressly renewed, all rightsgrantea in a voting trust agreement shallautomatically expire at the end of the agreedperiod, and the voting trust certificates as well asthe certificates of stock in the name of the trusteeor trustees shall thereby be deemed cancelledand new certificates of stock shall be reissued inthe name of the transferors. (Sec. 59)

40

Q: What are the .distinctions between avoting trust agreement and proxy?

A:I· .VOTING TRUST;' . PROXY

The agreement is Revocable anytimeexcept one withirrevocable interest

Trustee acquires legal Proxy has no legaltitle to the shares of title to the shares ofthe transferri ng the principalstockholderNot only right to voteis given, other rights Only right to vote isas well except the givenright to receive

dividendsThe trust may vote in

person or by proxy The proxy must voteunless the agreement in person

provides otherwiseThe agreement must Proxy need not be

be notarized notarizedProxy can only act at

Trustee is not limited a specifiedto act at any particular stockholder's

meeting meeting (if hotcontinuing)

The share certificate No cancellation of theshall be cancelled and certificate shall betransferred to the madetrusteeA trustee can voteand exercise all the A proxy can only vote

rights of the in the absence of thestockholder even owners of the stockwhen the latter is

presentThe right to vote is

The voting right is inherent in ordivorced from the inseparable from the

ownership of stocks right to ownership ofstock

An agreement must A proxy is usually ofnot exceed 5 years at shorter durationanyone time except although under Sec.when the same is 58 it cannot exceed 5made a condition of a years at anyone timeloan.Governed by the law Governed by the law

on trust on agency


~,.:"', STQCKS:AND\STOCKl'lOLD~RS '. Q: What is a subscription contract?

Q: How does one become a shareholder ina corporation?

A: A person becomes a shareholder themoment he:

1. Enters into a subscription contractwith an existing corporation (he is astockholder upon acceptance of thecorporation of his offer to subscribewhether the consideration is fully paidor not),

2. Purchase treasury shares from thecorporation, or

3. Acquires shares from existingshareholders by sale or any othercontract.

Q: What are the distinctions betweensubscription and purchase?

A:SUBSCRIPTION" ~,:,. PURCHASE'~

May be made before or May be made onlyafter incorporation after incorporation

Buyer does notbecome a

Subscriber becomes a stockholder until

stockholder even if he the fulfillment of

has not fully paid the the terms of thesale and

subscription registration thereofin the books of the

corporation

Cannot be released from The corporation

his subscription unless may rescind orcancel the contractall stockholders agree for non-fulfillment

thereto and no creditor of the contract byis thereby prejudiced the buyer

Corporate creditors may Creditors may notproceed against the proceed against

subscriber for his unpaid the buyer for thesubscription in case the unpaid price asassets of the corporation there is no privityare not sufficient to pay of contract

their claims between themMay be in any form, In purchase

written or oral, express amounting to moreor implied, and than 500 pesos,

therefore, not covered the Statute ofby the Statute of Frauds Frauds shall applySubscription price are Purchase price

considered assets of the does not becomecorporation, hence, assets of the

creditors may go after corporation unlessthem fully paid

A: It is a contract for the acquisition ofunissued stock in an existing corporation or acorporation still to be formed. It is consideredas such notwithstanding the fact that theparties refer to it as purchase or some othercontract. (Sec. 60)

Q: What are the kinds of subscriptioncontracts?

A:1. GR: Pre-incorporation subscription -

entered into before the incorporationand irrevocable for a period of six (6)months from the date of subscriptionunless all other subscribers consentor if the corporation failed tomaterialize. It cannot also be revokedafter filing the Articles of Incorporationwith the SEC (Sec. 61)

XPN: When creditors will beprejudiced thereby.

2. Post-incorporation subscriptionentered into after incorporation.

Q: What are valid considerations in asubscription agreement?

A:1. Actual cash paid to the corporation;

2. Property, tangible or intangible (i.e.patents or copyrights), the requisitesare as follows:a. The property is actually received

by the corporation;b. The property is necessary or

convenient for its use and lawfulpurposes;

c. It must be subject to a fairvaluation equal to the par orissued value of the stock issued;

d. The valuation thereof shallinitially be determined by theincorporators; and

e. The valuation is subject to theapproval by the SEC.

3. Labor or services actually rendered tothe corporation;

4. Prior corporate obligations orindebtedness;

Note: The indebtedness involved is onethat is acknowledged by the board.

5. Amounts transferred fromunrestricted retained earnings to

UNIVERSITY OF SANTO TOMAS ~+.PacuCtad de (/)erecfto Cioii .y' 41

CORPORATION CODE: STOCKS AND STOCKHOLDERS

stated capital (in case of declarationof stock dividends);

6. Outstanding shares in exchange forstocks in the event of reclassificationor conversion.

Note: Promissory notes or future services are notvalid considerations.

Q: What are shares of stock?

A: It is an interest or right which an owner hasin the management of the corporation and itssurplus profits, and, on dissolution, in all of itsassets remaining after the payment of Its debt.

Q: What are the distinctions betweencapital stock from shares of stock?

A:. . SHARES OF .

.~APITA'2 STOCK -.. _. 'STOCKIt is an interest or

right which anowner has in the

management of thecorporation, and its

surplus profits,and, on dissolution,

in all of its assetsremaining afterpayment of its

debt. Thestockholder mayown the shareseven if he is not

holding a certificateof stock.

I id iThe amount pal Indr secured to be

'pald in by thestockholders upon

which the.corporation is to

conduct itsoperation. It is the

property of thecorporation itself(monetary value).

Q: What is a certificate of stock?

A: It is a paper representation or tan~ibleevidence of the stock itself and of variousinterests therein (Tan v. SEC, G.R. No. 95696,Mar. 3, 1992)

Q: What are the distinctions betweenshares of stock from certificates of stock?

A::. ;-~'''5HAREO~ :',~I,:pERTIFICATE OF '..,.,-, . STOCK, ". ,STOCK'

Evidence of theholder's ownership ofthe stock and of his

right as a shareholderand of his extentspecified therein.

Unit of interest ina corporation

It is anincorporeal or

intanqible

It is concrete andtangible

42 Iteam:ldll.'41

propertyIt may be issued

It may be issued onlyby thecorporation even if the subscription isif the subscription fully paid.is not fully paid.

Q: What are the requlsltes for the issuanceof the Certificate of Stock?

A:1. The certificate must be signed by the

president or vice-president,countersigned by the secretary orassistant secretary;

2. The certificate must be sealed withthe seal of the corporation;

3. The certificate must be delivered;4. The par value as to par value shares,

or full subscription as to no par valueshares must be fully paid, the basis ofwhich is the doctrine of indivisibility ofsubscri ption;

5. The original certificate must besurrendered where the personrequesting the issuance of acertificate is a transferee from thestockholder (Bitong v. CA, etc al.,G.R. No. 123553, July 13, 1998).

Q: What is the Doctrine of Individuality ofSubscription?A: A subscription is one entire and indivisiblewhole contract. It cannot be divided intoportions. (Sec. 64)

Q: What is the rule on right to issuance?

A: A corporation may now, in the absence ofprovisions in their by-laws to the contrary,apply payments made by subscribers-stockholders, either as:

1. Full payment for the correspondingnumber of shares of stock, the parvalue of each of which is covered bysuch payment; or

2. Payment pro-rata to each and all theentire number of shares subscribedfor. (Baltazar V. Lingayen Gulf ElectricPower Co., Inc, G.R. No. L-16236-38,June 30, 1965)


Who are required to pay theirs bscription in full?

1. Non-resident foreign subscribersupon incorporation must pay in fulltheir subscriptions unless their unpaidsubscriptions are guaranteed by asurety bond or by an assumption by aresident stockholder through anaffidavit of liability.

2. In case of no-par value shares, theyare deemed fully paid and non-assessable.

Q: Is a stockholder entitled to the shares ofstock subscribed although not fully paid?

A: Yes. As long as the shares are notconsidered delinquent, they are entitled to allrights granted to it whether or not thesubscribed capital stocks are fully paid.

Q: Is a stock certificate negotiable?

A: No. It is regarded as quasi-negotiable in thesense that it may be transferred byendorsement, coupled with delivery.

Q: Why is a stock certificate notnegotiable?

A: Because the holder thereof takes it withoutprejudice to such rights or defenses as theregistered owners or transferor's creditor mayhave under the law, except insofar as suchrights or defenses are subject to the limitationsimposed by the principles governing estoppel.(De los Santos v. Republic, G.R. No. L-4818,Feb. 28, 1955)

Q: Maya stockholder bring suit to compelthe corporate secretary to register validtransfer of stocks?

A: Yes, it is the corporate secretary's duty andobligation to register transfers of stocks.

Q: To be valid and binding on thecorporation and third parties, is theattachment or mortgage of shares of stockrequired to be registered in thecorporation's stock and transfer book?

A: An attachment or mortgage of shares ofstock need not be registered in thecorporations stock and transfer book inasmuchas a chattel mortgage over shares of stockdoes a "transfer of shares" and that onlyabsolute transfers of shares of stock arerequired to be recorded in the corporation's

stock and transfer book in order to have "forceand effect as against third persons".(Chemphil Export and Import Corporation v.CA, G.R. Nos. 112438-39, Dec. 12, 1995)

Q: How are shares of stock transferred?

A:1. If represented by a certificate, the

following must be strictly compliedwith:a. Delivery of the certificate;b. Indorsement by the owner and

his agent;c. To be valid to third parties, the

transfer must be recorded in thebooks of the corporation (RuralBank of Lipa v. CA, G.R. No.124535, Sept 28,2001).

2. If not represented by a certificate(such as when the certificate has notyet been issued or where for somereason is not in the possession of thestockholder).a. By means of deed of

assignment: andb. Such is duly recorded in the

books of the corporation.

Q: A is the registered owner of StockCertificate No. 000011. He entrusted thepossession of said certificate to his bestfriend B who borrowed the said endorsedcertificate to support B's application forpassport (or for a purpose other thantransfer). But Bsold the certificate to X, abona fide purchaser who relied on theendorsed certificates and believed him tobe the owner thereof.

Can A claim the shares of stocks from X?Explain.

A: No. Since the shares were alreadytransferred to "B", "A" cannot claim the sharesof stock from "X". The certificate of stockcovering said shares have been duly endorsedby "A" and entrusted by him to "B". By his saidacts, "A" is now estopped from claiming saidshares from "X", a bona fide purchaser whorelied on the endorsement by "A" of thecertificate of stock. (2001 Bar Question)


PacuCtad de (j)ereclio Civit


Q: What if the transfer is not recorded, is itvalid?

A: Yes, but, only insofar as the parties to thetransfer are concerned.

Note: . Hence, the corporation has the right torefuse to recognize any transfer of shares whichhas not been duly registered in the stock andtransfer book. (Sec. 63)

Q: What are the remedies wherecorporation refuses to transfer certificateof stocks?

A:1. Petition for mandamus;2. Suit for specific performance of an

express or implied contract;3. May sue for damages where specific

performance cannot be granted;

Note: There must be a special power of attorneyexecuted by the registered owner of the shareauthorizing transferor to demand transfer in thestock and transfer book (Ponce vs. ArsonsCement, G.R. No. 139802, Dec. 10, 2002).

The law does not prescribe a period within whichthe registration of the transfer of shares shouldbe effected. Hence, the action to enforce the rightdoes not accrue until there has been a demandand a refusal concerning the transfer.

Q: When may the corporation validly refuseto register the transfer of shares?

A: No shares of stock against which thecorporation holds any unpaid clairn shall betransferable in the books of the corporation.The "unpaid claim" refers to the unpaidsubscription on the shares transferred and notto any other indebtedness that the transferormay have to the corporation. (Sec. 63)

Q: When are stock certificates issued?

A: Certificates of stock shall be issued to asubscriber only until the full payment of hissubscription, together with interest andexpenses, if any is due. (Sec. 64)

Q: When should the balance of thesubscription be paid?

A: It should be paid:1. On the date specified in the

subscription contract, without need ofdemand or call, or;

2. If no date of payment has beenspecified, on the date specified on thecall made by the BOD; or

44

3. When insolvency supervenes upon acorporation and the court assumesjurisdiction to wind it up, all unpaidsubscriptions become payable ondemand, and are at oncerecoverable, without necessity of anyprior call.

Q: Will the unpaid balance accrue interest?

A: Subscribers for stock shall pay to thecorporation interest on all unpaid subscriptionsfrom the date of subscription, if so required by,and at the rate of interest fixed in the by-laws.If no rate of interest is fixed in the by-laws,such rate shall be deemed to be the legal rate.(Sec. 66)

The above interest is different from the interestcontemplated by Sec. 67. The said unpaidbalance will only accrue interest, by way ofpenalty, on the date specified in the contract ofsubscription or on the date stated in the callmade by the board.

Note: Interest contemplated in Sec. 66 ismoratory interest, while Sec. 67 speaks ofcompensatory interest.

Q: What is the effect of failure to pay thesubscription on the date it is due?

A: It shall render the entire balance due andpayable and shall make the shareholder liablefor interest at the legal rate on such balance,unless a different rate of interest is provided inthe by-laws.

Q: When will the share become delinquent?

A: If within 30 days from the date of paymentspecified in the contract of subscription or fromthe date stated in the call made by the board,no payment is made, all stocks covered bysaid subscription shall thereupon becomedelinquent and shall be subject to sale unlessthe BOD orders otherwise.

Note: "Call" means the resolution or formaldeclaration of the board that the unpaidsubscriptions are due and payable.

Q: What are the remedies of corporationsto enforce payment of stocks?

A:1. Extra-judicial sale at public auction

(Sec. 67)2. judicial action (Sec. 70)


Vhat is the procedure for the sale of=-"Jnquent stocks?

1. Resolution - the board shall issueresolution ordering the sale ofdelinquent stock;

2. Notice - notice of said sale, with acopy of the resolution, shall be sent toevery delinquent stockholder eitherpersonally or by registered mail;

3. Publication the notice shallfurthermore be published once aweek for two consecutive weeks in anewspaper of general 'circulation inthe province or city where theprincipal office of the corporation islocated;

4. Sale - the delinquent stock shall besold at the public auction to be heldnot less than 30 days nor morethan60 days from the date stocks becomedelinquent;

5. Transfer - the stock so purchasedshall be transferred to such purchaserin the books of the corporation and acertificate for such stock shall beissued in his favor; and

6. Credit remainder - the remainingshares, if any: shall be credited infavor of the delinquent stockholderwho shall likewise be entitled to theissuance of a certificate of stockcovering the same (Aquino, PhilippineCorporate Law Compendium, 2006).

Q: Who is the winning bidder in adelinquency sale?

A:1. The person participating in the

delinquency sale who offers to paythe full amount of the balance of thesubscription together with theaccrued interest, costs ofadvertisement and expenses of sale,for the smallest number of shares;

2. If there is no bidder as mentionedabove, the corporation may bid forthe same, and he total amount dueshall be credited as paid in full in thebooks of the corporation. Suchshares shall be considered' astreasury shares.

Note: The board is not bound to accept thehighest bid unless the contrary appears. This isforthe reason that in public sale, the bidder is theone making the offer to purchase which thecorporation'is free to accept or rejeet.

Q: When may delinquency sale bediscontinued or cancelled?

A: If the delinquent SH pays the unpaidbalance plus interest, costs and expenses onor before the date specified for the sale orwhen the BOD orders otherwise.

Q: Can a stockholder assail thedelinquency sale?

A: The stockholder may file an action to nullifythe sale on the ground of irregularity or defectin the notice of sale or in the sale itself. But thestockholder must first pay the amount forwhich the shares are sold with interest fromthe date of sale at the legal rate. The actionshall be commenced within 6 months from thedate of sale. (Sec. 69)

Q: What are the effects of stockdelinquency?

A:1. Upon the stockholder

a. Accelerates the entire amount ofthe unpaid subscription;

b. Subjects the shares to interestexpenses and costs;

c. Disenfranchises the shares fromany right that inheres to the to astockholder, except the right todividends (but which shall beapplied to any amount due onsaid shares, or, in the case ofstock dividends, to be withheldby the corporation until fullpayment of the delinquent shares(Sec. 43).

2. Upon the director owning delinquentsharesa. If the delinquent stockholder is a

director, the director shallcontinue to be a director but hecannot run for re-election(Sundiang and Aquino, Reviewerin Commercial Law, 2006);

b. A delinquent stockholder seekingto be elected as director may notbe a candidate for, not be dulyelected to, the board.


PacuCtaa de (])ereclio CiviC ~ 45


Q: What is the procedure for issuance ofnew certificate of stock in lieu of lost,stolen or destroyed ones?

A:1. Affidavit - the registered owner shall

execute and file an affidavit regardingthe share and the circumstancesregarding its loss;

2. Verification - the corporation shallverify the affidavit and otherinformation and evidence with thebooks of the corporation;

3. Publication - the corporation shallpublish a notice in a newspaper ofgeneral circulation published in theplace where the corporation has itsprincipal office, once a week for 3consecutive weeks at the expense ofregistered owner of the certificate ofstock which has been lost, stolen, ordestroyed;

4. One year waiting period - there shallbe a waiting period of 1 year from thedate of its publication during which acontest can be interposed;

5. Contest - if the contest has beenpresented to .said corporation or if anaction is pending in court regardingthe ownership of said certificate ofstock which has been lost, stolen, ordestroyed, the issuance of newcertificate of stock shall besuspended until the final decision ofthe court regarding the ownership of

, said certificate of stock which hasbeen lost, stolen, or destroyed; and

6. Replacement - if there is no contestwithin the 1 year period, thecorporation shall then replace thecertificate. The replacement of stockcertificate can be made before theexpiration of 1 year period if a bond isposted

Note: The prescribed procedure does not applyto a case where the certificates are in thecompany's possession when mislaid whichthereby obligates the corporation, not thestockholder, to suffer the consequences.

46 Iteam:iGW

Q: May the corporation be sued for theissuance of new certificates of stock?

A: No action shall prosper against thecorporation for the issuance of new certificatesunless there is bad faith, fraud or negligencepresent.

Q: A stockholder claimed that his stockcertificate was lost. After going throughwith the procedure for the issuance of lostcertificate, and no contest was presentedwithin 1 year from the last publication, thecorporation issued a new certificate ofstock in lieu of the supposed lostcertificate. The stockholder immediatelysold his shares and endorsed thereplacement certificate to a buyer. It turnedout that the original certificate was not lost,but sold and endorsed to another person.(1) May the corporation be made liable bythe aggrieved party? (2) Who will have abetter right over the shares, the endorseeof the original certificate or the endorsee ofthe replacement certificate?

A:1. No, the corporation cannot be made

liable. Except in cases of fraud, badfaith, or negligence on the part of thecorporation and its officers, no actionmay be brought against anycorporation which have issuedcertificates of stock in lieu of thoselost, stolen, or destroyed pursuant tothe procedure prescribed by law.

2. The endorsee of the replacementcertificate has a better right to theshares. After expiration of 1 yearfrom the date of the last publication,and no contest has been presented tosaid corporation regarding saidcertificate, the right to make suchcontest has been barred and saidcorporation already cancelled in itsbooks the certificate Which have beenlost, stolen, or destroyed and issuedin lieu thereof new certificate.

Q: What if there are oppositions on theissuance of new certificates, what may thecorporation do?

A: The corporation may file an interpleaderproceeding to compel the parties to litigateamong themselves.

UST GOI:DEN NOTES 2010

: When may a corporation issue a-eplacement certificate of subscription

. hout waiting for the expiration of oneear?

. The registered owner shall file a bond orcmer security effective for a period of one (1)lear in which case a new certificate may be- ued even before the expiration of the one1) year period. Provided, That if a contest has

Jean presented to said corporation or if an2 'on is pending. in court regarding theownership of said certificate of stock which has

en lost, stolen or destroyed, the issuance of.ne new certificate of stock in lieu thereof shalloe suspended until the final decision by thecourt regarding the ownership of saidcertificate of stock which has been lost, stolenor destroyed. (Sec. 73)

Q: What are the rights of stockholders?

A:1. Management Right

a. To attend and vote in person orby proxy at a stockholders'meetings (Secs. 50, 58);

b. To elect and remove directors(Sees. 24, 18);

c. To approve certain corporateacts (Sec. 58);

d. To compel the calling of themeetings (Sec. 50);

e. To have the corporationvoluntarily dissolved (Sec. 118,119);

f. To enter into a voting trustagreement (Sec. 59);

g. To adopt/amend/repeal the by-laws or adopt hew by-laws(Sees. 46, 48);

2. Proprietary rightsa. To transfer stock in the corporate

book (Sec. 63);b. To receive dividends when

declared (Sec. 43);c. To the issuance of certificate of

stock or other evidence of stockownership (Sec. 63);

d. To participate in the distributionof corporate assets upondissolution (Sec. 118, 119);

e. To pre-emption in the issue ofshares (Sec. 39);

3. Remedial rightsa. To inspect corporate books (Sec.

74);b. To recover stock unlawfully sold

for delinquency (Sec. 69);

c. To demand payment in theexercise of appraisal right (Secs .41, 81);

d. To be furnished recent financialstatements or reports of thecorporation's operation (Sec. 75);

e. To bring suits (derivative suit,individual suit, andrepresentative suit).

Q: What is a pooling agreement?

A: This is an agreement, also known as votingagreement, entered into by and between 2 ormore stockholders to make their shares vote inthe same manner. This usually relates toelection of directors where parties oftenprovide for arbitration in case of disagreement.This does not involve a transfer of stocks but ismerely a private agreement. (Sec. 100)

Q: When are pooling agreements valid?

A: As long as they do not limit the discretion ofthe BOD in the management of corporateaffairs or work any fraud against stockholdersnot party to the contract.

Q: Give the summary of vote requirementsfor stockholders

A:1. 2/3 of outstanding capital stock

(OCS) along with majority of theboard:a. Amendment of AOI;b. Extending and Shortening

Corporate Termc. Increasing / Decreasing capital

stock / bonded indebtedness;d. Sale or disposition of all,

substantially all of corporateassets;

e. Investment of corporate funds inanother corporation or for' apurpose other than mainpurpose;

f. Issuance of stock dividends;g. Corporate mergers or

consolidation;h. Voluntary dissolution of the

corporation whether or notcreditors are prejudiced.

2. 2/3 of outstanding capital stocksa. Removal of directors;b. Ratification of contract with

director or officer where first tworequisites of Sec. 32 are lacking;

c.' Where stockholders of managedcorporation own more than 1/3 ofoutstanding capital stock entitled

UNIVERSITY OF SANTO TOMAS .i) 47PacuCtaa ae CDereclio Civif' .


to vote of the managingcorporation are also the majorityof the board of managedcorporation, such 213 vote isrequired to approve managementcontract;

d. Delegation to the board toamend, repeal by-laws or adoptnew by-laws.

3. Majority of outstanding capital stockswith majority of the boarda. Approval of management

contract;b. Amendment to by-laws, repeal of

by-laws, adoption of new by-laws.

4. Majority of outstanding capital stocka. For quorum in electing members

of the board by cumulativevoting;

b. Grant of compensation tomembers of the board;

c. Adoption of original by-laws;d. Revocation of delegated

authority to the board of directorsto amend or repeal or adopt newby-laws.

5. The right to vote of non-votingstockholders may be limited orbroadened to the extent specified inthe AOI or by-laws, however, theymay still vote in instances specified inthe Corporation Code.

Q: Is a provision stating that the consent ofthe board must be obtained before transferof shares valid?

A: No. A provision that requires anystockholder who wishes to sell, assign ordispose of his shares in the corporation to firstobtain the consent of the board of directors orother stockholders of the corporation is void asit unduly restrains the exercise of thestockholder of his right to transfer.

Q: What is the right of first refusal?

A: A right that grants to the corporation oranother stockholder the right to buy the sharesof stock of another stockholder at a fixed priceand only valid if made on reasonable termsand consideration.

Except in the case of a close corporationwhere the right of first refusal is required to bea feature to be found in the articles ofihcorporation, the right of first refusal can onlyarise by means of a contractual stipulation, or

48

when it is provided for in the articles ofincorporation.

Note: When the by-laws provide a right of firstrefusal, it is null and void. There is no authorityto create property restrictions in by-lawsprovisions. (Hodges v. Lezama, 62 O.G. 6823)

Q: May a provision in the articles ofincorporation validly grant a right of firstrefusal in favor of other stockholders?

A: Yes, the SEC, as a matter of policy, allowsrestrictions on transfer of shares in the articlesof incorporation if the same is necessary andconvenient to the attainment of the objectivefor which the company was incorporated,unless palpably unreasonable under the

. circumstances. (SEC Opinion, Feb. 20, 1995)

Q: What actions can the stockholders ormembers bring?

A:1. Derivative suit - one brought by one

or more stockholders or members inthe name and on behalf of thecorporation to redress wrongscommitted against it or to protect orvindicate corporate rights, wheneverthe officials of the corporation refuseto sue or are the ones to be sued orhold control of the corporation. Therequisites are as follows:a. There should be ah existing

cause of action in favor of thecorporation;

b. The stockholder or member mustfirst make a demand upon thecorporation or the managementto sue unless such a demandwould be futile;

c. Stockholder or member must besuch at the time of theobjectionable acts ortransactions unless thetransactions are continuouslyinjurious; and

d. The action must be brought inthe name of the corporationwhich must be alleged

Note: The stockholder is only nominalparty in a derivative suit. The real partyin interest is the corporation.

2. Individual suit - and action brought bya stockholder against the corporationfor direct violation of his contractualrights.


3. Representative suit - one brought bya person in his own behalf and onbehalf of all similarly situated.

Q: AA, a minority stockholder, filed a suitagainst BB, CC, DD, and EE, the holders ofmajority shares of MOP Corporation, foralleged misappropriation of corporatefunds. The complaint averred, inter alia,that MOP Corporation is the corporation in"hose behalf and for whose benefit thederivative suit is brought. In their capacityas members of the Board of Directors, themajority stockholders adopted a resolutionauthorizing MOP Corporation to withdrawthe suit. Pursuant to said resolution, thecorporate counsel filed a Motion to Dismissin the name of the MOP Corporation.Should the motion be granted or denied?Reason briefly.

A: It .should not be denied. The requisites fora valid derivative suit exist in this case. First,AA was exempt from exhausting his remedies\' ithin the corporation and did not have ademand on the Board of Directors for the lattero sue. Here, such a demand would be futile,since the directors who comprise the majority(namely BB, CC, DO and EE are the onesguilty of the wrong complained of. Second, AAappears to be a stockholder at the time of thealleged misappropriation of corporate funds.Third, the suit is brought on behalf and for thebenefit of MOP Corporation. In this connection,it was held inCommart (Phils.) Inc. v. Securities andExchange Commission, G.R. No. 85318, June3, 1991, that to grant to the corporationconcerned the right of withdrawing ordismissing the suit, at the instance of themajority stockholders and directors whohemselves are the persons alleged to have

committed the breach of trust against theinterests of the corporation would be toemasculate the right of the minoritystockholders to seek redress for thecorporation. Filing such action as a derivativesuit even by a lone stockholder is one of theprotections extended by law to minoritystockholders against abuses of the majority.

Q: What are the liabilities of stockholders?

A: Liability:1. to the corporation for the unpaid

subscription;2. to the corporation for interest on

unpaid subscription;3. to the creditors of the corporation;4. for watered stock; and5. for dividends unlawfully paid;

"':'~"~':.~.""'.

Academics CommitteeChairperson: Abraham D. Genllino II

"V'icc-Cbair for .,LlaulemiCi: Jeannie J\. LaurentinoVIi-e·Chair/or Admill & FiJ/(J/"': Aissa Celine H. Luna

Via-Chair Jor Lryotll & D'Jigll: Loise Rae G. Naval

Mercantile Law CommitteeStlbi,d I'-le"d: Holy T. Ampague),

AJJI. Suhjcd Head' Manilyn Rose S. Sotelo


Aireen M. CachoSocrates Benjie 1. MarbilRon Cherne S. Mendoza

Edison James F. l'agalilauanMaybelline M. Santiago

~"'-:~"~"'~' ~


PacuCtad de Der ech» Civif 49

CORPORATION CODE: CORPORATE BOOKS AND RECORDS

Q: What books are required to be kept by acorporation?

A:1. Book for the minutes of SH and BOD

meetings;2. Record of transactions;3. Stock and transfer book; and4. Other books required to be kept.

Q: What are the contents of a stock andtransfer book?

A:1. All stocks in the name of the

stockholders alphabetically arranged;2. Amount paid and unpaid on all stocks

and the date of payment of anyinstallment;

3. Alienation, sale or transfer of stocks;4. Other entries as the by-laws may

prescribe.

Q: Who may make proper entries in stockand transfer books?

A: The obligation and duty falls on thecorporate secretary. If the corporate secretaryrefuses to comply, the stockholder mayrightfully bring suit to compel performance.The stockholder cannot take the law on to hishands; otherwise such entry shall be void.(Torres, Jr. v. CA, G.R. No. 120138, Sept. 5,1997)

Q: What is the probative value of the stockand transfer book?

A: The stock and transfer book is the bestevidence of the transactions that must beentered or stated therein. However, the entriesare considered prima facie evidence only andmay be subject to proof to the contrary (Bilongv. CA,IG.R. No. 123553, July 13, 1999).

iQ: Who are the persons given the right toinspect corporate books?

A:1, Any director, trustee, stockholder or

member;2. Voting trust certificate holder;3. Stockholder of sequestered company;

or;~\4. Beneficial owners of ~.I:H;lres.

50

Q: What is the basis. of SH's right ofinspection?

A: Their ownership of the assets and propertyof the corporation whether this ownership or.interest be termed equitable, beneficial orquasi-ownership. It is predicated upon thenecessity of self-protection.

Q: What are the limitations on the right toinspection?

A:1. The right must be exercised during

reasonable hours on business days;2. The person demanding the right has

not improperly used any informationobtained through any previousexamination of the books and recordsof the corporation; and

3. The demand is made in good faith orfor legitimate purpose (Sec. 74);

4. The inspection should only be for apurpose germane to his interest as aSH;

5. It should follow the formalities thatmay be required in the by-laws;

6. The right does not extend to tradesecrets;

7. It is subject to limitations underspecial laws,e.g. Secrecy of BankDeposits.

Note: The right extends, in compliance withequity, good faith, and fair dealing, to a foreignsubsidiary wholly-owned by the corporation.

•...--:.~ ..--..Academics Committee

Cbairperson. Abraham D. Ccnuino 11Via-Cbairfor Academia: Jeannie A. Laurcntino

Vice-Chair for .Admin e:.--Finance: Aissa Celine H. LunaVite-Chairfor Utyout & De.r{~II:Loise Rae G. Naval

Mercantile Law CommitteeSubjed Head: Holy T. Ampaguey

A.r.rt. Subjed Head: Manilyn 'Rose S. Sotelo


Airccn M. CachoSocrates Beujie I. MarbilRon Cherrie S. Mendoza

Edison James F. PagalilauanMaybellino M. Santiago

.""~;.~~'.


Q: What are the distinctions betweenmerger and consolidation?

: What is combination?

. It is used to designate an alliance or::onfederation or sale or other transaction-=tween two or more transaction, by virtue of, ich will not necessarily result in the loss of

separate existence of the corporations'quino, Philippine Corporate Law

moetuiium, 2006)

: What are the common forms oforporate combinations?

A:1. Sale of assets;2. Lease of assets;3. Sale of stock;4. Merger; or5. Consolidation.

Q: What are the limitations on corporatecombinations?

A:1. Should not create monopolies;2. Should not eliminate free and healthy

competition; and3. Should not create illegal

combinations such as bankscombined with insurance companies.

Q: What is merger?

A: One where a corporation absorbs the otherand remains in existence while others aredissolved. (Sec. 76)

Q: What is consolidation?

A: One where a new corporation is createdand consolidating corporations areextinguished. (Sec. 76)

A:fo MERGER 0 '".CONSOLIDATIOW'''',I

All of the constituentcorporationsinvolved are

dissolved exceptone

No new corporationis created

The survivingcorporation acquires

all the assets,liabilities, and

capital stock of allconstituent

cor orations

All assets, liabilities,and capital stock of all

consolidatedcorporations are

transferred to the newcorporation

Q: What is the procedure for merger orconsolidation?

A:1. Board of each corporation shall draw

up a plan of merger or consolidation,setting forth:a. Names of corporations involved

(constftuent corporations);b. Terms and mode of carrying it

out;c. Statement of changes, if any, in

the present articles of survivingcorporation; or the articles of thenew corporation to be formed incase of consolidation.

2. Plan for merger or consolidation shallbe approved by majority vote of eachboard of the concemed corporationsat separate meetings.

3. The same shall be submitted forapproval by the stockholders ormembers of each such corporation atseparate corporate meetings dulycalled for the purpose. Notice shouldbe given to all stockholders ormembers at least two (2) weeks priorto date of meeting, either personallyor by registered mail.

4. Affirmative vote of 2/3 of theoutstanding capital stock in case ofstock corporations, or 2/3 of themembers of a non-stock corporationshall be required.

5. Dissenting stockholders may exercisethe right of appraisal. But if Boardabandons the plan to merge or

UNIVERSITY OF SANTO TOMAS ~~. 51Pac~{tad de De rech o Civit .•.

CORPORATION CODE: MERGER AND CONSOLIDATION

consolidate, suchextinguished.

right

6. The plan may still be amended beforethe same is filled with the SEC;however, any amendment to the planmust be approved by the same votesof the board members of trustees andstockholders or members required forthe original plan.

7. After such approval, Articles ofMerger or Articles of Consolidationshall be executed by each of theconstituent corporations, signed bypresident or VP and certified bysecretary or assistant secretary,setting forth:a. Plan of merger or consolidation;b. In stock corporation, the number

of shares outstanding; in non-stock, the number of members;

c. As to each corporation, numberof shares or members voting forand against such plan,respectively

8. Four copies of the Articles of Mergeror Consolidation shall be submitted tothe SEC for approval. Specialcorporations like banks, insurancecompanies, building and loanassociations, etc., need the priorapproval of the respectivegovernment agency concerned.

9. If SEC is satisfied that the merger orconsolidation is legal, it shall issuethe Certificate of Merger or theCertificate of Incorporation, as thecase may be.

10. If the SEC is not satisfied, it shall seta hearing, giving due notice to all thecorporations concerned. (Sees. 76-79)

Q: When shall the merger or consolidationbecome effective?

A: Upon issuance by the SEC of the certificateof rnerger and consolidation. In the case ofmerger or consolidation of banks or bankinginstitutions, building and loan associations,trust companies, insurance companies, publicutilities, educational institutions and otherspecial corporations governed by special laws,the favorable recommendation of theappropriate government agency shall first beobtained.

52

is Q: Will the absorbing corporation or thenewly created corporation bound toassume the liabilities of the dissolvedcorporation or the consolidatedcorporation?

A:GR: Generally, when one corporation buysall the shares/assets of another corporationthis will not operate to dissolve the othercorporation and as the two corporations stillmaintaining their separate corporateentities, one will not answer for the debts ofthe other.

XPN: (to the non-assumption of liabilities)1. If the purchase was in fraud of the

creditors;2. If there is an express assumption of

liabilities;3. If there is a consolidation or merger;4. If the purchaser is merely a

continuation of the seller.

Q: What is the difference between mergerand consolidation and sale of assets?

A:I MERGER AND ,SALE OF ASSETS II CONSOLIDATION·I

Sale of assets is Does not necessary

always involved involve merger andconsolidation.

Title to the assets are Transfer of title is bytransferred byoperation of law virtue of contract

Purchasing

There is automatic corporation is not

assumption of generally liable forthe debts andliabilities liabilities of the

selling corporationThe constituent The sellingcorporation are corporation is notautomatically dissolved by the

dissolved mere transfer of all(but no liquidation) its property

The sellingThere is continuance corporation ordinarilyof the enterprise and contemplates aof the stockholders liquidation of the

enterprise


'10 corporations agreed to merge. Theyexecuted an agreement specifying the

iving corporation and the absorbedration. Under the agreement of

-3rger dated November 5, 1998, theiving corporation acquired all the

.•_ is, properties and liabilities of theorbed corporation.

• at would happen to the absorbedrporation? Must the absorbedrporation undertake dissolution and theding up procedures? Explain your

o. There is no need for the absorbedrporation to undertake dissolution and

.-riding up procedure. As a result of theer, the absorbed corporation is

~ omatically dissolved and its assets and~ili ies are acquired and assumed by the

. ing corporation.

: Pending the approval of the merger bye Securities and Exchange Commission,ay the surviving corporation already

itute suits to collect all receivables duethe absorbed corporation from its

stomers? Explain your answer.

. o. The merger does not become effective'1 and unless approved by the Securities

2.."Id Exchange Commission. Before theaoproval by the SEC of the merger, thesurvivinq corporation has no legal personality.: . respect to receivables due to the

absorbed corporation.

: A case was filed against a customer tolIect on the' promissory note issued by

im after the date of the merger agreement.The customer raised the defense that while

e receivables as of the date of the mergeragreement were transferred to thesurviving corporation, those receivablesvhlch were created after the mergeragreement remained to be owned by theabsorbed corporation. These receivables'lQuld be distributed to the stockholdersconfonnably with the dissolution andliquidation procedures under the NewCorporation Code? Discuss the merits ofthis argument.

A: Whether the receivable was incurred by theabsorbed corporation before or after themerger agreement, or before or after theapproval thereof by the SEC, the saidreceivable would still belong to the survivingcorporation under Sec. 80 of the CorporationCode which does not make any distinction aso the assets and liabilities of the absorbed

corporation that the surviving corporationwould inherit. (1999 Bar Question)

Q: In case of merger, can an absorbingcorporation (Bank B) validly commence asuit against the debtor of the absorbedcorporation (Bank A)?

A: Yes, Bank B can sue the debtor of Bank Abecause it has already acquired the rights andinterests of the latter. Novation (by virtuechange of creditor) cannot be a properdefense because the surviving corporationacquires all the rights, properties,and liabilitiesof the dissolved corporation. (Chester 8abst v.CA, ei. et., G.R. No. 99398 & 104625, Jan. 26,2001)Q: What if there are properties under theabsorbed corporation's name and thesurviving corporation wants to sell thesame, is there a need to obtain a new titleor sign a deed of sale between the twocorporations?

A: No. The surviving corporation acquires theproperty without need of further act. Hence, itmay sell said property even without obtaining anew title or signing a deed of sale.

Q: What happens to the employees of theabsorbed corporation? Is the survivingcorporation duty-bound to absorb theformer's employees?

A: Yes, because employment agreements orcontracts are considered liabilities but withoutprejudice to termination due to redundancy.

Q: What is a spin-off?

A: It has the opposite effect of merger orconsolidation, whereby a department, divisionor portions of the corporate businessenterprise is sold-off or assigned into a newcorporation that will arise by the processwhichmay constitute it into a subsidiary of theoriginal corporation. The validity of spin-offsdepends upon valid business cause and goodfaith. (San Miguel Corp. Employees Union-PTGWO v, Confesor, G.R. No. 111262, Sept.19, 1996)


Pacu(tad'd'e (])ereclio CiviC53

CORPORATION CODE: ApPRAISAL RIGHT

APPRAISAL RIGHT

Q: What is appraisal right?

A: The right to withdraw from the corporationand demand payment of the fair value of hisshares after dissenting from certain corporateacts involving fundamental changes incorporate structure. (Sec. 81)

Q: In what instances may the right ofappraisal be exercised?

A:1. In case any amendment to the

articles of incorporation which has theeffect of:a. Changing or restricting the rights

of any stockholder or authorizingpreferences over those ofoutstanding shares; or

b. Changing the term of thecorporate existence.

2. In case of sale, lease, exchange,transfer, mortgage, pledge or otherdisposition of all or substantially all ofthe corporate property and assets asprovided in the Code (Sec. 81);

3. In case of merger or consolidation(Secs. 77,81);

4. In case of investment of corporatefunds in another corporation orbusiness or for any other purpose;(Sec. 42);

5. In cases of close corporations, astockholder may, for any reason,compel the corporation to purchasehis shares when the corporation hassufficient assets in its books to coverits debts and liabilities exclusive ofcapital stock (Sec. 105);

Q: What are the conditions tor the exerciseof appraisal right?

A:1. Any of the instances set forth by the

law must be present;2. Dissenting stockholder must have

voted against the proposed action;3. Demand for payment must be made

within 30 days from the date the voteis taken thereon;

4, Price must be based on fair market! value as of day prior to date on which

vote was taken;5. Submission by withdrawing

stockholder of his shares to thecorporation for notation of beingdissenting stockholder within 10 daysfrom the written demand;

54

6. Payment must be made only whenthe corporation has unrestrictedretained earnings in its books;however, in case of a closecorporation which only requires that ithas assets and the payment of thefair value of the shares to thedissenting SH will not result to itsinsolvency.

7. Stockholder must transfer his sharesto the corporation upon payment bythe corporation.

Q: When will the dissenting stockholderlose his right of appraisal?

A:1. If the dissenting stockholder fails to

make a written demand on thecorporation within 30 days after thedate on which the vote was taken forpayment on the fair value of hisshares. Such failure shall be deemedto be a waiver of his appraisal right.

2. When the dissenting stockholder failsto submit his certificates of stockrepresenting his shares for notationthereon that such shares aredissenting shares, within 10 daysafter demand for payment for hisshares.

3. When the shares of the dissentingstockholder are transferred to anotherperson and the certificates coveringsaid shares are consequentlycancelled.

Q: What are the rules in case ofdisagreement on the fair value of shares?

A: If within a period of sixty (60) days from thedate the corporate action was approved by thestockholders, the withdrawing stockholder andthe corporation cannot agree on the fair valueof the shares, it shall be determined andappraised by three (3) disinterested personsone of Whom shall be named by thestockholder, another by the corporation, andthe third by the two thus chosen. The findingsof the majority of the appraisers shall be final.

The award shall be paid by the corporationwithin thirty (30) days after such award ismade.


: What are the effects of the demand anderminatlon of right?

1. From the time of demand for paymentof the fair value of a stockholder'sshares until either the abandonmentof the corporate action involved or thepurchase of the said shares by thecorporation, all rights accruing tosuch shares, including voting anddividend rights, shall be suspended;

2. The dissenting stockholder shall beentitled to receive payment of the fairmarket value of his shares as agreedupon between him and thecorporation or as determined by theappraisers chosen by them.

If he is not paid within 30 days afterthe award, his voting and dividendrights shall immediately be restored.(Sec. 83)

Q: When are the rights of a stockholderrestored even after the exercise ofappraisal right?

A:GR: A dissenting stockholder whodemands payment of his shares is nolonger allowed to withdraw from hisdecision.

XPN: When the following instances arepresent:

1. If such demand for payment iswithdrawn with the consent of thecorporation;

2. If the proposed corporate action isabandoned or rescinded by thecorporation;

3. If the proposed corporate actiondisapproved by the SEC where suchapproval is necessary;

4. If the SEC determines that suchstockholder is not entitled to theappraisal right. (Sec. 84)

Note: In such instances, his status as astockholder shall thereupon be restored, and alldividend distributions which would have accruedon his shares shall be paid to him.

Q: How is valuation date determined?

A: The fair value of the shares of thedissenting stockholder is determined as of theday prior to the date on which the vote wastaken notwithstandinq any appreciation ordepreciation in value of the shares inanticipation of such corporate action.

Q: Who bears the cost of appraisal?

A:GR: Costs of appraisal shall be borne bythe corporation

XPN: The costs shall be borne by thestockholder, when the fair valueascertained by the appraisers isapproximately the same as the price whichthe corporation may have offered to paythe stockholder. (Sec. 85)

Note: In the case of an action to recover such fairvalue, all costs and expenses shall be assessedagainst the corporation, unless the refusal of thestockholder to receive payment was unjustified.

Q: What is the effect of the transfer ofshares of the dissenting stockholder?

A: .1. The rights of the transferor as a

dissenting stockholder shall cease;2. The transferee shall become a

regular stockholder with the right toreceive all dividend distributionswhich would have accrued to suchshares; and

3. The right of the transferor as adissenting stockholder to be paid thefair value of the shares shall cease.

Q: A dissenting stockholder transfers hisshares of stock and his certificate of stockbearing the notation that such shares aredissenting shares, are consequentlycancelled. Will the transferee acquire theright of the transferor to demand from thecorporation the payment of the fair value ofthe shares?

A: No, because upon transfer of the shares ofthe dissenting stockholder, his right as adissenting stockholder shall cease and thetransferee shall have all the rights of a regularstockholder and all dividend distributions whichwould have accrued on such shares shall bepaid to the transferee. The transfer of sharesis abandonment by the dissenting stockholderof his appraisal right.


Pacu{tati tie I])ereclio Civ i]

CORPORATION CODE: NON-STOCK CORPORATIONS

. NON-STOCK.' CORPORATION

Q: What is the concept of a non-stockcorporation?

A: It is one where no part of its income isdistributable as dividends to its members.

Even if there is a statement of capital stock, foras long as there is no distribution of retainedearnings to its members, the corporation isnon-stock.

Any profit which it may obtain as an incident toits operations shall whenever necessary orproper, be used in furtherance of the purposeor purposes for which it was organized.

Note: They are govenied by the same rulesestablished for stock corporations, subjecthowever, to special provisions governing non-stock corporations.

Q: What are the requisites of a non-stockcorporation?

A:1. It does not have capital stock divided

into shares;

2. No part of its income during itsexistence is distributable as dividendsto its members, trustees, or officers;

Q: For what purposes may a non-stockcorporation be organized?

A: Non-stock corporation may be formed ororganized for charitable, religious, educational,professional, cultural, fraternal, literary,scientific, social, civic service, or similarpurposes, like trade, industry, agriculture andlike chambers, or any combination thereof.

Q: What are the rules regardingconversion?

A:1. A non-stock corporation cannot be

converted into a stock corporationthrough mere amendment of itsArticle of Incorporation. This wouldviolate Sec.S7 which prohibitsdistribution of income as dividends tomembers. Giving the membersshares is tantamount to distribution ofits assets or income. (SEC Opinion,Mar. 20, 1995)

2. A non-stock corporation can beconverted into a stock corporation

56

only if the members dissolveand then organize acorporation. However, thereresulting new corporation.Opinion, May 13, 1992)

it firststockis a(SEC

3. A stock corporation may be convertedinto a non-stock corporation by mereamendment provided all therequirements are complied with. Itsrights and liabilities will remain.

Q: What are the' distinctions between astock corporation and a non-stockcorporation?

A:

mayheld at any place

outside the place ofbusiness but must

be within thePhili

Place of meeting:within the city or

municipality where theplace of business is

located

Term of BOD: 1 year

Assets are distributedaccording to interest


Termination:governed by the

AOI

Q: What are the rights of members?

A:1. Right to vote - A member is entitled

to one (1) vote. However, such rightmay be broadened, limited or deniedin the Articles of Incorporation or by-laws. (Sec.89) thus, the by-laws of anon-stock corporation may provide forthe desired voting rights of members,including the number of votes. (SECOpinion, Oct. 10, 1989)

2. Right to transfer membership - As ageneral rule, a member cannottransfer his membership (sincemembership is personal to themember) in a non stock corporation.However, by way of exception, theArticles on Incorporation or by-lawsmay provide for their transferability.(Sec. 90)

Q: What is the order of distribution ofassets on dissolution of non-stockcorporati ons?

A:1. All its creditors shall be paid;

2. Assets held subject to return ondissolution, shall be delivered back totheir givers;

3. Assets held for charitable, religiouspurposes, etc., without condition fortheir return on dissolution, shall beconveyed to one or moreorganizations engaged in similaractivities as dissolved corporation;

4. All other assets shall be distributed tomembers, as provided for in theArticles or by-laws; and

5. In case of there is no provision in theAOI or by-laws, distribution may bemade in accordance to a plan of

distribution adopted by the board oftrustees by majority vote and by atleast 2/3 of the members. (Sec. 94)

Q: Can a non-stock corporation offsetunused contributions of members againstthe balance of receivables from the samemembers?

A: No. The unused contributions of memberscannot be offset against the balance ofreceivables because this would amount todistribution of the capital of the corporation.Members of Non-stock Corporation are notentitled to distribution of capital. They are onlyentitled to distribution of capital upondissolution when it is provided for in thearticles of incorporation or by-laws. (SECOpinion, Nov. 27, 1985)

Academics CommitteeCbairper.ron:Abraham D. Genuino IT

'Via-Chair for Academia: Jeannie A. LaurentinoVia-Chair/or Admin e;.-Finance: Aissa Celine H. Luna

Via-Chair Jor Layout & Desig»: Loise Rae G. Nan!

Mercantile Law CommitteeSubject Head: Holy T. Ampaguey

AJJI. Subjed Head: Manilyn Rose S. Sotelo


Aireen M. CachoSocrates Benjie 1. Marbi!Ron Cherne S. Mendoza



PacuCtati tie (])ereclio Civif 57

CORPORATION CODE: CLOSE CORPORA TrONS

CLOSE CORPORATION

Q: What is a close corporation?

A:1. Whose articles of incorporation

provide that:a. All the corporation's issued stock

of all classes, exclusive oftreasury shares, shall be held ofrecord by not more than aspecified number or persons notexceeding twenty (20);

b. All the issued stock of all classesshall be subject to one or morespecified restrictions on transfer;

c. The corporation shall not list inany stock exchange or make anypublic offering of any of its stockof any class.

2. Whose stocks, at least 213 of thevoting stocks or voting rights of whichare owned or controlled by anothercorporation which is a closecorporation.

Note: The Corporation is not a close corporationeven if the shares belong to less than twenty ifnot all the requisites are present. (San JuanStructural and Steel Fabricators, Inc. v. CA, G.R.No. 129459, Sept. 29, 1998)

Q: What are the characteristics of a closecorporati on?

A:1. Stockholders may act as directors

I without need of election and thereforeI are liable as directors;

2., Stockholders who are ihvolved in themanagement of the corporation areliable in the same manner asdirectors are;

3. Quorum may be greater than meremajority;

4. Transfer of stocks to others, whichwould increase the number ofstockholders to more than themaximum are invalid;

5. Corporate actuations may be bindingeven without a formal board meeting,if the stockholder had knowledge orratified the informal action of theothers;

6. Pre-emptive right extends to all stockissues;

7. Deadlock in board are settled by theSEC, on the written petition by anystockholder; and

8. Stockholder may withdraw and availof his right of appraisal.

58

Q: What is the difference between ordinarystock corporation and close corporation?

A:ORDINARY STOCK CLOSE CORPORATION.CORPORATION I

Its AOI must contain the

Its AOI need only special mattersprescribed by Sec. 97,contain the general aside from the generalmatters enumerated matters in Sec. 14.in Sec. 14 of the Failure to do soCode precludes a de jure close

corporation statusIts status as an 2/3 of its voting stock orordinary stock voting rights must not becorporation is notaffected by the owned or controlled by

ownership of its another corporationwhich is not a close.voting stock or voting corporationrights

Its AOI cannot Its AOI may classifyclassify directors directors

The corporate Its AOI may provide thatofficers and any or all of the corporate

employees are officers or employeeselected by a majority may be elected or

vote of all the appointed by themembers of the BOD stockholders

Business of theBusiness of the corporation may becorporation is managed by the

managed by the stockholders if the AOIBOD so provide, but they are

liable as directorsThe pre-emptive The pre-emptive right isright is subject to the subject to no exceptionsexceptions found in unless denied in the AOISec. 39

The appraisal right The appraisal right maybe exercised andmay be exercised by compelled against thea stockholder only in corporation by athe cases provided stockholder for anyin Secs. 81 and 42 reason

Arbitration or intra" Arbitration of intra-corporate deadlock corporate deadlock byby the SEC is not a the SEC is an availableremedy in case the remedy in case thedirectors orstockholders are so directors or stockholders

divided respecting are so divided respectingthe management of thethe management of corporationthe corporation

In case of voluntary Any stockholder whodissolution, approval thinks there isof the majority vote mismanagement or fraudof the BOD and in the corporation maystockholdersrepresenting 213 of file a petition with the

SEC to dissolve thethe outstanding corporationcapital is reauired.


: What cannot be a close corporation?

A: MOSBI PEP1. Mining companies;2. Qil companies;3. .§tock exchanges;4. !!anks;5. insurance companies;6. Eublic utility;7. Educational institutions; and8. Other corporation declared to be

vested with Eublic interest. (Sec. 96)

ate: A "close corporation" is different from a"closed corporation" and a "closely heldc poration".

: What are the conditions for validity ofrestrictions on transfer of shares?

A:1. Such restrictions must appear in the

AOI and in the by-laws as well as inthe certificate of stock, otherwise theyshall not be binding on any purchaserthereof in good faith;

2. They shall not be more onerous thangranting the existing stockholders orthe corporations the option topurchase the shares of thetransferring stockholders with suchreasonable terms, conditions, orperiod stated therein.

ate: Any transfer made should not result inexceeding the number of stockholders as allowed")y he Code.

Q: What is the nature of restrictions ontransfer?

A; It is in the nature of a right of first refusal in:2 or of stockholders which can be waived byj)e stockholder, if the latter fails to exercisethe option to purchase within the period stated·0 he articles and by-laws.

Q: Can good faith be a defense in theissuance or transfer in breach of qualifyingconditions?

A: No, according to Sec. 99, there is aconclusive presumption of knowledge of therestrictions.

Q: What are the effects where stockholdersare managers? '"

A:1. No longer necessary to elect

directors;2. Stockholders concerned shall be

deemed the directors;3. The stockholders shall have the same

liabilities as directors;4. To the extent that the stockholders

are actively engaged in themanagement or operation of thebusiness and affairs of a closecorporation, the stockholders shall beheld to strict fiduciary duties to eachand among themselves; and

5. The stockholders .shall be personallyliable for corporate torts unless thecorporation has obtained reasonablyadequate liability insurance.

Q: What is the effect of unnecessary orimproperly held board meeting?

A: Any action by the directors of a closecorporation without a meeting shall be valid if:

1. Before or after such action is taken,written consent is signed by all thedirectors;

2. All the stockholders have actual orimplied knowledge of the action andmake no prompt objection;

3. The directors are accustomed to takeinformal action with the express orimplied acquiescence of all thestockholders;

4. All the directors have express orimplied knowledge of the action inquestion and make no promptobjection thereto.

Q: What is deadlock in a closecorporation?

A: It is when the directors or stockholders areso divided respecting the management of thebusiness and affairs of the corporation that thevotes required for any corporate action cannotbe obtained and as a result, business andaffairs can no longer be conducted to theadvantage of the stockholders generally.

Q: What is the remedy in case of deadlocksin a close corporation?

A: The SEC may be asked to intervene andthe SEC may perform such actions that maybe necessary under the circumstancesincluding the appointment of a provisionaldirector who, as an impartial person will haveall the powers of a duly elected director.

UNIVERSITY OF SANTO TOMAS ~:l;J 59Pacu[tad de <Derecfio Civil .• "

CORPORATION CODE: SPECIAL CORPORATIONS

.,,', , SPECIAL CORPORATIONS Q: What is the nationality of a corporationsole?

Q: What is an educational corporation?

A: It is a stock or non-stock corporationorganized to provide facilities for teaching orinstruction. (Secs. 106 - 108)

Note: A favorable recommendation of the DECSor CHED is essential for the approval of its AOIand by-laws.

It is primarily governed by special laws andsuppletorily governed by the provisions of theCode.

Q: What is a religious corporation?

A: A corporation composed entirely of spiritualpersons and which is organized for thefurtherance of a religion or for perpetuating therights of the church or for the administration ofchurch or religious work or property. It isdifferent from an ordinary non-stockcorporation organized for religious purposes.(Secs. 109- 116)

Q: Are religious groups required to beregistered with the SEC?

A: No, the Corporation Code does not requireany religious groups to be registered as acorporation but if it wants to acquire legalpersonality, its members should incorporateunder the Code.

Q: What are the kinds of ReligiousCorporation?

A:1. Corporation sole - a special form of

corporation, usually associated withthe clergy, consisting of one persononly and his successors, who isincorporated by law to give somelegal capacities and advantages(Sec. 110);

2. Religious societies or corporateaggregate - a non-stock corporationgoverned by a board but withreligious purposes. It is incorporatedby an aggregate of persons, religiousorder, diocese, synod, sect, etc. (Sec.116)

Q: How is a corporation sole organized?

A: By the mere filing of a verified articles ofincorporation with the SEC without the need ofan issuance of a certificate of incorporation.(Sec. 111)

60

A: A corporation sole does not have anynationality but for purposes of applyingnationalization laws, nationality is determinednot by the nationality of its presiding elder butby the nationality of its members, constitutingthe sect in the Philippines. Thus, the RomanCatholic Church can acquire lands in thePhilippines even if it is headed by the Pope.(Roman Catholic Apostolic Church v. LandRegistration Commission, G.R. No. L-8451,Dec. 20, 1957)

Q: May a corporation sole acquireproperty?

A: Yes a corporation sole may acquireproperty even without court intervention bypurchase, donation and other lawful means.

Q: How may a corporation sole alienateproperty?

A:1. By obtaining an order from the RTC

of the province where the property issituated after notice of the applicationfor leave to sell or mortgage has beengiven by publication or otherwise

2. In cases where the rules, regulationsand discipline of the religiousdenomination, sect or church,religious society or order concernedrepresented by such corporation soleregulate the method of acquiring,holding, selling and mortgaging realestate and personal property, suchrules, regulations and discipline shallcontrol, and the intervention of thecourts shall not be necessary. (Sec.113)

Q: How is the vacancy filled in acorporation?

A: By accession to the office by thesuccessors of any chief archbishop, bishop,priest, minister, rabbi or presiding elder, (Sec.114)

Note: They shall be permitted to transactbusiness on the filing with the SEC a copy of theircommission, certificate of election, or letters ofappointment, duly certified by any notary public.


: How is a corporation sole dissolved?

. By filing a verified declaration of dissolution:::::e:ing:

1.2.3.

4.

The name of tile corporation;Reason for dissolution;Authorization for the dissolution bythe particular religious denomination,sect or church;Names and addresses of the personswho will supervise the dissolution andwinding up.

Academics CommitteeCbairperso»: Abraham D. Genuino II

Via-Cbairfor .Academics: Jeannie A. LaurentinoVia-Cbairfor Admin & Fiuana: Aissa Celine H. Luna

Vice·OJ"ir jiJr Layo,,! & DeJign: Loise Rae G. Naval

Mercantile Law CommitteeSub jed Head' Holy T Ampaguey

Ass!. Subjed Head: Manilyn Rose S. Sotelo

Members:Edwin Marc T Baldia

Aireen M. CachoSocrates Benjie I. MarbilRon Cherrie S. Mendoza



Pacu{tati tie (j)ereclio Civi] 61

CORPORATION CODE: DISSOLUTION

DISSOLUTION

Q: What is meant by dissolution?

A: It is the extinguishment of the franchise of acorporation and the termination of its corporateexistence.

Q: What are the voluntary modes ofdissolution of a corporation?

A:1. Where no creditors are affected

Procedure:a. Majority vote of the board of

directors or trustees; andb. Resolution duly adopted by the

affirmative. vote of thestockholders owning at least 2/3of the outstanding capital stockor at least 2/3 of the members ata meeting duly called for thatpurpose.

c. A copy of the resolutionauthorizing the dissolution shallbe certified by a majority of theboard of directors or trustees andcountersigned by the secretary ofthe corporation.

d. Such copy shall be filed withSEC. (Sec. 118)

2. Where creditors are affectedProcedure:a. Filing a petition for dissolution

with the SECb. Such petition must be signed by

majority of the board of directorsor trustees

c. Must also be verified by thepresident or secretary or one ofits directors

d. The dissolution was resolvedupon by the affirmative vote ofthe stockholders representing atleast 2/3 of the outstandingcapital stock or at least 2/3 of themembers at a meeting dulycalled for that purpose.

e. If there is no sufficient objection,and the material allegations ofthe petition are true, a judgmentshall be rendered dissolving thecorporation and directing suchdisposition of its assets as justicerequires, and may appoint areceiver to collect such assetsand pay the debts of thecorporation. (Sec. 119)

3. By shortening the corporate term - Avoluntary dissolution may be effectedby amending the AOI to shorten its

62

corporate term pursuant to theprovisions of the Code. A copy of theamended AOI shall be submitted tothe SEC.. Upon approval of theamended AOI of the expiration of theshortened term, the corporation shallbe deemed dissolved without anyfurther proceedings, subject to theprovisions of the Code on liquidation.

As an additional requirement, theSEC requires to submit the finalaudited financial statement not olderthan 60 days before the applicationfor shortening the corporate term.

4. In case of a corporation sole, bysubmitting to the SEC for approval, averified declaration of dissolution(Sec. 115). This merely needs theaffidavit .of the presiding elder. Noneed for a board resolution.

5. By merger or consolidation, wherebythe constituent corporationsautomatically cease upon issuanceby the SEC of the certificate ofmerger or consolidation, except thesurviving or consolidated corporationwhich shall continue to· exist. (Secs.79 and 80)

6. Expiration of the corporate term (Sec.11).

Q: What are the involuntary modes ofdissolution of a corporation?

A:1. Failure to organize and commence

transaction of its business within 2years from date of incorporation.(Sec. 22)

2. Continuous inoperation for a period ofat least 5 years.

3. Failure to file by-laws within therequired period but, according to aSEC Opinion, SEC will give it theopportunity to explain such failure annot automatically dissolve thecorporation.

4. By order of the SEC upon a verifiedpetition and after proper notice andhearing on the ground of seriousmisrepresentation as to what thecorporation can do or is doinq to thegreat prejudice of or damage to thegeneral public.


5. Revocation or forfeiture of thefranchise or certificate ofincorporation due to its misuse ornon-use pursuant to q.uo warrantoproceedings filed by the SolicitorGeneral.

6. Failure to file required reports.

Q: XYZ Corporation entered into a contractof lease with ABC, Inc., over a piece of realestate for a term of 20 years, renewable foranother 20 years, provided that XYZ'scorporate term is extended in accordancewith law. Four years after the term of XYZCorporation expired, but still within theperiod allowed by the lease contract for theextension of the lease period, XYZ Corp.notified ABC, Inc., that it is exercising theoption to extend the lease. ABC, Inc.,objected to the proposed extension,arguing that since the corporate life of XYZCorp. had expired, it could no longer opt torenew the lease. XYZ Corp. countered thatwithstanding the lapse of its corporate termit still has the right to renew the leasebecause no quo warranto proceedings forinvoluntary dissolution of XYZ Corp. hasbeen instituted by the Office of the SolicitorGeneral. Is the contention of XYZ Corp.meritorious? Explain briefly.

A: XYZ Corporation's contention is notmeritorious based on the ruling of theSupreme Court in PNB v. CFt of Rizat, May27, 1992. XYZ Corp. was dissolved ipso factoupon the expiration of its original term. Itceased to be a body corporate for the purposeof continuing the business for which it wasorganized, except only for purposes connectedwith its winding up or liquidation. Extending thelease is not an act to wing up or litigate XYZ'saffairs. It is contrary to the idea of winding upthe affairs of the corporation. (2004 BarQuestion)

Q: What is liquidation?

A: It is the process by which all the assets ofthe corporation are converted into liquid assets(cash) in order to facilitate the payment ofobligations to creditors, and the remainingbalance if any is to be distributed to thestockholders.

Note: At this stage, the corporationcontinuesasa body corporate for 3 years only for thepurposes of liquidating and winding up itscorporateaffairs.

Q: What are the modes of liquidation?

A:1. By a management committee or

rehabilitation receiver appointed bySEC; (Sec. 119, last par.)

2. By the corporation itself or its boardof directors or trustees; (Sec. 122,par. 1)

3.. By a trustee to whom the assets ofthe corporation had been conveyed.(Sec. 122, par. 2); (Board ofLiquidators v. Kataw, G.R. No. L-18805, Aug. 14, 1967)

Note: The 3-year period of liquidationdoes notapply to methods1 and 3 as long as the trusteeor the receiveris appointedwithinthesaid period.

Q: When is the question as to the right ofpriority of claimant against assets of thecorporation being dissolved and liquidatedbecomes important?

A: The question becomes important when theassets of the corporation is not sufficient topay a!1the claims

Q: Does a corporation in the process ofliquidation have legal authority to engagein any new business?

A: No, a corporation in the process ofliquidation has no legal authority to engage inany new business, even if the same is inaccordance with the primary purpose stated inits article of incorporation.

Q: The Securities and ExchangeCommission approved the amendment ofthe articles of incorporation of GHQCorporation shortening its corporate life toonly 25 years in accordance with Sec. 120of the Corporation Code. As shortened, thecorporation continued its businessoperations until May 30, 1997, the last dayof its corporate existence. Prior to saiddate, there were a number of pending civilactions, of varying nature but mostlymoney claims filed by creditors, none ofwhich was expected to be completed orresolved within five years from May 30,1997. If the creditors had sought yourprofessional help at that time aboutwhether or not their cases could bepursued beyond May 30, 1997, what wouldhave been your advice?

A: The cases can be pursued even beyondMay 30, 1997, the last day of the corporateexistence of GHQ Corporation. Thecorporation is not actually dissolved upon the


Pacu{taa de CJ)ereclio Civif ~. 63

CORPORATION CODE: DISSOLUTION

expiration of its corporate term. There is stillthe period for liquidation or winding up. (2000Bar Question)

Q: X Corporation shortened its corporatelife by amending its articles ofincorporation. It has no debts but owns aprime property located in Quezon City. Howwould the said property be liquidatedamong the five stockholders of saidcorporation? Discuss two methods ofliquidation.

A: The prime property of X Corporation can beliquidated among the five stockholders afterthe property has been conveyed by thecorporation to the five stockholders, by dividingor partitioning it among themselves in any twoof the following ways:

1, By physical division or partition basedon the proportion of the values oftheir stockholdings; or .

2. By selling the property to a thirdperson and dividing the proceedsamong the five stockholders inproportion to their stockholdings; or

3. After the determination of the value ofthe property, by assigning ortransferring the property to onestockholder with the obligation on thepart of said stockholder to pay theother four stockholders the amountlsin proportion to the value of thestockholding of each. (2001 BarQuestion)

Q: What are the consequences if theliquidation is not tenninated within the 3-year period?

A:1. Pending suits for or against the

corporation which were initiated priorto the expiration of the 3-year periodshall continue. (Gelano v. CA, G.R.No. L-39050, Feb. 24, 1981)

2 .. New actions may still be filed againstthe trustee of the corporation evenafter the expiration of the 3-yearperiod but before the affairs of saidcorporation have been finallyliquidated or settled by the trustee.(Republicv. Marsman, G.R. No. L-18956 Apr. 27, 1972)

3. A corporation which has a pendingaction which cannot be finished withinthe 3-year period is authorized toconvey all its property, includingpending choses of action, of a trusteeto enable it to prosecute and defendsuits by or against the corporationbeyond the 3-year period. Where no

64 Iteam:iB

trustee is appointed, its counsel whoprosecuted and represented theinterest of the corporation may beconsidered as trustee of saidcorporation, at least with respect tothe matter in litigation (Gelano v. CA,G.R. No. L-39050, Feb. 24, 1981).The directors may also be permittedto continue as trustees to completethe liquidation. (Clemente v. CA,G.R. No. 82407, Mar. 27, 1995)

4. The creditors of the corporation whowere not paid may follow the propertyof the corporation that may havepassed to its stockholders unlessbarred by prescription or laches ordisposition of said property in favor ofa purchaser in good faith.

Q: May the corporation, through itspresident condone penalties and chargesafter it had been placed underreceivership?

A: No. The appointment of receiver operatesto suspend the authority of a corporation andof its directors and officers over its propertyand effects, such authority being reposed inthe receiver. (Yam v. CA, G.R. No. 104726Feb 11, 1999)

Q: What is the difference betweenliquidation and rehabilitation?

A:.: LIQUIDATION '. REHABILITATION'

Connotes a winding upor setting with

creditors and debtors

Connotes opening orreorganization

Contemplatescontinuance of

corporate life in aneffort to restore the

corporation to itsformer successful

operation

Winding up process sothat assets may bedistributed to those

entitled


< 'FOREIGN-CORPORATION ',,,,, Q: Who can be a resident agent?

Q: What is a foreign corporation?

A: It is a corporation formed, organized orexisting under any law other than those of thePhilippines, and whose laws allow Filipinocitizens and corporation to do business in itsown country or state. (Sec. 123)

Note: The definition espouses the incorporationlest and the reciprocity rule and is significant forlicensing purposes.

Q: What are the requisites for obtaininglicense to do business?

A:1. The foreign corporation should file a

verified application containing andtogether with Ihe following:a: Designated resident agent (who

will receive summons andnotices for the corporation;

b. a special power of attorneyshould also be submitted forsuch purpose;

2. An agreement that if it ceases totransact business or if there is nomore resident agent, summons shallthen be served through SEC;

3. Oath of Reciprocity. Certificate underOath. of the authorized official of theforeign corporation's country thatallows Filipino citizens andcorporations to do business in saidcountry.

4. Within 60 days from issuance oflicense, the corporation shoulddeposit at least Pi 00, 000.00 (cash,property or bond) for the benefit ofcreditors subject to further depositevery six months.

Q: Why do foreign corporations needlicense to transact business in thePhilippines?

A: Foreign corporations need license to:1. Place them under the jurisdiction of

thecourt;2. Place them in the same footing as

domestic corporation;3. Protect the public in dealing with the

said corporation.

-:

A:1. An individual, who must be of good

moral character and of soundfinancial standing, residing in thePhilippines; or

2. A domestic corporation lawfullytransacting business in thePhilippines, designated in a writtenpower of attorney by a foreigncorporation authorized to do businessin the Philippines.

Q: Can a resident agent sign the certificateof non-forum shopping?

A: No, while a resident agent may be aware ofthe actions filed against the principal, he maynot be aware of the actions initiated by theprincipal, therefore he cannot sign thecertificate of non-forum shopping that is arequirement for filing of an initiatory pleading incourt (Expert Travel & Tours Inc. v. CA, G.R.No. 152392, May 26,2005).

Q: What are the jurisdictional tests of"doing or transacting business" in thePhilippines for foreign corporations?

A:1. Twin Characterization Test

a. Cqntinuity Test - doing businessimplies a continuity ofcommercial dealings andarrangements, and contemplatesto some extent the performanceof acts or works or the exerciseof some functions normallyincident to and in progressiveprosecution of, the purpose andobject of its organization.

b. Subsequent Test - a foreigncorporation is doing business inthe country if it is continuing thebody or substance of theenterprise of business for whichit was organized. (PhilippineCorporate Law, Villanueva, 2001ed.)

2. Contract TestWhether the contracts entered into bythe foreign corporation, or by anagent acting under the control anddirection of the foreign corporation,are consummated in the Philippines.

To be "doing or transacting businessin the Philippines" for the purposes ofSec. 133 of the Corporation Code, theforeign corporation must actually

U N I V E R SIT V 0 F 5 ANT 0 TOM A S ~~ ! 65Pacu{tad de Derecho Civif .,.

CORPORATION CODE: FOREIGN CORPORATIONS

transact business in the Philippines,that is, perform specific businesstransactions within the Philippinesterritory on a continuing basis, in itsown name or for its own account.

Note: Actual transaction of businessWithin the Philippine territory is anessential requisite for the Philippines toacquire jurisdiction over a foreigncorporation and thus require the foreigncorporation to secure a Philippinebusiness license (B. Van Zuiden Bros.,Ltd. v. GTVL Manufacturing Industries,Inc., G.R. No. 147905, May 28, 2007).

Q: What are the considered as "doing ortransacting business" in the Philippines forforeign corporations?

A:1. Foreign Investment Act of 1991 (R.A.

7042)a. Soliciting orders, service

contracts, and opening offices;b. Appointinq representatives,

distributors domiciled in thePhilippines or who stay for aperiod or periods totaling 180days or more;

c. Participating in the management,supervision or control of anydomestic business, firm, entity,or corporation in the Philippines;

d. Any act or acts that imply acontinuity of commercial dealingsor arrangements, andcontemplate to some extent theperformance of acts or works orthe exercise of some functionsnormally incident to and inprogressive prosecution of, thepurpose and object of itsorganization.

2. Implementing Rules of RA 7042a. Mere investment as shareholder

and exercise of rights asinvestor;

b. Having a nominee director orofficer to represent its interest inthe corporation;

c. Appointing a representative ordistributor which transactsbusiness in its own name and forits own account.

d. Publication of a generaladvertisement thrbugh any printor broadcast media;

e. Maintaining a stock of goods inthe Philippines solely for thepurpose of having the same

66

processed by another entity inthe Philippines;

f. Consignment by the foreigncorporation of equipment with alocal company to be used in theprocessing of products forexport;

g.. Collecting information in thePhilippines; and

h. Performing services auxiliary toan existing isolated contract ofsale which are not on acontinuing basis.

Q: What are the effects of lack of license?

1. On suitsa. Foreign corporation doing

business in the Philippines:

i. May not sue or intervene inany action in any court oradministrative agency of thePhilippines; but

ii. May be sued on any validcause of action recognizedin the Philippines (under thedoctrine of quasi-estoppel byacceptance of benefits)(Sec. 133).

b. Foreign corporations not doingbusiness in the Philippines:

i. Generally, it may not be sueand be sued in any court inany or administrative agencyof the Philippines;

ii. However, it may sue and besued for isolatedtransactions, as well as forthose which are casual orincidental thereto.

2. On contracts

GR: The contracts are valid betweenthe parties but are unenforceable.They are enforceable only uponsecuring license.

XPN: The contracts are null and voidif they are contrary to law, morals,good customs, public order andpublic policy.


Q: Does an "isolated transaction" by aforeign corporation qualify as "doingbusiness" in the Philippines?

A: It depends. If a single or isolatedtransaction is incidental and casualtransaction, it cannot qualify as doingbusiness" since it lacks the element ofcontinuity. However, where a single or isolatedtransaction is not merely incidental or casualbut indicates the foreign corporation's intentionto do business in the Philippines, said singleact or transaction constitutes "doing business"in the Philippines.

Q: What are the jurisprudential rulesrelated to the consequences of notobtaining license by a foreign corporation?

A:1 . Doctrine of isolated transactions -

foreign corporations, even unlicensedones can sue or be sued on atransaction or series of transactionsset apart from their common businessin the sense that there is no intentionto engage in a progressive pursuit ofthe purpose and object of businesstransaction (Eriks Pte. Ltd. v. CA,G.R.No. 118843, Feb. 6, 199n

2. In pari delicto rule - in the case ofTop-Weld manufacturing VS. ECEDS.A. (G.R. No: L-44944, Aug. 9,1985), the court denied the reliefprayed for by petitioner when it ruledthat the very purpose of the law wascircumvented and evaded when thepetitioner entered' into the saidagreements despite the prohibitioncontained. in the questioned law. Theparties were considered as being inpari delicto because they equallyviolated R.A. No. 5455.

3. Doctrine of Estoppel - the party isestopped from 'questioning thecapacity of a foreign corporation toinstitute an action in our courts whereit had obtained benefits from itsdealings with such foreigncorporations and thereafter omitted abreach or sought to renege itsobligations (Merrill Lynch v. CA, GR.No. 978160, July 24, 1992)

Q: Give instances when unlicensed foreigncorporations can sue.

A:1. Isolated transactions;2. The action aims to protect its good

name, goodwill, and reputation;3. The subject contracts provide that

Philippine courts will be the onlyvenue to future disputes orcontroversies;

4. A license subsequently grantedenables the foreign corporation to sueon contracts executed before thegrant of the license;

5. Recovery of erroneously deliveredproperty;

6. Where the unlicensed foreigncorporation has a domesticcorporation.

Q: Maya foreign corporation not engagedin business in the' Philippines and anational of a country which is a party toany convention, treaty, or agreementrelating to intellectual property rights or therepression of unfair competition, to whichthe Philippines is also a party or extendreciprocal rights sue in trademark orservice mark enforcement action?

A: Yes, the foreign corporation mentionedabove may sue in trademark or service markenforcement action. This is in accordance withSection 160, in relation to Section 3 of R.A.No. 8393, The Intellectual Property Code.(Sehwani Inc. v. In-n-Out Burger, GR. No.171053, Oct. 15, 2007)

Q: What are the grounds for revocation oflicense of a foreign corporation?

A:1. Failure to file annual reports required

by the Code;

2. Failure to appoint and maintain aresident agent in the Philippines asrequired by the Code;

3. Failure to inform the SEC of thechange of address of the residentagent;

4. Failure to submit copy of amendedarticles or by-laws or articles ofmerger or consolidation;

5. A misrepresentation in materialmatters in reports;


Pacu{taa de Dere cho Civif 67

CORPORATION CODE: FOREIGN CORPORATIONS

6. Failure to pay taxes, imposts, andassessments;

7. Engage in business unauthorized bySEC; and

8. Acting as dummy of a foreigncorporation; (Sec. 134).

Q: What is the procedure for the revocationof the license by SEC?

A:1. The SEC shall issue a corresponding

certificate of revocation, furnishing acopy thereof to the appropriategovernment agency in the propercase;

2. The SEC shall also mail to thecorporation at its registered office inthe Philippines a notice of suchrevocation accompanied by a copy ofthe certificate of revocation.

Q: What is the procedure for the withdrawalof license?

A: By filing a petition for withdrawal of license

A:1. All claims which have accrued in the

Philippines have been paid,compromised or settled;

2. All taxes, imposts, assessment, andpenalties, if any, lawfully due to thePhilippine Government or any of itsagencies or political subdivisionshave been paid; and

3. The petition for withdrawal of licensehas been established once a week for

'three consecutive weeks in anewspaper of general circulation inthe Philippines.

68

Academics CommitteeChairper.rol1:Abraham D. Genuino II

Via·Cbair for .Academics: Jeannie A. LaurentinoVia-Oiair Jor Admin & Finance: Aissa Cclinel-I. Luna

Vice·Chair!or Lryotll & De.rigl1:Loise Rae C. Naval

Mercantile Law CommitteeSuo/ed Head' Holy 1". Arnpaguey

A.r.rt. Subject Head: Manilyn Rose S. Sotel~ .

Members:Edwin Marc T. Baldin

Aireeu M. CachoSocrates Benjie I. MarbilRon Cherrie S. Mendoza



-, Rl!lES OF PROCEDURE ON " ',CO,RPORATE REHABILITATION (200B) ,

- .•.. ,~. (A.M. No. 00·a·10·SC) 'j, ~

: What is rehabilitation?

•. The restoration of the debtor to a position ofcessful operation and solvency, if it is

shown that its continuance of operation iseconomically feasible and its creditors canrecover by way of the present value ofoayrnents projected in the plan, more if the

rporation continues as a going concern thani is immediately liquidated. (Sec. 1, Rule 2)

: What is the nature of corporateehabilitation?

: It is a summary proceeding. Also, it is aoroceedinq in rem, but non-adversarial. (Sec.1, Rule 3)

ote: It is a non-adversarial proceeding because;he status or fact sought to be established is the- ability of the corporate debtor to pay its debts.','henthey fall due.

Q: Are the rules limited to corporations?

A: No. The rules apply to petitions forrehabilitation filed not only by corporations butalso by partnerships and associations. (Sec. 1,Rule 1)

ote: The same applies to de facto corporationsand corporations by estoppel.

Q: Are government corporations and publiccorporations included in the rules?

A:GR: No. They are governed primarily bytheir charter and special laws.

XPN:1. If the special law granting their

franchise is silent, the rules oncorporate rehabilitation will applysuppletorily

2. If the special law granting theirfranchise expressly mentions that theinterim rules will govern them inrehabilitation cases.

Q: Who are considered debtors in a petitionfor rehabilitation?

A: It shall mean any corporation, partnershipor association or a group of companies,whether supervised or regulated by theSecurities and Exchange Commission or othergovernment agencies, on whose behalf a

petition for rehabilitation has been filed. (Sec.1, Rule 2)

Q: Where is the petition for rehabilitationfiled?

A:·1. The RTC having jurisdiction over the

territory where the debtor's principaloffice is located as specified in itsArticles of Incorporation orpartnership.

2. Where the principal office of thecorporation, partnership orassociation is registered in the SECas Metro Manila, the action must befiled in the regional trial court of thecity or municipality where the headoffice is located.

3. A joint petition by a group ofcompanies shall be filed in the RTCwhich has jurisdiction over theprincipal . office of the parentcompany, as specified in its Articlesof Incorporation. (Sec. 2, Rule 3)

Q: What are the kinds of rehabilitationbased on the party filing the petition?

A:1. Debtor-initiated rehabilitation - filed

by any debtor who foresees theimpossibility of meeting its debtswhen they respectively fall due (Sec.1, Rule 4) .

2. Creditor-initiated rehabilitation - filedby any creditorls holding at leasttwenty percent (20%) of the debtor'stotal liabilities may file a petition forrehabilitation of a debtor that cannotmeet its debts as they respectivelyfali due (Sec. 1, Rule 5)

3. Pre-negotiated rehabilitation - Adebtor that foresees the impossibilityof meeting its debts as they fall duemay, by itself or jointly with any of itscreditors, file a verified petition for theapproval of a pre-negotiatedrehabilitation plan (Sec. 1, Rule 6)

Q: What is a stay order?

A: It is an order issued by the court after thefiling of a petition for rehabilitation to defer orsuspend ali actions or claims against thecorporation seeking rehabilitation.


PacuCtaa de ([)ereclio Civi],,! 69

CORPORATION CODE: CORPORATE REHABILITATION

Q: What is the purpose of a stay order?

A: To enable the management committee orthe rehabilitation receiver to effectivelyexercise powers free from any judicial orextrajudicial interference that might undulyhinder or prevent the rescue of the debtorcompany. (Ramos v. NLRC, G.R. No. 126773,Apr. 14, 1999)

Q: ~at is the duration of the stay order?

A: Th~ stay order shall be effective from thedate of its issuance until the approval of therehabilitation plan or the dismissal of thepetition. (Sec. 9, Rule 3)

Q: What are included in the term "claims"suspended by a stay order?

A: It shall include all claims or demands ofwhatever hature or character against a debtoror its property, whether for money orotherwise. (Sec. 1, Rule 2)

Note: The issuance of a stay order does notaffect the right to commence actions orproceedings insofar as it is necessary to preservea claim against the debtor. (Sec. 7, Rule 3)

Q: What are excluded from the stay order?

A:1. Claims against letters of credit and

similar security arrangements issuedby a third party to secure the paymentof the debtor's obligations; and

2. Foreclosure by a creditor of propertynot belonging to a debtor undercorporate rehabilitation. (Sec. 7, Rule3 and Sec.2, Rule 6)

Note: Where the owner of suchproperty sought to be foreclosed is alsoa guarantor, said owner shall be entitledto the benefit of excussion. (ibid.)

Q: What is the effect of suspension ofclaims on the secured creditors' preferenceover the corporate debtor'sproperties?

A: All the creditors should stand on equalfooting. Not anyone of them should be givenany preference by paying one or some of themahead of the others. As between creditors, thekey phrase is "equality is equity." (Sobrejuanitev. ASB Development Corporation, GR. No.165675, Sept. 30, 2005)

70

Q: Would it not amount to impairment ofcontract as it effectively takes away thecreditor's preference of credits?

A: No. It merely suspends the action for claimsagainst the debtor and the secured creditorsmay still enforce their preference· when theassets of the debtor are liquidated. (ChinaBanking Corporation v. ASB Holdings, Inc.,G.R. No. 172192, Dec. 23,2008)

Q: What are the prohibited acts inrehabilitation?

A:1. The debtor is prohibited from selling,

encumbering, transferring ordisposing in any manner any of itsproperties except in the ordinarycourse of business

2. The debtor is prohibited from makingany payment of its liabilities except:a. goods and services in the

ordinary course of businessb. administrative expenses incurred

after the issuance of the stayorder

c. new loans or other forms ofcredit accommodations obtainedfor the rehabilitation of the debtorwith prior court approval

d. when ordered by the court

3. The debtor's suppliers of goods orservices are prohibited fromwithholding supply of goods andservices in the ordinary course ofbusiness for as long as the debtormakes payments for the services andgoods supplied after the issuance ofthe stay order. (Sec. 7, Rule 3 &Sec.2, Rule 6)

Q: Who is a rehabilitation receiver?

A: A person appointed by the RTC in behalf ofall parties for the purpose of preserving andconserving the property and preventing itspossible destruction or dissipation, if it wereleft in the possession of any of the parties. Heacts in a fiduciary capacity and with impartialitytowards all interested.


-: Does the receiver take all the control.:..ray from the corporation?

o. The rehabilitation receiver shall only::. ersee and monitor the operations of theceotor during the pendency of the::-oceedings. (Sec. 12, Rule 3)

: Hera Miravalles is the receiver of Phijamrporation engaged in plant breeding

, ich is under rehabilitation. They entered· 0 a business with Tugue Hotel Corp, to· mish 1,000 hydrocultural plants with theatter. Consequently, those plants were

eaten by rats inside the hotel. Tugue Hotelorp filed an action for damages againsthijam Corp.' Phijam Corp, who on theher hand Instituted a third party claim

against Hera ..ls Hera liable?

o. The general rule is the receiver shallbe subject to any action, claim or demand

connection with any act done or omitted byin good faith in the exercise of his

'unctkms and powers conferred in the rules.e exception is if there is bad faith or fraud

n his part. There is no showing of bad faith on· e part of the receiver. Rather, it was the ratson .he hotel who caused the damage. (Jorge

. Miravite, Commercial Law Review, 2002)

Q: What are the grounds for the dismissalof a receiver?

A: He may be dismissed by the court uponmotion:

1.

2.

if he fails, without just cause, toperform any of his powers andfunctionson any of the grounds for receiving atrustee under the general principles oftrust: (Sec. 17, Rule 3) .a. removal appears essential in the

interest of petitionersb. insane or otherwise incapable of

discharging his trustc. evidently unsuitable

Q: What are the effects of the rehabilitationplan?

A:1. The plan and its provisions shall be

binding upon the debtor and allpersons who may be affected by it,including the creditors, whether or notsuch persons have participated in theproceedings or opposed the plan orwhether or not their claims have beenscheduled;

2. GR: The debtor shall comply with theprovisions of the plan and shall takeall actions necessary to carry out theplan.

XPN: Any compromises on amountsor rescheduling of timing of paymentsby the debtor shall be binding on thecreditors regardless of whether or notthe plan is successfully implemented.

3. Payments shall be made to creditorsin accordance with the provisions ofthe plan;

4. Contracts and other arrangementsbetween the debtor and its creditorsshall be interpreted as continuing toapply to the extent that they do notconflict with the provisions of theplan. (Sec. 20, Rule 3)

Q: What are the powers and functions of amanagement committee or rehabilitationreceiver?

A:1. To take custody of and control over

all the eXisting assets and property(not management over the affairs) ofsuch entities under management;

2. To evaluate the existing assets andliabilities, earnings and operations ofsuch corporations, partnerships orother associations;

3. To determine the best way to salvageand protect the interest of theinvestors and creditors;

4. To study, review and evaluate thefeasibility of continuing operationsand structure and rehabilitate suchentities if determined to be feasible bythe RTC;

5. To report and be responsible to theRTC until dissolved; and

6. May overrule or revoke the actions ofthe previous management and Boardof Directors of the entity undermanagement, in spite of anyprovisron of law, Articles ofIncorporation, or By-Laws to thecontrary. (P.O. 1799)

U N I V E R SIT Y a F 5 ANT a TOM A S ~~ •

'FacuCtad de Dere cho CiviC '..,. 71

CORPORATION CODE: CORPORATE REHABILITATION

Q: What is the condition precedent for theappointment of a rehabilitation receiver ormanagement committee for thecorporation?

A: There must be an actual, threatened orimminent danger of loss of corporate propertyor of any other injury to stockholders.

Q: Is conflict among stockholders a groundfor the appointment of a receiver?

A:GR: Mere disagreement amongstockholders as to the affairs of thecorporation would not in itself suffice as aground for the appointment of amanagement committee.

XPN: Where the dissension amongstockholders is such that the corporationcannot successfully carry on its corporatefunctions, the appointment of amanagement committee becomesimperative (Molina v. Women's Credit Inc.,G.R. No. 151921, Apr. 8, 2006).

72

Academics CommitteeChairperson: Abraham D. Genl1ino II

T/ia!-Cbair/orAcade!JJic.r: Jeannie A. LaurentinoVt~.·Chair for Admin & Finance: Aissn Celine H. Luna

Vice-Chair for Layoul &DeJigll: Loise Rae G. Naval

Mercantile Law CommitteeSubjed Head: Holy T. i\mpoguey

ArJf. SlIbjed Head: Manilyn Rose S. Sotelo


Airccn M. CachoSocrates Benjie 1. MarbilRon Cherrie S. Mendoza

Edison] ames F. PagalilauanMaybelline M. Santiago

" -.~,~.~., ..


SECURt:rIES REGULAT ON COD ..(R.A. No. 8799) , ',.

Q: What is the nature of the SecuritiesRegulation Code (SRC)?

A: The SRC is enacted to protect the public'rom unscrupulous promoters, who stakebusiness or venture claims which have reallyno basis, and sell shares or interests therein toinvestors.

Q: What is the state policy with regard tothe SRC?

A:1. Establish a socially-conscious market

that regulates itself;2. Encourage widest participation of

ownership in enterprises andenhance democratization of wealth;

3. Promote development of capitalmarket;

4. Protect investors and ensure full andfair disclosure about securities;

5. Minimize, if not totally eliminate,insider trading and other fraudulent ormanipulative devices; and practiceswhich distorts the free market.

Q: What are the provisions in the SRCintended to protect the investors?

A:1. No securities shall be sold or offered

to be sold in the Philippines unlessregistered with the SEC.

2. Provisions providing for criminal andcivil liabilities in filing false orfraudulent registration statements.

3. Provisions for the protection ofminority stockholders through clearrules in proxy solicitations.

4. Rule on tender offer.5. Increase of penalty in case of

violation of the SRC.6. Only persons accredited by the SEC

may deal in securities.

Q: What is a tender offer?

A: Publicly declared intention to buy securitiesof public companies given to all stockholdersby:

1. Filing with the SEC a declaration tothat effect, and paying the filing fee.

2. Furnishing the issuer a statementcontaining the information required ofthe issuers as SEC may prescribe,including subsequent or additionalmaterials.

3. Publishing all requests or invitationsfor tender, or materials making atender offer or requesting or invitingletters of such security.

Note: It is also defined as an offer by theacquiring person to stockholders of a publiccompany for them to tender their shares on theterms specified in the offer.

Q: What then is the purpose of tenderoffer?

A: Tender offer is in place to protect theinterest of minority stockholders of a targetcompany against any scheme that dilutes theshare value of the investments. It affords suchminority shareholders the opportunity towithdraw or exit from the company underreasonable terms, a chance to sell their sharesat the same price as those of the majoritystockholders. .

Q: In what instances is a tender offerrequired to be made?

A:1. The person intends to acquire 15% or

more of the equity share of a publiccompany pursuant to an agreementmade between or among the personand one or more sellers. .

2. The person intends to acquire 30% ormore of the equity shares of a publiccompany within a period of 12months. '

3. The person intends to acquire equityshares of a public company thatwould result in ownership of morethan 50% of the said shares. (2002Bar Question)

Note: Tender offer applies to both direct andindirect acquisition.

Q: What may be considered as a public. company?

A:1. Those listed; or2. Those with assets of at least 50M

pesos and having 200 shareholdersowning at least 100 shares each.


PacuCtad de ([)erecno Cioit .~ 73

CORPORATION CODE: SECURITIES REGULATION CODE

Q: What are the unlawful and prohibitedacts relating to tender offers? 4. Derivatives - options and warrants;

A: It shall be unlawful for any person to:1. Make any :untrue statement of a

material fact or omit to state anymaterial fact necessary in order tomake statements made notmisleading, and

2. Engage in any fraudulent, deceptive,or manipulative acts or practices inconnection with any tender offer orrequest or invitation for tenders, orany solicitation of security holders inopposition to or in favour of any suchoffer, request, or invitation.

Q: What are the reportorial requirementsunder the SRC in regard to transactions ofdirectors, officers and principalstockholders?

A:1. Every person who is:

a. Directly or indirectly thebeneficial owner of more than10% of any class of any equitysecurity of a covered issuer, and

b. A director or an officer of theissuer of such security,

2. Shall file with the SEC a statement ofthe amount of all equity securities ofsuch Issuer of which he is a beneficialowner.

Q: What are securities?

A: Securities are shares, participation orinterests in a corporation or in a commercialenterprise or profit-making venture andevidenced by a certificate, contract,instrument, whether written or electronic incharacter. It includes:

1. Equity instruments - Shares of stock,certificates of interest or participationin a profit sharing agreement,certificates of deposit for a futuresubscription, proprietary or non-proprietary membership certificates incorporations;

2. Investments instruments -Investmentcontracts, fractional undividedinterests in oil, gas, or othermineral rights;

3. Debt instrumentsdebentures, notes,indebtedness,securities;

bonds,evidence ofasset-backed

74

5. Trust instruments - Certificates ofassignments, certificates ofparticipation, trust certificates, votingtrust certificates or similarinstruments;

6. Future - Other instruments as may inthe future be determined by the SEC.(1996 Bar Question)

Q: What are the kinds of securities withregard to the need for registration to theSEC?

A:1. Exempt (from registration) - Can be

issued and sold without registration.(Sec. 9)

2. Non-exempt (from registration) -Cannot be issued and sold withoutregistration.

3. Sold in exempt transactions. (Sec. 10)

Q: What is registration with regard tosecurities?

A: It is the disclosing to the SEC of allmaterial and relevant information about theissuer of the security. Its purpose is to informthe public for them to be able to make goodbusiness judgment. It is the filing of registrationstatement.

Q: What is the rule with regard toregistration of securities?

A:GR: No security can be sold or offered forsale or distribution within the Philippinesunless accompanied by a registrationstatement filed with and approved by theSEC.

XPN:1. Exempt securities;2. Securities sold

transactions.in exempt

Q: What are the effects of non-registration?

A: The issuer would be penalized. Issuers ofsecurities not registered shall be subjectcriminal, civil and administrative charges.


Q: What are the exempt securities?

A:1. Any security issued or guaranteed by

the Government of the Philippines, orby any political subdivision or agencythereof, or by any person controlledor supervised by, and acting asinstrumentality of said government.

2. Any security issued or guaranteed bythe government of any country withwhich the Philippines maintainsdiplomatic relations, or by any state,province or political subdivisionthereof on the basis of reciprocity:Provided, that the SEC may requirecompliance with the form and contentof disclosures the SEC mayprescribe.

3. Certificates issued by a receiver or bya trustee in bankruptcy duly approvedby the proper adjudicatory body.

4. Any security or its derivatives the saleor transfer of which, by law, is underthe supervision and regulation of theOffice of Insurance Commission,Housing and Land Use RegulatoryBoard, or the Bureau of InternalRevenue.

5. Any security issued by a bank exceptits own shares of stock.

6. Other securities as determined by theSEC

Note: Being an issuer of an exempt security doesnot exempt such issuer from the requirement ofsubmission of reports - full and fair disclosure.

Q: What are exempt transactions?

A:1. Any judicial sale, or sale by an

executor, administrator, guardian,receiver or trustee in insolvency orbankruptcy;

2. Those sold by a pledge, mortgagee,or any other similar lien holder, toliquidate a bona fide debt (a securitypledged in good faith as security forsuch debt;

3. Those sold or offered for sale in anisolated transaction, the owner notbeing an underwriter;

4. Distribution by the corporation ofsecurities to its stockholders asdividends:

5. Sale of capital stock of a corporationto its own stockholders exclusively;

6. Bonds or notes secured by amortgage are sold to a singlepurchaser at a single sale; i

7. Delivery of security in exchange forany other security pursuant to theright of conversion;

8. Broker's transactions executed uponthe customer's orders;

9. Share subscriptions prior toincorporation or in pursuance of anincrease in its authorized capitalstock;

10. Exchange of securities by the issuerwith its existing security holdersexclusively;

11. Sale by issuer to fewer than 20. persons in the Philippines during any

12 month period;

12. Sale to banks, investment houses,insurance companies and any entitiesruled qualified by the SEC.

Q: What is the procedure for registration ofsecurities?

A:1. Application - All securities required to

be registered shall be registeredthrough the filing by issuer with SEC,of a sworn registration statement;

2. Prospectus The registrationstatement shall include anyprospectus required or permitted tobe delivered;

3. Other information - The infonmationrequired for the registration of anykind and all securities shall include,among others, the effect of thesecurities' issue on ownership, on themix of ownership, especially foreignand local ownership;

4. Signatories to registration statement- The registration statement shall besigned by the issuer's executiveofficer, its principal operating officer,its comptroller, its principal

UNIVERSITY OF SANTO TOMAS .~Pacu{tad de Dere cho CiviC .... , :75


accounting officer, its corporatesecretary or persons performingsimilar functions, accompanied by aduly verified resolution of the BoD ofthe issuer;

5. Written consent of expert - Thewritten consent of the expert namedas having certified any part of theregistration statement or anydocument used in connectiontherewith shall also be filed;

6. Certification by selling stockholders -Where the registration statementincludes shares to be sold by theselling shareholders, a writtencertification by such sellingshareholders as to the accuracy ofany part of the registration statementcontributed by. such sellingshareholders shall also be filed;

7. Fees - The issuer shall pay to theSEC; the SEC shall prescribe by rule,diminishing the fees in inverseproportion, the value of the aggregateprice of the offering;

8. Notice and publication - Notice of thefiling of the registration statementshall be imniediately published by theissuer in two newspapers of geperalcirculation in the Philippines; once aweek for two consecutive weeks,reciting that a registration statementhas been filed, and that the aforesaidregistration statement, as well as thepapers attached thereto are open toinspection at the SEC duringbusiness hours, and copies thereof,shall be furnished to interestedparties at a reasonable charge;

9. SEC Power for production of books -The SEC may compel the production

. of all the books and papers of suchissuer, and may administer oaths to,and examine the officers of suchissuer, or any other person connectedtherewith as to its business andaffairs;

10. Ruling - Within 45 days after the dateof the filing of the registrationstatement, or by such later date towhich the issuer has consented, theSEC shall declare the registrationstatement effective or rejected,unless the applicant is allowed toamend the registration statement.

76 Iteam:I.Mi.;

Q: What should the issuer do after theeffectivity of the registration statement?

A: Upon the effectivity of the registrationstatement, the issuer shall state under oaththat all registration requirements have beenmet, and all information are true and correct tothe best of his ability.

Q: What are the grounds for rejection andrevocation of registration?

A:1. The issuer:

a. Has been judicially declaredinsolvent;

b. Has violated any of theprovisions of the Code, the rulespromulgated pursuant thereto, orany order of the SEC of whichthe issuer has notice inconnection with the offering forwhich a registration statementhas been filed;

c. Has been or is engaged or isabout to engage in fraUdulenttransactions;Has made any false ormisleading representations ofmaterial facts in any prospectusconcerning the issuer or itssecurities; or

d. Has failed to comply with anyrequirement that the SEC mayimpose as a condition forregistration of the security forwhich registration statement hasbeen filed.

2. The registration statement is on itsface incomplete or inaccurate orincludes any untrue statement of amaterial fad or omits to state amaterial fact required to be statedtherein.

3. The issuer or any underwriter hasbeen convicted by a competentjudicial or administrative body of anoffense involving moral turpitudeand/or fraud or is enjoined by theSEC or other competent judicial oradministrative body for violations ofsecurities, commodities and otherrelated laws

4. Any issuer who refuses to permit the·examination to be made by theCommissioner.


Q: What are the grounds for suspension orcancellation of certificate of registration:

A:1. Fraud in procuring registration;2. Serious misrepresentation as to

objectives of corporation;3. Refusal to comply with lawful order of

SEC;4. Continuous inoperation for at least 5

years;5. Failure to file by-laws within required

period;6. Failure to file reports;7. Other similar grounds. (Sec. 6 [LJ)

Q: What are the grounds for suspension ofregistration?

A:1. If any time, the information contained

in the registration statement filed is orhas become misleading, incorrect,inadequate or incomplete in anymaterial respect; or

2. The sale or offering for sale of thesecurity registration there under maywork or tend to work a fraud;

3. Pending investigation of the securityregistered to ascertain whether theregistration of such security should berevoked on any ground specified theSRC; and

4. Refusal to furnish informationrequired by the Commission. (Sec.15)

Q: Who are the securities marketprofessionals as classified by the SRC?

A: They are the broker, dealer, associatedperson of a broker or dealer, and a salesman.

Q: Who is a broker?

A: A person engaged in the business ofbuying and selling securities for the account ofothers.

Q: Who is a dealer?

A: Any person who buys and sells securitiesfor his/her own account in the ordinary courseof business.

Q: Who is an associated person of a brokeror dealer?

A: He is an employee of a broker or dealerwho directly exercises control of supervisoryauthority but does not include a salesman, oran agent, or a person, whose functions aresolely clerical or ministerial.

Q: Who is a salesman?

A: He is a natural person, employed as such,or as an agent, by a dealer, issuer or broker tobuy and sell securities; but for the purpose ofregistration, shall not include any employee ofan issuer whose compensation is notdetermined directly or indirectly on sales ofsecurities of the issuer.

Q: What is the obligation of the broker tohis client?

A: The primary obligation of the broker is toensure his account's compliance with the law.Since a brokerage relationship is essentially acontract for the employments of an agent, thelaw on contracts govern the broker-principalrelationship (Abacus Securities Corp. v. Ampil,G.R. No. 160922, Feb. 27, 2006).

Q: Are security market professipnalsrequired to be registered?

A: Yes. Under Sec. 19 of the RevisedSecurities Act, no broker shall sell anysecurities unless he is registered with the SEC(Nicolas vs. CA, et et., G.R. No. 12285, Mar.27, 1998).

Q: Can a stockbroker who has not obtaineda license from the SEC, recovermanagement fees allegedly earned fromhandling the securities transactions of aclient?

A: No. An unlicensed person may not recovercompensation for services as a broker where astatute or ordinance is applicable and such isof a regulatory nature.


Pacu{tad de (])ereclio CiTliC 77


Q: What is margin trading?

A: A kind of trading that allows a broker toadvance for the customer/investor part of thepurchase price of the security and to keep it ascollateral for such advance.Q: What is the margin allowance standard?

A: The credit extended must be for an amountnot greater than, whichever is higher of:

1. 65% of the current market price of thesecurity; or

2. 100% of the lowest market priceduring the preceding 36 months, butnot more than 75% of the currentmarket price.

Q: What are the purposes of the marginrequirements?

A: They are primarily intended to achieve amacroeconomic purpose - the protection ofthe overall economy from excessivespeculation in' securities. Their recognizedsecondary purpose is to protect smallinvestors.

Q: Who has the burden of compliance withmargin requirements?

A: The brokers and dealers.

Note: In securities trading, the brokers areessentially the counterparties to the stocktransactions at the Exchange. Since theprincipals of the broker are generally undisclosed,the broker is personally liable for the contractsthus made. Brokers have a right to be reimbursedfor sums advanced by them with the express orimplied authorization of the principal. (AbacusSecurities Corporation v. Ampil, G.R. No.160016, Feb. 27, 2006)

Q: What are the unlawful acts under theSRC?

A: i1i

r Submission of false registrationstatements - criminal, civil, andadministrative liabilities may beimposed against those who signedsaid statement.

Prescriptive period: 2 years fromdiscovery but not later than 5 years

. from the time all the securities aresold to the public.

2. Sale to public through:a. Insider trading - the selling or

buying of a security by an insiderwhile in possession of materialnon-public information.

78

b. Short selling - It is the selling ofshares which the seller does notactually own or possess andtherefore cannot, himself supplythe delivery.

c. Shortswing transaction - It is onewhere a person buys securitiesand sells the same within aperiod of 6 months.

3. Manipulation of security prices

a. Transactions intended to createactive trading:i. Wash Sale - To effect any

transaction in any securitythat involves no change inthe beneficial ownershipthereof.

ii. Matched Sale - There is achange of ownership in thesecurities by entering anorder for the purchase/saleof security· With theknowledge that asimultaneous order ofsubstantially the same size,time, ana price, for the saleor purchase of any suchsecurity, has or will beentered by or for the sameor different parties.

iii. Similar transactions wherethere is no change ofbeneficial ownership.

b. Engaging in transactions whichinduce price to increase ordecrease:i. Marking the tape - Buy

security at or near theclosing hour of trading.

ii. Painting the tapeProjecting a rosy picture ofthe corporation throughpublication

iii. Squeezing the floatControlling the supply of theshares so as to increasedemand of the shares

iv. Hype and dump - Build upthe company to induceothers to join, only to bedumped later.

v. Boiler room operations -Employ high pressure tacticsto force purchase and saleof security.


Q: Suppose A is the owner of severalinactive securities. To create anappearance of active trading for suchsecurities, A connives with B by which Awill offer for sale some of his securities andB will buy them at a certain fixed price, withthe understanding that although therewould be an apparent sale, A will retain thebeneficial ownership thereof.

1. Is the arrangement lawful?2. If the sale materializes, what is it

called?

A:1. No. The arrangement is not lawful. It

is an artificial manipulation of theprice of securities. This is prohibitedby the Securities Regulation Code.

2. If the sale materializes, it is called awash sale or simulated sale. (2001Bar Question)

Q: Who is an insider?

A: A person in possession of corporateinformation not generally available to thepublic, as a director, an accountant, or otherofficer or employee of a corporation.

Q: What is the presumption with regard toinsider trading?

A: A purchase or sale made by an insider orhis relative within the second degree shall bepresumed to be effected while in possession ofmaterial non-public information if transactedafter such information came into existence butprior to the public dissemination of suchinformation, and lapse of reasonable time for[he market to absorb such information.

Q: Who may be an insider?

A:1. The issuer;

2. A director or officers of or a personcontrolling the issuer;

3. A person whose relationship orformer relationship to the issuer giveshim access to material informationabout the issuer or the security that isnot generally available to the public;

4. A govemment employee, or director ,or officer of an exchange, clearingagency and/or self-regulatoryorganization who has access tomaterial information about an issuer

or a security that is not generallyavailable to the public; or

5. Constructive Insider - A person wholearns such information by acommunication from any of theforegoing insiders. (Sec. 3.8) (1995Bar Question) i

Q: What are the other prohibited acts in aninsider trading?

A: It shall be unlawful:1. For an insider to communicate

material non-public information aboutthe issuer or the security to anyperson who thereby becomes aninsider, where original insidercommunicating knows or has reasonto believe that such person will likelybuy or sell on the basis of suchinformation

2. For any person, other than the tenderofferor, who is in possession ofmaterial non-public informationrelating to such tender offer to[ransact securities covered by thetender offer

3. For the tender offeror, or those actingin his behalf, the issuer of securitiescovered by the tender offer, and anyinsider, to communicate material non-public information relating to thetender offer which would likely resultin violation of prohibition of the insiderfrom trading.

Q: When is information "material non-public"?

A: If:1. Information about the issuer or the

security which has not been generallydisclosed to the public and wouldlikely affect the market price of thesecurity after being disseminated tothe public and the lapse of areasonable time for the market toabsorb the information; or

2. Would be considered by a reasonableperson important under thecircumstances in determining hiscourse of action whether to buy, sellor hold a security (Sec. 27.2). (1995Bar Question)


PacuCtad de CDerecno CiviC ,,!' 79


Q: Ms. OB was employed in MASInvestment Bank. WIC, a medical drugcompany, retained the bank to assesswhether it is desirable to make a tenderoffer for DOP company, a drugmanufacturer. OB overheard in the courseof her work the plans of WIC. By herselfand thru associates, she purchased DOPstocks available at the stock exchangepriced at P20 per share. When WIC's tenderoffer was announced, DOP stocks jumpedto P30 per share. Thus OB earned a sizableprofit. Is OB liable for breach and misuse ofconfidential or insider information gainedfrom her employment? Is she also liable fordamages to sellers or buyers with whomshe traded? If so, what is the measure ofsuch damages? Explain briefly.

A: OB is an insider since she is an employeeof the Bank, the financial adviser of DOP, andthis relationship gives her access to materialinfom\ation about the issuer (DOP) and thelatter's securities (shares), which information isnot generally available to the public.Accordingly, OB is guilty of insider tradingunder Section 27 of the Securities RegulationCode, which requires disclosure when tradingin securities.

OB is also liable for damages to sellers orbuyers with whom she traded. UnderSubsection 63.1 of the Securities RegulationCode, the damages awarded could be anamount not exceeding triple the amount of thetransaction plus actual damages. Exemplarydamages may also be awarded in case of badfaith, fraud, malevolence or wantonness in theviolation of the Securities Regulation Code orits implementing rules. The court is alsoauthorized to award attorney's fees notexceeding 30% of the award. (2004 BarQuestion)

Q: What are the possible defenses againstinsider trading?

A:1. That the informationwas acquired not

on account of his relationshipwith theissuer; or

2. That the other party knew or can bepresumed to know the materialinformation.

80

Q: Equity Online Corporation (EOl), a NewYork corporation, has a securitiesbrokerage service on the Internet afterobtaining all requisite U.S. licenses andpermits to do so. EOl's website(www.eonline.com). which is hosted by aserver in Florida, enables internet users totrade on-line in securities listed in thevarious stock exchanges in the U.S. EOlbuys and sells U.S. listed securities for theaccounts of its clients all over the world,who convey their buy and sell instructionsto EOl through the internet. EOl has nooffices, employees or representativesoutside the U.S. The website has icons formany countries, including an icon "ForFilipino Traders" containing the day'sprices of U.S. listed securities expressed inU.S. dollars and their Philippine pesoequivalent.

Grace Gonzales, a resident of Makati, is aregular customer of the website and hasbeen purchasing and selling securitiesthrough EOl with the use of her AmericanExpress credit card. Grace has nevertraveled outside the Philippines.After a series of erroneous stock picks, shehad incurred a net indebtedness ofUS$30,OOOwith EOl, at which time shecancelled her American Express creditcard.

After a number of demand letters sent. toGrace, all of them unanswered, EOl,through a Makati law firm, filed a complaintfor collection against Grace with theRegional Trial Court of Makati. Grace,through her lawyer, filed a motion todismiss on the ground that aot, (a) wasdoing business in the Philippines without alicense and was therefore barred frombringing suit and (b) violated the SecuritiesRegulation Code by selling or offering tosell securities within the Philippineswithout registering the securities with thePhilippine SEC and thus came to court"with unclean hands."

EOl opposed the motion to dismiss,contending that it had never established aphysical presence in the Philippines andthat all of the activities related to thetrading in U.S. securities all transpiredoutside the Philippines.If you are the judge, decide the motion todismiss by ruling on the respectivecontentions of the parties on the basis ofthe facts presented above.

A: The grounds of the motion to dismiss areboth untenable. EOL is not doing business in


the Philippines, and it did not violate theSecurites Act, because it was not sellingsecurities in the country.The contention of EOL is correct, because itnever did any business in the Philippines. Allits transactions in question were consummatedoutside the Philippines. (2002 Bar Question)

Academics CommitteeChaiJpenon: Abraham D. Genuino II

Vice-Cbair for ~l(adelJlit:f: Jeannie A. LaurentinoVia-Cbair for"Admin & F,'lum-e: Aissa Celine H. Luna

Vie-Chair for wyoJ/1 & OeJigl/: Loise Rae G. Naval

Mercantile Law CommitteeSubjed Head: Holy T. Arnpaguey

AJJ/. Silo/cd Head: Manilyn Rose S. Sotelo


Aireen M. CachoSocrates Benjie I. MarbilRon Cherrie S. Mendoza

Edison James F. PagalilaunnMaybelline M. Santiago


Pacu{tad de <Derecho CiviC 81

CORPORATION CODE: SEC REORGANIZATION ACT

. SEC REORGANIZATION ACT(P.O. No. 902·A)

Q: What are the two tests to determine theexistence of an intra-corporate

Q: What are the new features of the SECunder P.O. 902-A? A:

controversy?

A:1. SEC has no more quasi-judicial

functions.a. Jurisdiction over intra-corporate

controversies was transferredfrom the SEC to the RTC actingas a special commercial court(Calleja v. Panday, G.R. No.168696, Feb. 28, 2006).

b. The SEC shall retain jurisdictionover pending suspension ofpayments/rehabilitation casesfiled as of June 30, 2000 untilfinally disposed.

c. Administrative supervision isretained in the SEC (Fabia v.CA,G.R. No. 132684, Sept. 11,2002)

2. Philippine Stock Exchange is nowopen to the public.

3. SRC seeks to protect both the publicand minority interest.

Q: What are intra-corporate disputes?

A: Any controversy or dispute between thecorporation and the stockholder or thestockholders among themselves or relates tothe regulation of corporate affairs such as:

1.. Suspension of payment;2. Termination of officers - If the office

was created by the by-laws or by theboard pursuant to the authority underthe by-laws;

3. Derivative suit;4. Matters regarding lnspection of

corporate books;5. Issue relating to election or

appointment of officers and directors(Prescriptive period of filling a suit is15 days from election);

6. Petition for corporate rehabilitation.

82

1. Relationship test - the existence ofintracorporate relations between oramong the parties is sufficient toinvest jurisdiction to the RTCregardless of the subject matter of thedispute .

2. Controversy test - mere existence ofan intracorporate relationship is notsufficient to determine existence of anintracorporate controversy. Theincidents and nature of therelationship must as well be takeninto consideration.

Q: Which has the authority to list shares?

A: The Philippine Stock Exchange (PSE).

Q: Can the decision of the PSE be set asideby the SEC?

.A: Yes, on the basis of its supervisory powers,but only if the PSE acted in bad faith.

Q: Where should a criminal charge forviolation of the SRC be filed?

A: Since a criminal charge for violation of theSRC is a specialized dispute, it must first bereferred to an administrative ;;Jgencyof specialcompetence, the SEC and where thecomplaint is criminal in nature, the SEC shallendorse the complaint to the Department ofJustice for preliminary investigation andprosecution (Baviera v. Paglinawan, G.R. No.16838~Feb. 8,200~

However, fraudulent acts or schemes whichthe SEC shall exclusively investigate orprosecute are those in violation of any law orrules and regulations administered andenforced by the SEC alone. If the criminalcase is not within the specialized jurisdiction ofthe SEC, it does not preclude thesimultaneous and concomitant filing of acriminal action before the regular courts.(Fabia v. CA, G.R. No. 132684, Sept. 11,2002)


1~1::W·iiM:l!¥lI~&ij;!ll~113~ii'-1!4WmJl!lQ: What are the principal features of anegotiable instrument?

A:1. Negotiability - it may pass from hand

to hand similar to money, so as to'give the holder in due course the rightto hold the instrument and collect thesum payable.

2. Accumulation of secondary contracts- where the instrument is negotiatedfrom person to perosn, more partiesand secondary contracts are added,hence, the more advantageous it willbe to the holder as he can proceednot only against the person whotransferred the instrument to him butalso against all transferors.

Q: What are the elements of a negotiableinstrument?

A:1. In writing and signed by the maker or

drawer;2. Contains an unconditional promise or

order to pay a sum certain in money;3. Payable all demand, or at a fixed or

determinable future time;4. Payable to order or to bearer (so

called badges of negotiability); and5. If addressed to a drawee, he must be

named or otherwise indicated withreasonable certainty. (Sec. 1)

Note: A negotiable instrument need not follow theexact language of NIL, as long as the terms aresufficient which clearly indicate an intention toconform to the requirements of the law. (Sec. 10)

o. 5 applies only to bills of exchange. Apromissory note has no drawee.

Q: State and explain whether the followingare negotiable instruments under theNegotiable Instruments Law:

1. Postal money order;2. A certificate of time deposit which

states "This is to certify that bearerhas deposited in this bank the sumof FOUR THOUSAND PESOS(P4,000.00) only, repayable to thedepositor 200 days after date."

3. Letters of credit;4. Warehouse receipts;5. Treasury warrants payable from a

specific fund.A:

1. A Postal Money Order is not anegotiable instrument because of the

conditions appearing at the backthereof, thereby making the orderconditional, contrary to Section 1 ofthe Negotiable Instruments Law.(Phil. Educ. Co. lnc., v. Soriano, 148-A Phil 521 U971)

2. A certificate of time deposit is anegotiable instrument, because it isan acknowledgment in writing by thebank of the amount of deposit with apromise to repay the same to thedepositor or bearer thereof at aspecific time. (Caltex v. CA, GR. No.97753, Aug. 10, 1992)

3. A letter of credit is not a negotiableinstrument, because it is not payableto order or bearer (Art. 568, Code ofCommerce) and is generallyconditional;

4. Warehouse receipts are notnegotiable instruments, because theirsubject matter is things or goods, andnot a sum certain in money.

5. Treasury warrants payable from aspecific fund are not negotiableinstruments as they are payable outof a particular fund which mayor maynot exist, thereby making the orderconditional, in contravention ofSection 1 of the NegotiableInstruments Law. (2005 BarQuestion)

Q: Is a withdrawal slip a negotiableinstrument?

A: Withdrawal slips are non-negotiableinstruments. The essence of negotiabilitywhich characterizes a negotiable paper as acredit instrument lies in its freedom to circulatefreely as a substitute for money. Thewithdrawal slips in question lacked thischaracter. (Firestone Tire & Rubber Co. v. CA,GR. No. 113236, Mar. 5, 2001)

Note: In this case, a client maintained a specialsaving account with his drawee bank and wasallowed to withdraw funds through specialwithdrawal slips and used the withdrawal slips inpayment of certain purchases, as if they werechecks. The creditor deposited these withdrawalslips to its bank which in turn would send them forcollection to the drawee bank. The fact that otherwithdrawal slips were honored and paid by thedrawee bank was no license for the collectingbank to presume that subsequent withdrawalslips would be honored and paid immediately. Itcould not have expected that the withdrawal slipsare to be treated as checks by other entities.


PacuCtaa ae (j)erecfto Cioi] '9> 83

NEGOTIABLE INSTRUMENTS LAW

Q: Which of the following stipulations orfeatures of a promissory note (PN) affect ordo not affect its negotiability, assumingthat the PN is otherwise negotiable?Indicate your answer by writing theparagraph number of the stipulation orfeature of the PN as shown below and yourcorresponding answer, either "Affected" or"Not affected." Explain.

1. The date of the PN is "February 30,2002."

2. The PN bears interest payable onthe last day of each calendarquarter at a rate equal to fivepercent (5%) above the thenprevailing 91-day Treasury Bill rateas published at the beginning ofsuch calendar quarter.

3. The PN gives the maker the optionto make payment either in moneyor in quantity of palay orequivalent value.

4. The PN gives the holder the optioneither to require payment in moneyor to require the maker to serve asthe bodyguard or escort of theholder for 30 days.

A: I11. Paragraph 1 - Negotiability is not

affected. The date is not one of thereqUirementsfor negotiability.

2. Paragraph 2 - Negotiability is notaffected. The interest is to becomputed at a particular time and isdeterminable. It does not make thesum uncertain or the promiseconditional.

3. Paragraph 3 Negotiability isaffected. Giving the maker the optionrenders the promise conditional

4. Paragraph 4 - Negotiability is notaffected. Giving the option to theholder does not make the promiseconditional. (2002 Bar Question)

Q: EJ bought a used cell phone from PB.PB preferred cash but EJ is a friend so PBaccepted EJ's promissory note for P10,OOO.PB thought of converting the note intocash by endorsing it to his brother JV. Thepromissory note is a piece of paper withthe following hand-printed notation: "EJwill pay PB P10,000 1 week from today inconsideration of the cell phone bought fromPB." Below this notation EJ's signaturewith "8/1/00" next to it, indicating the dateof the promissory note. When PBpresented EJ's note to JV, the latter said itwas not a negotiable instrument under thelaw and so could not be a valid substitutefor cash. PB took the opposite view,

84

insisting on the note's negotiability. Youare asked to referee. Which of the opposingviews is correct?

A: JV is right. The promissory note is notnegotiable. It is not issued to order or bearer.There is no word of negotiability containingtherein. It is not issued in accordance withSection 1 of the Negotiable Instruments Law.

Q: Tony Laguesma is an indorsee of apromissory note that simply states: "Pay toJovin Usin P400." The note has no date, noplace' of payment and no considerationmentioned. It was signed by Marian KayVinand written under her letterhead specifyingthe address, which happens to be herresidence. Edison accepted the promissory

. note as payment for services rendered toJames, who in turn received the note fromJovin Usin as payment for a prepaid cellphone card worth 450 pesos. The payeeacknowledged having received the note onAugust 1, 2000. A Bar reviewee had toldEdison, who happens to be your friend,that he is not a holder in due course underArticle 52 of the Negotiable InstrumentsLaw (Act 2031) and therefore does notenjoy the rights and protection under thestatute. Edison asks for our advicespecifically in connection with the notebeing undated and not mentioning a placeof payment and any consideration. Whatwould your advice be?

A: The fact that the instrument is undated anddoes not mention the place of payment doesnot militate against its being negotiable. Thedate and place of payment are not materialparticulars required to make an instrumentnegotiable. The fact that no mention is madeof any consideration is not material.Consideration is presumed. (2000 BarQuestion)


Q: Distinguish a negotiable document froma negotiable instrument. (2005 BarQuestion)

A: ,' " , 'NEGOTIABLENEGOTIABLE

INSTRUMENT DOCUMENTS OFTITLE

Subject is money Subiect is qcodsDocument is a.mere

evidence of title -Is itself the property tile things of value

with value being the goodsmentioned in the

documentHas all the Does not have these

requisites of Sec. 1 requisitesHolder may run

after the secondary Intermediate partiesparties for payment are not secondarilyif dishonored by the liable if document is

party primarily dishonoredliable

Holder (if a holder Holder can neverin due course) mayacquire rights over acquire rights to the

the instrument document better

better than his than his

predecessors predecessors

Q: What is the purpose of the NegotiableInstruments Law?

A: To facilitate transactions in commercialpaper and to promote free flow of credit. Thelaw tries to make negotiable instruments havethe same attributes and characteristics asmoney (negotiability).

Q: What are the functions of a negotiableinstrument? .

A:1. As a valid substitute for money;2. As a medium of exchange for most

commercial transactions; and3, As a medium of credit transactions.4. Increase purchasing media in

circulation

Q: What are the factors to determine thenegotiability of the instrument?

A:1. Words that appear on the face of

negotiable instrument;2. Requirements enumerated in Section

1 of NIL;3. Intention of the parties by considering

the whole of the instruments.

Q: Is a negotiable instrument legal tender?

A:GR: Negotiable instruments are not legaltender. Only coins and notes issued bythe Bangko Sentral ng Pilipinas areconsidered legal tender, (Sec, 52, RA7653)

XPN: A check which has been clearedand credited to the account of the creditorshall be equivalent to delivery to thecreditor of cash in an amount equal to theamount credited to his account. (Sec. 60,New Central Bank Act)

Q: What are the two kinds of negotiableinstruments under the law?

A:1, Promissory notes (PN) An

unconditional promise in writing madeby one person to another, signed bythe maker, engaging to pay ondemand, or at a fixed or determinablefuture time, a sum certain in money toorder or to bearer. (Sec. 184)

2, Bi/I of exchange (BOE) - Anunconditional order in writingaddressed by one person to anothersigned by the person giving it,requiring the person to whom it isaddressed to pay on demand or at afixed or determinable future time asum certain in money to order or tobearer, (Sec. 126)

Note: Checks are special form ofBOE,

Q: Who are the parties to a negotiableinstrument?

A:1, Maker - the person who makes a

promissory note and promises to paythe amount stated therein,

2. Payee - the obligee, that is, theperson who, by the terms of the noteor bill, is to receive payment.

3. Drawer - the person who draws thebill of exchange and orders thedrawee to pay a, sum certain inmoney

4, Drawee - the person to whom theorder to pay is addressed in a bill ofexchange

UNIVERSITY OF SANTO TOMAS ~~. 85Pacu(tad de <Dereclio Civil .• ~


Q: Who is a holder?

A: A holder is a person in possession of abearer instrument or an indorsee of an orderinstrument who is in possession thereof. Aholder is the obligee, a person who canenforce payment of the instrument.

I

Q: Who is a referee in case of need?

A: He is a person who may be designated inthe instrument as the person who may beresorted to by the parties in case of dispute

Q: Distinguish promissory note from a billof exchange.

A:PROMISSORY NOTE BILL OF EXCHANGE

Promise Order2 original parties 3 partiesMaker is primarily Drawer is

liable secondari)yHableOnly 1 2 presentments (for

presentment (for acceptance and forpayment) is payment) are

needed generally needed

Q: Who are the original parties to a PN?

A:1. Maker - Makes the promise and

signs the instrument; and·2 .. Payee - To whom the instrument is

payable.

Q: Who are the parties in a BOE?

A:1. Drawer - Gives the order to pay

money to a third party;2. Drawee - To whom the bill is

addressed and ordered to pay;becomes "acceptor" When heindicates a willingness to acceptresponsibility for the payment of thebill; and

Note: It is only when a draweebecomes an acceptor that he isprimarily liable.

3. Payee - In whose favor the bill isdrawn.

Q: What are the different stipulations thatwill not affect the certainty of the sumcontained in the instrument?

A: The sum payable is a sum certain althoughit is to be paid:

1. With interest; or2. By stated installments; or3. With acceleration clause; or4. With exchange; or5. With costs of collection or an

attorney's fee, in case payment shallnot be made at maturity. (Sec. 2)

Q: What provisions do not affect thenegotiability of an instrument?

A:1. Authorizes the sale of collateral

securities in case the instrument benot paid at maturity

2. . Authorizes a confession of judgmentif the instrument be not paid atmaturity; or

3. Waives the benefit of any lawintended for the advantage orprotection of the obligor

4. Gives the holder an election torequire something to be done in lieuof payment of money

5. It is not dated6. It does not specify the value given, or

that any value had been giventherefor

7. It does not specify the place where itis drawn or the place where it ispayable

8. It bears a seal9. It designates a particular kind of

currency in which payment is to bemade (Sees. 5 and 6)

Q: What is the test of negotiability?

A: Whether or not an additional promise (otherthan those required in Sec. 1 of the NIL) wouldgive rise to a cause of action for breach ofcontract if the additional act were not done. If itdoes, the instrument is rendered non-negotiable. (Villanueva, Commercial LawReview)


Q: A manager's check, made payable tocash was tendered by the seller to thebuyer as payment for the return of thereservation fee. The buyer refused toaccept the check. Hence, the sellerconsigned the check to the court. Decide.

A: In general, a manager's check is not legaltender. The creditor has the option of refusingor accepting it. However, payment in check bythe debtor may be acceptable as valid, if noprompt .objection to said payment is made.(Pabugais v, Sahijiwani, G.R. No. 156846,Feb. 23, 2004)

Q: When is a promise not consideredunconditional?

A: An order or promise to payout of aparticularfund is not unconditional. (Sec. 3)

Note: But an unqualified order or promise to payis unconditional though coupled with:

.1. An indication of a particular fund out ofwhich reimbursement is to be made, ora particular account to be debited withthe amount; or

2. A statement of the transaction whichgives rise to the instrument. (Ibid.)

Q: What constitutes determinable futuretime?

A: If payable:1. At a fixed period after date or sight; or2. On or before a fixed or determinable

future time specified therein; or3. On or at a fixed period after the

occurrence of a specified event. (Sec.4)

Note: An instrument payable upon acontingency is not negotiable and thehappening of the event does not cure thedefect. (Ibid.)

Q: What is the effect of ante-dating andpost-dating?

A: I does not affect the negotiability provided: is not done for an illegal purpose. It may beego iated before or after the date given as

g as it is not negotiated after its maturity.e person to whom the instrument isi ered acquires title thereto as of the date ofi ery.

Q: What are the distinctions between anegotiable instrument and a non-negotiableinstrument?

A:.NEGOTII\BLE • < NON·NEGOTIABLE-.

Contains all Does not have any,requisites under some or all

Sec. 1 requisitesTransferred by Transferred by

negotiation assiqnrnentHolder in due Transferee acquires

course (HIDC) can rights no better thanhave rights better his transferorthan his transferor

Prior party does notPrior parties warrant payment but

warrant payment merely the legality ofhis title

Q: When is an instrument payable ondemand?

A:1. When it is so expressed to be

payable on demand, at sight or onpresentation;

2. When no period of payment is stated;or

3. When issued, accepted, or indorsedafter maturity. (Sec. 7)

Q: When is an instrument payable to order?

A: The instrument is payable to order where itis drawn payable to the order ofa specifiedperson, or to him or his order. (Sec. 8)

Q: When is an instrument payable tobearer?

A:1. It is expressed to be so payable to

bearer;2. Payable to a person named therein or

bearer;3. Payable to the order of a fictitious or

non-existing person, and such factwas known to the person making it sopayable;

4. The name of the payee does notpurport to be the name of any person;or

5. The only or last indorsement is anindorsement in blank. (Sec. 9)


Pacu{taa de CDerecho Civit ~~' 87


Q: In a check drawn payable to "cash", isan indorsement necessary?

A: No. Where a check is made payable to theorder of "cash", the word "cash" does notpurport to be the name of any person andhence the instrument is payable to bearer. Thedrawee bank need not obtain any indorsementof the check but may pay it to the personpresenting it without any indorsement. (AngTek Lian v. CA, G.R. No. L-2516, Sept. 25,1950)

Q: Is the date essential to make aninstrument negotiable?

A: The date is not essential (Sec. 6 [a)). Ifdated, such date is deemed a prima facieproof ,that it is the true date of the making,drawing, acceptance or indorsement of theinstruinent. (Sec. 11)

iQ: When is date important?

A: Date is important in the following instances,not to determine negotiability, but to determinematurity:

1. Where the instrument is payablewithin a specified period after date, orafter sight.

2. When the instrument is payable ondemand, date is necessary todetermine 'whether the instrumentwas presented within a reasonabletime from issue, or from the lastnegotiation.

3. When the instrument is an interest-bearing one, to determine when theinterest starts to run.

Q: When may date be inserted?

A:1. Where an instrument expressed to be

payable at a fixed period after date isissued undated, or

2. Where the acceptance of aninstrument payable at a fixed periodafter sight is undated

Note: Any holder may insert therein the true dateof issue or acceptance, and the instrument shallbe payable accordingly. (Sec.13)

Q: What is the effect of insertion of wrongdate?

A: It does not avoid the instrument in thehands of a subsequent holder in due course.In the hands of a holder in due course,. thedate inserted, even if wrong, is to be regardedas the true date (Sec. 13). With respect to the

88

person who inserted the wrong date, however,the instrument is avoided. (Bank of HOU9ton v.Day, 145 Mo. Appl. 410, 122 SW 756)

Q: What are the incidents in the life of anegotiable instrument?

A:1. Issue;2. Negotiation;3. Presentment for acceptance, in

certain kinds of bills of exchange;4. Acceptance;5. Dishonor by non-acceptance;6. Presentment for payment;7. Dishonor by non-payment;8. Notice of dishonor;9. Protest in certain cases; and10. Discharge

Q: What are the various situationsinvolving negotiable instruments?

A:1. Incomplete instrument

a. Deliveredi. With forgery and alterationii. Without forgery and

alterationb. Not delivered

i. With forgery and alterationii. Without forgery and

alteration

2. Complete instrumenta. Delivered


alterationb. Not delivered


alteration

INCOMPLETE BUT DELIVERED

Q: When is an instrument incomplete?

A: When it is wanting in any materialparticular, (Sec. 14)

Q: Who has the authority to fill up theblanks in an incomplete but deliveredinstrument?

A: The holder has a prima facie authority tocomplete it. And a signature on a blank paperdelivered by the person making the signaturein order that the paper may be converted into anegotiable instrument operates as a prima


facie authority to fill it up as such for anyamount. (Sec. 14)

Q: What is meant by material particular?

A: Any particular proper to be inserted in anegotiable instrument to make it complete.

Q: When maya prior party be bound by anincomplete but delivered instrument?

A: If it is filled up strictly in accordance with theauthority given and within a reasonable time.But if any such instrument, after completion, isnegotiated to a holder in due course, it is validand effectual for all purposes in his hands, andhe may enforce it as if it had been filled upstrictly in accordance with the authority givenand within a reasonable time. (Sec. 14)

Q: Jun was about to leave for a businesstrip. As his usual practice, he signedseveral blank checks. He instructed Ruth,his secretary, to fill them as payment forhis obligations. Ruth filled one check withher name as payee, placed P30,000.00thereon, endorsed and delivered it to Marie.Marie accepted the check in good faith aspayment for goods she delivered to Ruth.Eventually, Ruth regretted what she didand apologized to Jun. Immediately Jundirected the drawee bank to dishonor thecheck. When M.arie encashed the check, itwas dishonored. Is Jun liable to Marie?

A: Yes. This covers the delivery of anincomplete instrument, under Section 14 of theNegotiable Instruments Law, which providesthat there was prima facie authority on the partof Ruth to fill-up any of the material particularsthereof. Having done so, and when it is firstcompleted before it is negotiated to a holder indue course like Marie, it is valid for allpurposes, and Marie may enforce it within areasonable time, as if it had been filled upstrictly in accordance with the authority given.(2006 Bar Question)

Q: What is the rule when an instrument isincomplete and undelivered?

A: Not valid against the party whose signaturewas placed before delivery, whether the holderis a holder in due course or not. However,withrespect to a holder in due course, non-deliverymust be proved because as to him, there is aprima facie presumption of delivery.

Reason: Delivery is essential to validity. (Sec.15)

Q: What about the party whose signaturewas placed after delivery?

A: Valid against the party whose signaturewas placed after delivery like an indorserbecause the indorser warrants the instrumentto be genuine and in all respect what itpurports to be.

Q: PN makes a promissory note forP5,000.00, but leaves the name of the payeein blank because he wanted to verify itscorrect spelling first. He mindlessly left thenote on top of his desk at the end of theworkday. When he returned the followingmorning, the note was missing. It turned uplater when X presented it to PN forpayment. Before X, T, who turned out tohave filched the note from PN's office, hadendorsed the note after inserting his ownname in the blank space as the payee. PNdishonored the note, contending that hedid not authorize its completion anddelivery. But X said he had no participationin, or knowledge about, the pilferage andalteration of the note and therefore heenjoys the rights of a holder in due courseunder the Negotiable Instruments Law.Who is correct and why?

A: PN is right. The instrument is incompleteand undelivered. It did not create any contractthat would bind PN to an obligation to pay theamount thereof. (2000 Bar Question)

Q: Jun was about to leave for a businesstrip. As his usual practice, he signedseveral blank checks. He instructed Ruth;his secretary, to fill them as payment forhis obligations. Ruth filled one check withher name as payee, placed P30,OOO.OOthereon, endorsed and delivered it to Marie.She accepted the check in good faith aspayment for goods she delivered to Ruth.Eventually, Ruth regretted what she didand apologized to Jun. Immediately hedirected the drawee bank to dishonor thecheck. When Marie encashed the check, itwas dishonored.

Supposing the check was stolen while inRuth's possession and a thief filled theblank check, endorsed and delivered it toMarie in payment for the goods hepurchased from her, is Jun liable to Marie ifthe check is dishonored?

A: No. Even though Marie is a holder in duecourse, this is an incomplete and undelivered

UNIVERSITY OF SANTO TOMAS ~+~Pacu{tati tie (j)erecfio CiviC .•. 89


instrument, covered by Section 15 of theNegotiable Instruments Law. Where anincomplete instrument has not been delivered,it will not, if completed and negotiated withoutauthority, be a valid contract in the hands ofany holder, as against any person, includingJun, whose signature was placed thereonbefore delivery. Such defense is a realdefense even against a holder in due course,available to a party like Jun whose signatureappeared prior to delivery.

COMPLETE BUT UNDELIVERED

Q: What is the effect if an instrument isundelivered?

A: It is incomplete and revocable until deliveryof the instrument. (Sec. 16)

Q: What is delivery?

A: It is the transfer of possession, actual orconstructive, from one person to another (Sec.191), with the intent to transfer title to payeeand recognize him as holder thereof.

Q: When is an instrument issued?

A: The first delivery of the instrument,complete in form, to a person who takes it asholder. (Sec. 191)

Q: Can a creditor bank who was the payeein a check fraudulently obtained by a thirdperson who subsequently encashed it suethe drawer-debtor, third person, anddrawee bank for the amount of the check?

A: No, the payee of a negotiable instrumentacquires no interest with respect thereto untilits delivery to him. Without the initial delivery ofthe instrument from the drawer to the payee,there can be no liability on the instrument.(Development Bani, of Rizal v. Sima Wei, GR.No. 85419, Mar. 9, 1993)

Q: What is the effect if the instrument is inthe possession of a holder in due course?. IA: V~lid delivery is conclusively presumed.(Sec.! 16)

I

Q: What if the instrument is in thepossession of a party other than a holder indue course?

A: Prima facie presumption of delivery butsubject to rebuttal. It must be made either byor under the authority of the party making,drawinq, accepting, or indorsing.

Q: What is the rule if the instrument isdelivered conditionally or for a specialpurpose?

A: If the instrument lands in the hands of aholder in due course (one who does not knowof the conditional delivery or of its specialpurpose), the instrument will be as if there isno condition. To a holder not in due course,prior parties are not bound by the instrument.

Note: The law contemplates that the condition isorally or verbally conveyed to the holder upondelivery, because of the rule that the negotiabilityis determined only upon the face of theinstrument.

Q: Who are immediate parties?

A: Those having or being held to know theconditions or limitations placed upon thedelivery of an instrument. It means privity, andnot proximity.

Q: Who are remote parties?

A: Those who do not know the conditions orlimitations placed upon the delivery of aninstrument, even if he is the next partyphysically.

Q: May the checks issued by theDepartment of Justice as salary of thejudgment debtor, an Assistant City Fiscal,be garnished in favor of the judgmentcreditor prior to delivery to said judgmentdebtor?

A: No. As Assistant City Fiscal, the source ofthe salary is public funds. He receives hiscompensation in the form of checks from theDepartment of Justice through the City Fiscal,who had the custody over the checks.Inasmuch as said checks had not yet beendelivered to judgment debtor, they did notbelong to him and still had the character ofpublic funds. (De La Victoria v. Burgos, G.R.·No. 111190, June 27,1995)


, ',COMPLETE AND DELIVERED .,>, RULES OF CONSTRUCTION r'

Q: What are the rules when an instrumentis com plete and delivered?

A:1. Without forgery and alteration, all

parties are bound.

2. With forged indorsement and/oralterationa. Order instruments

i. Order promissory notePrior parties not bound.Forged signature iswholly inoperative (Sec.23); unless estoppelsets in with regard priorparties (cut-off rule).Subsequent partiesbound.

ii. Order bill of exchangeDrawer's accountcannot be charged bythe Drawee;Drawer has no cause ofaction against collectingbank, since the duty ofthe latter is only topayee;Drawee can recoverfrom collecting bank;Drawer not liable to thecollecting bank.Collecting bank bearsloss (can recover fromperson it paid)Payee can recoverfrom: Drawer andCollecting bank, but notfrom Drawee unlesswith acceptance of thebill;

b. Bearer instrumentsi. Bearer promissory note

Prior parties liable;Forged signatory notliable to party not holderin due course.

ii. Bearer bill of exchangeDrawee bank liable.

Q: What are the rules of construction incase of ambiguous or omissions ofnegotiable instruments?

A:1. Words prevail over figures;2. Interest runs from the date of the

instrument, if date from which interestis to run is unspecified; if undated,from the issue;

3. If undated, deemed dated on the dateof issue;

4. Written provisions prevail overprinted;

5. If there is doubt whether it is a bill ornote, the holder may treat it as eitherat his election;

6. When not clear in what capacity itwas signed, deemed signed as anindorser;

7. If "I promise to pay" but signed by twoor more persons, jointly and severallyliable.

RULES ON SIGNATORIES '...

Q: Who are the persons liable on aninstrument?

A:GR: Only persons .whose signaturesappear on an instrument are liable thereon.(Sec. 18)

XPN:1. Person signs in trade or assumed

name (Sec. 18 [2J) - Party whosigned must have intended to bebound by his signature.

2. Principal is liable if a duly authorizedagent signs .in his own behalfdisclosing the name of the principaland adding words to show he ismerely signing in a representativecapacity. (Sec. 19) - Authority maybe given orally or in writing (SPA,only an evidence of authority of anagent to third parties)

3. In case of forgery (Sec. 23)4. Acceptor makes his acceptance of a

bill on a separate paper (Sec. 134)5. Person makes a written promise to

accept the bill before it is drawn (Sec.135)


f£'acuCtati tie <Dereclio CiviC91


Q: What are the requisites to exempt anagent from liability? Q: When is there want of authority?

A:1. He is duly authorized;2. He adds words to his signature

indicating that he signs asagent/representative;

3. He discloses the name of hisprincipal. (Sec. 20)

Q: What is the effect of a signature byprocuration?

A: It operates as notice that the agent has buta limited authority to sign and the principal isbound only in case the agent in so signingacted within the actual limits of his authority.(Sec. 21)

Q: What are the effects of an infant orcorporation's indorsement?

A:1. Not void. The incapacity of the infant

is not a defense which can be availedof by prior parties. However, it doesnot destroy the right of such an infantindorser to disaffirm under the rulesof infancy;Passes property thereih;Voidable. Therefore, parties prior tothe minor or corporation cannot-escape liability by setting up asdefense the incapacity of theindorsers.A minor, however, may be heldbound by his signature in aninstrument where he is guilty of actualfraud committed by specificallystating that he is of age. (PNB v. CA,G.R. No. L-34404, June 25, 1980)

2.3.

4.

FORGERY .

Q: What is forgery?

A: Forgery is the counterfeit making orfraudulent alteration of any writing.

Q: When is there forgery?

A: Signature is affixed by one who does notclaim to act as an agent and who has noauthority to bind the person whose signaturehe has forged.

92

A: Signature is affixed by one who purports tobe an agent but has no authority to bind thealleged principal.

Q: What is the effect when there isforgery?

A:GR: The signature is wholly inoperative,and no right to retain the instrument, or togive a discharge thereof. or to enforcepayment thereof against any party to it, isacquired through or under such Signature.(Cut-off rule). But it does not avoid theinstrument.

XPN:1. If the party against whom it is sought

to enforce such right is precludedfrom setting up forgery or want ofauthority. (Sec. 23)

2. Where the forged Signature is notnecessary to the holder's title, inwhich case, the forgery maybedisregarded (Sec. 48)

Q: Can a payee of a check sue thecollecting bank for the amount of thechecks when it made payment of the sameunder a forged endorsement in favor of theforger?

A: Yes, since the Signature of the payee wasforged to make it appear that he had made anindorsement in favor of the forger, suchSignature should be deemed as inoperativeand ineffectual. The collecting bank grosslyerred in making payment by virtue of saidforged signature. The collecting bank is liableto the payee and must bear the loss because itis its legal duty to ascertain that the payee'sendorsement was genuine before cashing thecheck. (Westmont Bank v. Ong, G.R. No.132560, Jan. 3~ 2002)

Q: Who are preCluded from setting up thedefense of forgery?

A:1. Those who admit/warrant the

genuineness of the signature:indorsers, persons negotiating bydelivery and acceptor; (Sec 56)

2. Those who by their acts, silence, ornegligence, are estopped fromclaiming forgery;

3. A holder of a bearer instrument whosubsequently negotiates suchinstrument with a prior forgedindorsement (forged indorsement is


not necessary to his title it being abearer instrument).

Q: What are the rights of the parties incases of forged instruments?

A:1. Where note payable to order:

a. Party whose signature wasforged is not liable to a holder,even a HIDC

b. Indorsement is whollyinoperative.

2. Where note payable to bearer:a. The party whose indorsement is

forged is liable to a HIDC, but notto one who is not a HIDCReason: it can be negotiated by

mere deliveryb. The only defense available is

want of delivery but this defensecan be raised only against aholder not in due course.

3. Where bill payable to order: The partywhose indorsement is forged is notliable to any holder even a HIDC.The forged indorsement is whollyinoperative.

Q: A client indorsed a check with a forgedindorsement. The collecting bank indorsedthe check with the drawee bank. What arethe liabilities of the parties?

A: The collecting bank is bound by itswarranties as an indorser and cannot set upthe defense of forgery as against the draweebank.

The drawee bank is under strict liability to paythe check to the order of the payee. Paymentunder a forged indorsement is not to thedrawer's order. Since the drawee bank did notpay a holder or other person entitled to receivepayment, it has no right to reimbursement fromthe drawer. (Associated Bank v. CA, G.R. No.107382, Jan. 31,1996)

Q: What is the remedy of the drawee bank?

A: Tile drawee bank may not debit the accountof the drawer but may generally pass liabilityback through the collection chain to the partywho took from the forger and, of course, to theforger himself, if available. If the forgery is thatof the payee's or holder's indorsement, thecollecting bank is held liable, without prejudiceto the latter proceeding against the forger.Since a forged indorsement is inoperative, thecollecting bank had no right to be paid by the

drawee bank. The former must necessarilyreturn the money paid by the latter because itwas paid wrongfully. (Associated Bank v. CA,G.R. No. 107382, Jan. 31, 1996)

Q: What is the extent of the liability of thedrawee bank and the drawer for the amountpaid on checks with forged indorsementsof the payees, if the same was due to thenegligence of both the drawee bank andthe drawer?

A: The loss occasioned or caused by suchnegligence should be divided equally betweenthe drawer/depositor and the drawee.

Q: Can a drawer-depositor who entrustedhis check books, credit cards, passbooks,bank statements and cancelled checks tohis secretary and who had introduced thesecretary to the bank for purposes ofreconciliation of his accounts hold thedrawee bank liable for the amountswithdrawn by the secretary by forging hisSignature on the checks?

A: No, 11eis precluded from setting up theforgery due to his own negligence in entrustingto. his secretary his credit cards and checkbook including the' verification of hisstatements of account. (llusorio v. CA, GR.No. 139130, Nov. 27, 2002)

Q: Can a drawer, from whom checks werestolen but failed to report the same to theauthorities or the drawee bank, recover thevalue of the checks paid by the draweebank on the forged checks which' wasstolen from the drawer?

A: No, the drawer is the one which stahds tobe blamed for its negligence/predicament.(Security Bank and Trust Company v. TriumphLumber and Construction Corp., G.R. No.126696, Jan. 21, 1999)

Q: How is forgery proven and who has theburden of proof?

A: The drawer's signatures on the questionedchecks amount to prima facie evidence that heissued those checks. By denying that heissued the said checks, it is he who puts intoquestion the genuineness and authenticity ofthe Signatures appearing thereon, and it is hewho has the burden of proving that thosesignatures were forgeries. Forgery, as anyother mechanism of fraud must be provenclearly and convincingly, and the burden ofproof lies on the party alleging forgery. (ChiangVia Min v. CA, G.R. No. 137932, Mar. 28,2001)

UNIVERSITY OF SANTO TOMAS ~"-'j'~Pacu{taa de Dere cfio Civi] .•. 93

NEGOTIABLE INSTRUMENTS LA\\/I

Q: CX:maintained a checking account with.UBANK, Makati Branch. One of his checksin a stub of fifty was missing. Later, hediscovered that Ms. DY forged hissignature and succeeded to encashP15,000 from another branch of the bank.DY was able to encash the check when ET,a friend, guaranteed due execution, sayingthat she was a holder in due course. CanCX recover the money from the bank?Reason briefly.

A: Yes, CX can recover from the bank. UnderSection 23 of the Negotiable Instruments Law,forgery is a real defense. The forged check iswholly inoperative in relation to CX. CX cannotbe held liable thereon by anyone, not even bya holder in due course. Under a forgedsignature of the drawer, there is no validinstrument that would give rise to a contractwhich can be the basis or source of liability onthe part of the drawer. The drawee bank hasno right or authority to touch the drawer'sfunds deposited with the drawee bank. (2004Bar Question)

Q: Discuss the legal consequences when abank honors a forged check.

A:1. When drawer's signature is forged -

Drawee-bank by accepting the checkcannot set up the defense of forgery,because by accepting the instrument,the drawee bank admits thegenuineness of signature of drawer(BPI Family Bank v. Buenaventura,GR No. 148196, Sept. 30, 2005;Sec. 23, NIL).

Unless a forgery is attributable to thefault or negligence of the drawerhimself, the remedy of the drawee-bank is against the party responsiblefor the .forgery. Otherwise, drawee-bank bears the loss. A drawee-bankpaying on a forged check must beconsidered as paying out of its fundsand cannot charge the amount to thedrawer (Samsung Construction Co.Phils, v. Far East Bank, GR No.129015, Aug. 13, 2004). If thedrawee-bank has charged drawer'saccount, the latter can recover suchamount from the drawee-bank(Associated Bank v. CA, GR No.107382, Jan. 31, 1996; BPI v CaseMontessori Internationale, G.R. No.149454, May 28, 2004).

However, the drawer may beprecluded or estopped from setting

94 Iteam:bSli.nl1

up the defense of forgery as againstthe drawee-bank, when it is shownthat the drawer himself had beenguilty of gross negligence as to havefacilitated the forgery (MetropolitanWaterworks v. CA, GR No. L-62943,July 14, 1986).

2. Drawee bank versus collecting bank- When the signature of the drawer isforged, as between the drawee-bankand collecting bank, the drawee-banksustains the loss, since the collectingbank does not guarantee thesignature of the drawer. The paymentof the check by the drawee bankconstitutes the proximate negligencesince it has the duty to know thesignature of its client-drawer.(Philippine National Bank v. CA, GRNo. L-26001, Oct. 29, 1968). I

I3. Forged payee's Signature -i When

drawee-bank pays the forged! check,it must be considered as paying outof its funds and cannot charge theamount so paid to the account of thedepositor. In such case, the bankbecomes liable since its primary dutyis to verify the authenticity of thepayee's signature (Traders RoyalBank v. Radio Philippines Network,GR No. 138510, Oct. 10, 2002;Westmont Bank v, Ong, GR No.132560, Jan. 30, 2002).

4. Forged endorsement - Drawer'saccount cannot be charged, and ifcharged, he can recover from thedrawee-bank (Associated Bank v.CA, GR No. 107382, Jan. 31,1996).

Drawer has no cause of actionagainst collecting bank, since theduty of collecting bank is only to thepayee (Manila Lighter Transportation,Inc. v, CA, GR No. L-50373 Feb. 15,1990). Drawee-bank can recoverfrom the collecting bank (GreatEastern Life Ins. Co. v. Hongkong &Shanghai Bank, GR No. 18657,Aug. 23, 1922) because even if theindorsement on the check depositedby the bank's client is forged,collecting bank is bound by itswarranties as an indorser and cannotset up defense of forgery as againstdrawee bank (Associated Bank v. CA,GR No. 107382, Jan. 31, 1996).


Q: What are the kinds of fraud relating to anegotiable instrument?

A:1. Fraud in the execution or fraud in

factum A person, withoutnegligence, has signed an instrumentwhich was in fact a negotiable one,but was deceived as to the characterof the instrument and withoutknowledge of it (real defense).

2. Fraud in the inducement cr simplefraud - Relates to the quantity,quality, value or character of theconsideration of the instrument.Deceit is not in the character of theinstrument but in its amount or terms(personal defense).

Q: The drawer's signature was forged.There is, however, a provision in themonthly bank statement that if the drawer'ssignature was forged, the drawer shouldreport it within 10 days from receipt of thestatement to the drawee. The drawer,however failed to do so. What will be itseffect insofar as the drawer's right isconcerned?

A: Where the forgery of the drawer's signaturehas been clearly established, the drawee bankmust re-credit the account of the drawer. Thefailure of the drawer to report the forgery withinten days from receipt of the monthly bankstatement from the drawee bank does notpreclude tile drawer from questioning themistake of the drawee bank despite theprovision in the monthly statement that if noerror is reported in ten days, the account willbe deemed correct. (BPI v. CASA Montessi»,GR. No. 149454, May 28,2004)

Q: If forgery was committed by anemployee of the party whose signature wasforged (drawer), does it amount to estoppelso that the drawer is precluded inrecovering from the drawee bank?

A: The bare fact that the forgery wascommitted by an employee of the party whoseSignature was forged can not necessarily implythat such party's negligence was the cause ofthe forgery in the· absence of somecircumstances raising estoppel against thedrawer. Since the drawer is not precluded bynegligence from setting up the forgery, thegeneral rule should apply. Consequently, if abank pays a forged check, it must beconsidered as paying out of its own funds andcan not charge tile amount so paid to theaccount of the depositor. A bank is liable,

irrespective of its good faith, in paying a forgedcheck. (Samsung Construction Co. v. Far EastBank and Trust Company, GR. No. 129015,Aug. 13, 2004)

Q: What is consideration?

A: It is an inducement to a contract that is thecause, price or impelling influence, whichinduces a party to enter into a contract.

Note: It is not tile motive, for the latter is thepersonal or private reasons of a party inentering into a contract.

Q: What is the presumption recognized bylaw as to the existence of consideration?

A: Every negotiable instrument is deemedprima facie to have been issued for a valuableconsideration; and every person whosesignature appears thereon to have become aparty thereto for value. (Sec. 24)

Q: What constitutes value?

A: It is any consideration sufficient to support asimple contract. An antecedent or pre-existingdebt constitutes value and is deemed suchwhether the instrument is payable on demandor at a future time. (Sec. 25)

Note: Love and affection do not constitute valuewithin the meaning of the law.

Q: Who is a holder for value?

A: One who has given a valuableconsideration for the instrument issued ornegotiated to him (Sec. 26). The holder isdeemed as such not only as regards the partyto whom the value has been given to by himbut also in respect to all those who becameparties prior to the time when value was given.

Where the holder has a lien on the instrumentarising either from contract or by implication oflaw, he is deemed a holder for value to theextent of his lien. (Sec. 27)

Q: What is the effect of want ofconsideration?

A: It becomes a matter of defense as againstany person not a holder in due course; andpartial failure of consideration is a defense protanto, whether the failure is an ascertained andliquidated amount or otherwise (Sec. 28)

UNIVERSITY OF SANTO TOMAS ~~~"JPacuCtad de Der ec Iio CiviC '•. 95


Q: A travel agency sued the drawer for theamount of 6 post-dated checks which wereall dishonored. On the other hand, thedrawer claims that the checks were issuedfor purposes of accommodation. Who, asbetween the parties, has the burden ofproving that the checks were issued for aconsideration?

A: Since a negotiable instrumeht is presumedto have been issued for a valuableconsideration, the mere presentation of adishonored check in evidence entitles theholder to recover from the drawer even if thepayee did not establish the accountability ofthe drawer. The drawer of a check, not thepayee, has. the burden of proof to show thatthe check was issued without sufficientconsideration. (Travel-On v. CA, G.R. No. L-56169, June 26, 1992)

Q: Can a logging concessionaire whichissued promissory notes in favor of a bankto secure advances in connection to its logexportations raise the defense of want ofconsideration in a case filed by the bankfor the payment of the PN?A: No, the promissory note appears to benegotiable as they meet the requirements ofSec.1 of the NIL. Such being the case, thenotes are prima facie deemed to have beenissued for consideration. It bears noting that nosufficient evidence was adduced by thelogging concessionaire to show otherwise.(Quirino Gonzales Logging Concessionaire v.CA, G.R. No. 126568, Apr. 30, 2003)

Q: How is absence or failure ofconsideration distinguished frominadequacy of consideration?

A: Inadequacy of consideration does notinvalidate the instrument, unless there hasbeen fraud, mistake or 'undue influence (Art.1355, NCC). However, knowledge ofinadequacy of consideration would render theholder not a holder in due course. (Sec. 53)

Note: Failure of consideration means the failureor refusal of one of the parties to do, perform orcomplywith the considerationagreed upon.

.: .'.~. -, ACCOMMODATION· .. '

Q: Who is an accommodation party?

A: One who has signed the instrument asmaker, drawer, acceptor, or indorser, withoutreceiving value therefor, and for the purpose oflending his name to some other person. (Sec.29)

96

Q: What are the requisites to be anaccommodation party?

A:1. Accommodation party must sign as

maker, drawer, acceptor or indorser;2. No value is received by the

accommodation party for theaccommodated party; and

3. The purpose is to lend the name.

Note: It does not mean, however. thai onecannot be an accomodation party merelybecausehe has received some considerationforthe use of his name. The phrase "withoutreceiving value therefor" only means that novalue has been received for the instrument andnot for lendinghis name.

Q: What are the rights of anaccommodation party?

A:1. Right to revoke accommodation _

before the instrument has beennegotiated for value.

2. Right to reimbursement fromaccommodated party .theaccommodated party is the realdebtor. Hence, the cause of action isnot on the instrument but on animplied contract of reimbursement.

3. Right to contribution from othersolidary accommodation maker.(Sadaya v. Sevilla, G.R. No. L-17845,Apr. 27, 1967)


Q: What are the distinctions between anaccommodation party and a regular party?

A:'~C~OMMODATlON ' .REGULAR PARfv'

.: 'PARTY . r

Signs an instrumentwithout receiving Signs the instrument

value therefore (Sec. for value (Sec. 24)29)

Purpose of signing:lend his name to Not for that purposeanother person

(Sec. 29)May always show, Cannot disclaimby parol evidence, personal liability bythat he is only such parol evidenceCannot avail of the

defense ofabsence/failure of May availconsideration

against a holder notin due course

May suereimbursement after

paying the May not sueholder/subsequent

party

Q: Can a party who signed on the note asan accommodation party raise the defenseof absence or want of consideration?

A: An accommodation party who lends hisname to enable the accommodated party toobtain credit or raise money is liable on theinstrument to a holder for value even if hereceives no part of the consideration. Heassumes the obligation to the other party andbinds himself to pay the note on its due date.By signing the note, the accomodation partythus became liable for the debt even if he hadno direct personal interest in the obligation ordid not receive any benefit therefrom. (Henrydela Rama v. Admiral United Savings Bank,G.R. No. 154740, Apr. 16,2008)

Q: An accommodation party signed in theinstrument with their building and lot heldas mortgage subject to certain conditionsto be fulfilled by the creditor bank. Thecreditor bank failed to fulfil the conditions.The accommodation party now seeks toobtain release from its liability. Can acreditor bank, being a mere assignee of thenote refuse the release of anaccommodation party in a REM?

A: It depends. To be entitled to recover froman accommodated party, the holder of anegotiable instrument must be a holder in duecourse except for the notice of want of

consideration. If he does not qualify as aHIDC then he holds the instrument subject tothe defenses as if it were non-negotiable.(Prudencio v. CA, G.R. No. L-34539, July 14,1986)

Q: Can a corporation be an accommodationparty, if so, does the liability of anaccommodation party attach to acorporation?

A: No, the issue or indorsement of negotiablepaper by a corporation without considerationand for the accommodation of another is ultravires. Hence, one who has taken theinstrument with knowledge of theaccommodation nature thereof cannot recoveragainst a corporation where it is only anaccommodation party. (Crisologo-Jose v. CA,G.R. No. 80599, Sept. 15, 1989)

Q: Maya holder for value recover from anaccommodation party notwithstanding hisknowledge of such fact?

A: An accommodation party is liable on theinstrument to a holder for valuenotwithstanding that such holder at the time oftaking the instrument knew him to be only anaccommodation party. The accommodationparty is liable to a holder for value as if thecontract was not for accommodation. It is not avalid defense that the accommodation partydid not receive any valuable considerationwhen he executed the instrument. Nor is itcorrect to say that the holder for value is not aholder in due course merely because at thetime he acquired the instrument, he knew thatthe indorser was only an accommodationparty. (Ang Tiong v. Ting, G.R. No. L-26767,Feb. 22, 1968)

Q: On June 1, 1990, A obtained a loan ofP100,000 from B, payable not later than 20Dec. 1990. B required A -to issue him acheck for that amount to be dated Dec. 20,1990. Since he does not have any checkingaccount, A, with the knowledge of B,requested his friend, C, President of SaadBanking Corp (Saad) to accommodate him.C agreed, he signed a check for theaforesaid amount dated Dec. 20, 1990,drawn against Saad's account with theABC Commercial Banking Co. The By-lawsof Saad requires that checks issued by itmust be Signed by the President and theTreasurer or the Vice-President. Since theTreasurer was absent, C requested theVice-President to co-sign the check, whichthe latter reluctantly did. The check wasdelivered to B. The check was dishonored

UNIVERSITY OF SANTO TOMAS f~"~PacuCtad de ([)erecfio CiviC 'V' 97


upon presentment on due date forinsufficiency of funds.

1. Is Saad liable on the check as anaccommodation party?

2. If it is not, who then, under the

Iabove facts, is/are theaccommodation party?

A:1. Saad is not liable on the check as an

accommodation party. The act of thecorporation in accommodating afriend of the president is ultra vires(Ctlsotoqo-Jose vs. CA, GR. No.80599, Sept. 15, 1989). While it maybe legally possible for thecorporation, whose business is toprovide financial accommodations inthe ordinary course of business, suchas one given by a financing companyto be an accommodation party, thissituation, however, is not the case inthe bar problem.

2. Considering that both the presidentand vice-president were signatoriesto the accommodation, theythemselves can be subject to theliabilities of accommodation parties tothe instrument in their personalcapacity. (Cris%go-Jose v. CA, G.R.No. 80599, Sept. 15, 1989) (1991 BarQuestion)

:, ,; " . "NEGOTIATION ' . ,

Q: When is an instrument negotiated?

A: An instrument is negotiated when it istransferred from one person to another in sucha manner as to constitute the transferee theholder thereof. (Sec. 30)

Note: A holder is the payee or indorser of a bill ornote, who is in possession of it, or the bearerthereof. (Sec. 191)

Q: What are the methods of transferring anegotiable instrument?

A:1. Issue - first delivery of the instrument

complete in form to a person whotakes it as a holder.

2. Negotiation - an instrument isnegotiated when it is transferred fromone person to another in such amanner as to constitute thetransferee the holder thereof.

98 Iteam:._

3. Assignment - absent any expressprohibition against assignment ortransfer written on the face of a non-negotiable instrument, the same maybe assigned or transferred.

Q: What distinguishes negotiation fromassignment?

A:NEGOTIATION ASSIGNMENT I

Non-negotiable

Only a negotiable instrument may beassigned absent ofinstrument may be

any prohibitionnegotiatedagainst assignmentwritten on its face.The transferee can

The transferee, if he have no better rightsis a HIDC may than his transferor;

acquire better rights he merely steps intothan his transferor. the shoes of the

assignorThe holder can hold

the drawer liable The transferee hasand the indorsers no right of recourseliable if the party for payment against

primarily liable does immediate parties.not pay.

Q: A promissory note had already beenlegally extinguished because it satisfiedthe elements of compensation or legal set-off under Art. 1285 as between the makerand the assignor of the note who aremutually creditors and debtors of eachother. The holder assigned the note. Canthe maker raise the defense ofcompensation or legal set-off against theassignee?

A: Yes. The assignee takes the instrumentsubject to both personal and real defenses,because he merely steps into the shoes of theassignor. His remedy is aqainst the assignorarid not the maker of the note. (Sesbreno v.CA, G.R. No. 89252, May 24, 1993)

Q: What are the methods of negotiation?

A:1. If payable to bearer, it is negotiated by

delivery;2. If payable to order, it is negotiated by

the indorsement of the holdercompleted by delivery. (Sec. 30)


Q: What is the effect, if any, if a bearerinstrument is negotiated by indorsementand delivery?

A: A bearer instrument, even when indorsedspecially, may nevertheless be furthernegotiated by delivery, but the personindorsing specially shall be liable as endorserto only such holders as make title through hisendorsement (once a bearer instrument,always a bearer instrument). (Sec. 40)

Note: This rule does not apply to an instrumentoriginally payable to order but is converted intobearer instrument because the only or lastindorsement is an indorsement in blank.

Q: Richard Clinton makes a promissorynote payable to bearer and delivers thesame to Aurora Page. Aurora Page,however, endorses it to X in this manner:

"Payable to X. Signed: Aurora Page."

Later, X, without endorsing the promissorynote, transfers and delivers the same toNapoleon. The note is subsequentlydishonored by Richard Clinton. MayNapoleon proceed against Richard Clintonfor the note?

A: Yes. Richard Clinton is liable to Napoleonunder the promissory note. The note made byRichard Clinton is a bearer instrument. Despitespecial indorsement made by Aurora Pagethereon, the note remained a bearerInstrument and can be negotiated by meredelivery. When X delivered and transferredthe note to Napoleon, the latter became aholder thereof. As such holder, Napoleon canproceed against Richard Clinton. (1998 BarQuestion)

Q: Where indorsement should be placed?

A:1. On the instrument itself; or2. On a separate piece of paper

attached to the instrument called"allonge". (Sec. 31)

Q: Can there be partial indorsement?

A:GR: No. Indorsement must be of tile entireinstrument. (Sec. 32)

XPN: When there is partial payment.

Q: What is the effect when an orderinstrument was delivered withoutindorsement?

A: The transfer operates as an ordinaryassignment (Sec. 49). Without theindorsement, the transferee would not be theholder of the instrument. When indorsement issubsequently obtained, the transfer operatesas a negotiation only as of the time thenegotiation is actually made.

Note: The transferee has the right to requirethe transferor to indorse the instrument.

Q: What is the effect when a negotiableinstrument is merely assigned?

A: The transferee does not become a holderand he merely steps into the shoes of thetransferor. Any defense available against thetransferor is available against the transferee.(Salas v. CA, G.R. No. 76788 Jan. 22, 1990)

Q: What is an indorsement?

A: Indorsement is the writing of the name ofthe indorser on the instrument with the intentto transfer title to the same.

Q: What are the different kinds ofIndorsement?

A:1. Special (Sec. 34) - Specifies the

person to whom or to whose orderthe instrument is to be payable. Alsoknown as specific indorsement orindorsement in full.

2. Blank (Sec. 34) - Specifies noindorsee.a. Instrument is payable to bearer

and may be negotiated by. delivery;

b. May be converted to specialindorsement by writing over thesignature of the indorser in blankany contract consistent with thecharacter of indorsement (Sec.35).

3. Absolute - The indorser binds himselfto pay:a. upon no other condition than

failure of prior parties to do sob. upon due notice to him of such

failure

4. Conditional - Right of the indorsee ismade to depend on the happening ofa contingent event. Party required to

UNIVERSITY OF SANTO TOMAS ~""""'.

Pacu{taa de !.Dereclio CiviC .•. 99


pay may disregard the conditions(Sec. 39)

the indorsement which fact wasknown to him.

5. Restrictive - When the instrument:a. Prohibits further negotiation of

the instrument (it destroys thenegotiability of the instrument);

b. Constitutes the indorsee theagent of the indorser; (Sec. 36)

c. Vests the title in the indorsee intrust for or to the use of somepersons. But mere absence ofwords implying power tonegotiate does not make aninstrument restrictive.

6. Qualified (Sec. 34) - constitutes theindorser a mere assignor of the title tothe instrument. It is made by addingto the indorser's signature words like,without recourse (serves as anordinary equitable assignment) (Sec.38)

I

7. Joint - indorsement made payable to2 or more persons who are notpartners. (Sec. 41)

Note: All of them must indorse unlessthe one indorsing has authority toindorse for the others

6. Irregular (Sec. 64) - A person who,not otherwise a party to aninstrument, places thereon hissignature in blank before delivery.

7. Facultative Indorser waivespresentment and notice of dishonor,enlarging his liability and hisindorsement.

8. Successive - indorsement to twopersons in succession.

Note: Any of them can indorse to effectnegotiation of the instrument.

Q; What is the effect of a qualifiedindorsement:

A; A qualified indorsee has limited liability. Heis liable only if the instrument is dishonored bynon-acceptance or non-payment due to:

1. Forgery;2. Lack of good title on the part of the

indorser;3. Lack of capacity to indorse on the

part of the prior parties; or4. The fact that at the time of the

indorsement, the instrument wasvalueless or not valid at the time of

100

Note: A qualified indorser guarantess only thegenuineness of the instrument but does notguarantee its payment.

Q: What are the rights of an indorsee in arestrictive indorsement?

A:1. To receive payment of the instrument;2. To bring any action thereon that the

indorser could bring; and3. To transfer his rights as such

indorsee, where the form of theindorsement authorizes him to do so.(Sec. 37)

Q: What do subsequent indorsees acquire.under the restrictive indorsement?

A: All subsequent indorsees acquire only thetitle of the 151 indorsee. (Sec. 37)Q; When there is a joint indorsement, whomust indorse?

A;GR: All must indorse in order for thetransaction to operate as a neqotiatlon.(Sec. 41)

XPN:1. Payees or indorsees are partners;

andPayee or indorsee indorsing hasauthority to indorse for the others.

2.

Q: What are the instances where theindorsements served only as equitableassignment?

A:1. Indorsement of part of the amount of

the instrument. (Sec. 32)2. In cases of qualified indorsement.

(Sec. 38)3. Conditional Indorsement. (Sec. 39)4. Transfer of an instrument payable to

order by mere delivery. (Sec. 49)


Q: When can an indorsement be strickenout?

A: The holder may, at any time, strike out anyindorsement which is not necessary to his title.Indorser whose indorsement is struck out, andall indorsers subsequent to him, are relievedfrom liability on the instrument. (Sec. 48)

Q: When can a prior party negotiate aninstrument?

A: Where an instrument is negotiated back tohim. But, he is not entitled to enforce paymentthereof against any intervening party to whomhe was personally liable. (Sec. 50)

Q: What are the limitations torenegotiation?

A: In the following cases, a prior party cannotfurther negotiate the instrument:

1. Where it is payable to the order of athird person, and it has been paidby the drawer (Sec. 121[aJ);

2. Where it was made or accepted foraccommodation and has been paidby the party accomodated (Sec.121[b));

3. In other cases, where the instrumentis discharqed when acquired by aprior party. (Sec. 119)

Q: Who is a holder?

A: The payee or indorsee of a bill or note whois in possession of it or the bearer thereof.(Sec. 191)

Q: What are the classes of holders?

A:1. Holders in general (Simple Holders)

(Sec. 51);2. Holders for value (Sec. 26);3. Holders in due course (Secs. 52, 57).

Q: What are the rights of a holder ingeneral?

A:1. Right to sue2. Right to receive payment (Sec. 51)

Note: If the payment is in due course,the instrument is discharged.

Q: What constitutes payment in duecourse?

A: When made:1. At or after the maturity of the

instrument2. To the holder thereof, in good faith

and without notice that his title isdefective (Sec. 88)

Q: Who is a holder in due course (HIOC)?

A: He who takes a negotiable instrument:

1. That is complete and regular upon itsface;

Note: Absence of the requireddocumentary stamp will not make theinstrument incomplete. (It is not arequisite of negotiability under Sec. 1and it is not a material particular underSec. 125)

2. Became the holder before it wasoverdue, and without notice that ithas been previously dishonored, ifsuch was the fact;

Note: if the instruments is payable ondemand, the date of maturity isdetermined by the date of presentment,which must be made within areasonable time after its issue, if it is anote, or after the last negotiationthereof, if it is a bill of exchange. (Secs.71 and 143{aJ)

Where transferee receives notice of anyinfirmity in the instrument of defect inthe title of the person negotiating thesame before he had paid the fullamount agreed to be paid, he will bedeemed a holder in due course only tothe extent of the amount therefor paidby him. (Sec. 54)

3. Took it in good faith and for value;

4. At the time it was negotiated to him,he had no notice of any infirmity inthe instrument or defect in the title ofthe person negotiating it. (Sec. 52)

Note: Knowledge of the agent isconstructive knowledge to the principal.


Pacu(taa de CDerecfio Civit ~i·101

Q: Who is deemed to be a HIDC?I


A:GR: Every holder is deemed prima facie tobe a holder in due course;

XPN: When it is shown that the title of anyperson who has negotiated the instrumentwas defective. (Sec. 59)

Q: Larry issued a negotiabie promissorynote to Evelyn and ·authorized the latter tofill up the amount in blank with his loanaccount in the sum of P1,OOO. However,Evelyn inserted P5,OOOin violation of theinstruction. She negotiated the note toJulie who had knowledge of the infirmity.Julie in turn negotiated said note to Devifor value and who had no knowledge of theinfirmity.

1. Can Devi enforce the note againstLarry and if she can, for howmuch? Explain.

2. Supposing Devi indorses the noteto Baby for value but who hasknowledge of the infirmity, can thelatter enforce the note againstLarry?

A:1. Yes. Devi is a holder in due course

and the breach of trust committed byEvelyn cannot be set up by Larryagainst Devi because it is a personaldefense. As a holder in due course,Devi is not subject to such personaldefense.

2. Yes. Baby is not a holder in duecourse because she has knowledgeof the breach of trust committed byEvelyn against Larry which is just apersonal defense. But having takenthe instrument from Devi, a holder indue course, Baby has all the rights ofa holder in due course. Baby did notparticipate in the breach of trustcommitted by Evelyn who filled theblank but filled up the instrument withP5,000 instead of Pi ,000 asinstructed by Larry. (Sec. 58) (1993Bar Question)

102

Q: Can a payee be a HIDC?

A: There can be no doubt that a properinterpretation of NIL as a whole leads to theconclusion that a payee may be a holder indue course under the circumstances in whichhe meets the requirments of Sec. 52. (DeOcampo v. Gatchalian, GR. No. L-15126,Nov. 30, 1961)

Note: There is a contrary view on the matter,wherein it is contended that under subsection 4 ofSec. 52, the holder in due course must haveacquired the instrument through negotiation andan instrument is issued and not negotiated to apayee.

Q: Can a drawee be a HIDC?

A: A drawee does not by paying a bill becomea holder in due course since a holder refers toone who has taken the instrument as itpassess along in the course of negotiation;whereas a drawee, upon aceptance andpayment, strips the instrument of negotiabilityand reduces it to a mere voucher or proof ofpayment.

Q: What are the rights of a HIDC?

A:1. Hold the instrument free from

defenses available to parties amongthemselves;

2. Hold the instrument free from anydefect of title of prior parties;

3. Receive payment;

4. Enforce payment of the instrument forthe full amount thereof against allparties liable; and

5. Sue.

Q: Who is a holder not in due course(NHIC)?

A:1. One who became a holder of an

instrument without any of therequisites under Sec. 52;

2. One to whom an instrument payableon demand is negotiated after anunreasonable length of time fromissue. (Sec. 53)

UST GOLDEN NOTES 20'lO

Q: What are the rights of a NHIC?

A: The rights similar to an assignee. The otherrights are:

1. He may receive payment and if thepayment is in due course, theinstrument is discharged

2. He is entitled to the instrument butholds it subject to the same defensesas if it were non-negotiable

3. He may sue on the instrument in hisown name. (Sec. 5)

Q: What are the rights of a holder througha HIDC?

A: He has all the rights of 3 HIDC from whomhe derives his title in respect of all parties priorto such holder, provided he is not himself aparty to any fraud or illeqality- affecting theinstrument. (Sec. 58)

Note: A payee or indorsee whose title isdefective cannot better it by selling the instrumentto a HIDC and buying it again. Similarly, a HIDCwho negotiates the instrument to a holder otherthat one in due course and then reacquires it willhold the instrument as a holder in due course.

Q: How does the "shelter principle"embodied in the Negotiable InstrumentsLaw operate to give the rights of a HIDC toa holder who does not have the status of aHIDC? Briefly explain.

A: Under the shelter principle, a person whodoes not qualify as a holder in due course can,nonetheless, acquire the rights and privilegesof a holder in due course if he derives his titleto the instrument through a holder in duecourse. However, a person who previouslyheld the instrument cannot improve hisposition by later reacquiring it from a holder indue course if tile former holder was a party tofraud or illegal activity affecting the instrumentor had notice of a claim or defense against theinstrument. (2008 Bar Question)

Q: When is the title of a person (transferor)defective?

A:1. In its acquisition - When he obtained

the instrument,. or any signature thereto,by fraud, duress, or force and fear, orother unlawful means, or for an illegalconsideration.

2. In the negotiation - When he negotiatesit in breach of faith, or under suchcircumstances as amount to a fraud.(Sec. 55)

Q: What constitutes notice of defect (on thetransferee) ?

A: The person to whom it is negotiated musthave had actual knowledge of such facts orknowledge of other facts that his action intaking the instrument amounted to bad faith.(Sec. 56)

Q: What is the effect of notice before thefull amount is paid?

A: Transferee will be deemed a holder in duecourse only to the extent of the amounttherefore paid by him. (Sec. 54)

Q: The drawer delivered a check to EJ, anagent, 'for safekeeping only and for thepurpose of evidencing his sincere intentionto buy a car owned by RC, who is EJ'sprincipal. EJ did not return the check anddelivered it as payment for his hospitalexpenses to MB Clinic. Does thepresumption that every holder is presumedto be HIDC apply to MB Clinic?

A: No, the rule that a possessor of theinstrument is prima facie a HIDC does notapply to MB Clinic because there was a defectin the title of the holder, because theinstrument was not payable to EJ or to bearer,the drawer had no account with the payee, EJdid not show or tell the payee why he had thecheck in his possession and why he was usingit for the payment of his own account. Asholder's title was defective or suspicious, itcannot be stated that the payee acquired thecheck without knowledge of said defect in

. holder's title, the presumption that it is a HIDCdoes not exist. (De Ocampo & Co. v.Gatchalian, G.R. No. L-15126, Nov. 30, 1961)

Q: NSW received three post-dated andcrossed checks issued on the conditionthat the drawer on due date would makesufficient deposits to cover the checks.NSW did not wait for the maturity andindorsed the check to an investmenthouse, which deposited the same. Thechecks bounced. Is the investment house aholder in due course?

A: No, that the checks had been issuedsubject to the condition that the drawer on duedate would make the back up deposit for saidcheck which condition was not made,constitutes a good defense against the holderwho is not a HIDC, particularly when the checkwas crossed. The crossing of a check serves awarning to the holder that the check had beenissued for a definite purpose sothat he mustinquire if received the check pursuant to that

UNIVERSITY OF SANTO TOMAS t~7-".103Pacu(tad de (])erecfto CiviC ..,

NEGOTIABLE INSTRUMENTS LA \XII

purpose, otherwise, he is not a holder in duecourse. (State Investment House v. lAC, GR.No. 72764, July 13, 1989)

Q: What is the effect of possession of anegotiable instrument after presentmentand dishonor? .

A: It does not make the possessor a holderfor value within the meaning of the law. It givesrise to no liability on .the part of the maker ordrawer or indorsers. (STELCO MarketingCorp. vs. CA, G.R. No. 96160, June 17, 1992)

Q: Is a corporation to which four crossedchecks were indorsed by the payeecorporation a holder in due course andhence entitled to recover the amount of thechecks when the same had beendishonored for the reason of "paymentstopped"?

A: The checks were crossed checks andspecifically indorsed for deposit to payee'saccount only. From the beginning, thecorporation was aware of the fact that thechecks were all for deposit only to payee'saccount. Clearly then, it could not beconsidered a HlDC. However, it does notfollow as a legal proposition that simplybecause it was not a HIDC for having takenthe instruments in question, wi notice that thesame was for deposit only, that it wasaltogether precluded from recovering on theinstrument. The disadvantage in not being aHIDC is that the negotiable instrument issubject to defenses as if it were non-negotiable. (Atrium Management Corp. v. CA,G.R. No. 109491, Feb. 28, 2001)

. ,':, . LIABILITIES OF: THE PARTIES

Q: Who are primarily liable?

A:1. Maker - in a promissory note2. Acceptor - in a bill of exchange

Q: Who are secondarily liable?

A:1. Drawer2. Indorser

104

Q: To whom presentment made?

A:1. Promissory note - maker2. Bill of exchange - drawee/acceptor

Q: What are the liablities of those primarilyliable? .

A:1. Maker of a PN

a. Engages to pay according to thetenor of the instrument; and

b. Admits the existence of the payeeand his then capacity to indorse.(Sec. 60)

Consequently, maker is precludedfrom setting-up these defenses:

a. That payee is a fictitious person;b. That payee was insane, a minor,

or a corporation acting ultra vires.

Note: Liability of the maker is primary andunconditional.

2. Acceptor

a. Engages to pay according to thetenor of his acceptance;

b. Admits the existence of thedrawer, the genuineness of hissignature and his capacity andauthority to draw the instrument;and

c. Admits the existence of the payeeand his then capacity to indorse.(Sec. 62)

Consequently, acceptor is precludedfrom setting-up these defenses:

a. That the drawer is non-existent orfictitious;

b. That the drawer's signature is aforgery; and

c. That there is no considerationbetween him and the drawer

Note: Drawee does not become liable untilhe accepts the instrument in which case hebecomes an acceptor.

UST GOLDEN NOTES2010

Q: What are words which depict the natureof the liability of the makers/drawers?

A: An instrument which begins with "I", or"Either of us" promise to pay, when signed bytwo or more persons, makes them solidarilyliable. Also, the phrase "joint and several"binds the makers jointly and individually to thepayee so that all may be sued together for itsenforcement, or the creditor may select one ormore as the object of the suit. (AstraElectronics Corp. v. Phil. Export and ForeignLoan Guarantee Corporation, G.R. No. 96073,Dec. 21, 2003)Q: On the right bottom margin of a PNappeared the signature of the corporation'spresident and treasurer above their printednames with the phrase "and in his personalcapacity." The corporation failed to pay itsobligation. Are the officers liable?

A: Yes, persons who write their names on theface of promissory notes are makers and liableas such. The officers are co-makers and assuch, they cannot escape liability arisingtherefrom. (Republic Planters Bank v. CA,G.R.No. 93073, Dec. 21, 199~

Q: X draws a check against his currentaccount with Bonifacio Bank in favor of B.Although X does not have sufficient funds,the bank honors the check when it ispresented for payment. Apparently, X hasconspired with the bank's bookkeeper sothat his ledger card would show that he stillhas sufficient funds.

The bank files an action for recovery of theamount paid to B because the checkpresented has no sufficient funds. Decidethe case.

A: The bank cannot recover the amount paidto B for the check. When the bank honored thecheck, it became an acceptor. As acceptor, thebank became primarily and directly liable tothe payee/holder B.

The recourse of the bank should be against Xand its bookkeeper who conspired to make X'sledger show that he has sufficient funds.

Alternative Answer:The bank can recover from B. This is solutioindebiti because there is payment by the bankto B when such payment is not due. The checkissued by X to B as payee had no sufficientfunds. (1998 Bar Question)


Pacu(taa de iJ)erecfio Civ i]~i~105

NEGOTIABLE INSTRUMENTS LA \"XI

Q: What are the liabilities of those secondarily liable?

A:ABSOLUTE LIABILITY LIMITED LIABILITY

1. Qualified Indorser warrants that:a. Instrument is genuine;

1. Drawer of a BOE warrants: b. he has good title to it;a. the existence of payee and his then c. capacity to contract of all prior

capacity to indorse; parties; andb. that the instrument will be accepted or d. no knowledge of any fact which

paid by the party primarily liable; and would impair the validity of thec. that if dishonored, he pay the party instrument. (Sec.65)

entitled to be paid. (Sec. 61)Note: He is liable to all parties who derive theirtitle through his indorsement.

2. General indorsera. Warrants that:

i. Instrument is genuine;ii. He had good title to it; 2. Person negotiating by delivery - Sameiii. All prior parties had capacity to warranties as a qualified indorser. But

contract; unlike a qualified indorser, a personiv. Instrument, at the time of negotiating by mere delivery is liable only

indorsement, was valid and to his immediate transferee. (par. 2, Sec.subsisting; 65)

b. On due presentment, it shall beaccepted or paid, or both according to Note: Person negotiating by mere delivery and aits tenor; qualified indorser's secondary liability is limited,

c. if the instrument is dishonored and the namely, to their warrantiesnecessary proceedings on dishonor beduly taken, he will pay the holder. (Sec.66)-

3. Irregular indorser .

a. In an order instrument, liable to thepayee and all subsequent parties

b. If bearer instrument or payable to orderof maker or drawer, liable to all partiessubsequent to the maker or drawer

c. If he signs for accomodation of thepayee, liable to all parties subsequentto payee. (Sec. 64j

Q: Distinguish a drawer from a maker.

A:,.; :DRAWER' "- .MAKER

I Issues a BOE Issues a PNOnly secondarily Primarily liable! liable

Can limit his liabilityby putting "without Cannot limit liability

recourse"

Q: What are the conditions in order forpersons secondarily liable in a BOE(drawer and indorsers) to become liable?

A:1. The bill is presented for acceptance

(Sec. 143);2. The bill is dishonored by non-

acceptance or non-payment (Sec.70); and

3. The necessary proceedings fordishonor are duly taken (Sec. 152).

106


Q: To whom is the drawer secondarilyliable?

A:1. Tile holder;2. Any of tile indorsers intervening

between holder and drawer who iscompelled to pay by tile holder. tiledrawer will be liable to that indorserso compelled to pay.

Q: Who is deemed an indorser?

A: A person placing his signature upon aninstrument otherwise than as maker oracceptor, is deemed to be an indorser, unlesshe clearly indicates by appropriate words Ilisintention to be bound in some other capacity.(Sec. 63)

Note: A person who places his indorsement onan instrument negotiable by delivery incurs allliabilities of an indorser. (Sec. 67)

Q: Distinguish an irregular indorser from ageneral indorser.

A: An irregular indorser, not otherwise a partyto tile instrument, places his signature thereonin blank before delivery to add credit thereto. Ageneral indorser is a regular party to tileinstrument like a maker, drawer or acceptorand he signs upon delivery of tile instrument.Wilile an irregular indorser signs foraccommodation, a regular indorser signs forvaluable consideration. (Sec. 64[2]) (2005 BarQuestion)

Q: Who is a qualified indorser?

A: A qualified indorser is a person whoindorses without recourse. (Sec. 65)

Q: Does an indorser warrant the solvencyof prior parties?

A: A general indorser warrants tile solvency ofprior parties, while a qualified indorser doesnot.

Q: A issued a promissory note payable toB or bearer. A delivered the note to B. Bindorsed tile note to C. C placed the note inhis drawer, which was stolen by the janitorX. X indorsed the note to 0 by forging C'ssignature. 0 indorsed the note to E who inturn delivered the note to F, a holder in duecourse, without indorsement. Discuss theindividual liabilities to F of A, Band C.

A: A is liable to F. As the maker of thepromissory note, A is directly or primarily liable

to F, who is a holder in due course. Despitethe presence of the special indorsements onthe note, these do not detract from the fact thata bearer instrument is always negotiable bymere delivery, until it is indorsed restrictively"for deposit only."

B, as a general endorser, is liable to Fsecondarily, and warrants that the instrumentis genuine and in all respects what it purportsto be; that he has good title to it; that all priorparties had capacity to contract; that he has noknowledge of any fact which would impair thevalidity of the instrument or render it valueless;that at the time of his indorsement, theinstrument is valid and subsisting; and that ondue presentment, it shall be accepted or paid,or both, according to its tenor, and that if, it bedishonored and the necessary proceedings ondishonor be duly taken, he will pay the amountthereof to the holder, or to any subsequentindorser who may be compelled to pay.

C is not liable to F since the latter cannot tracehis title to the former. The Signature of C in thesupposed indorsement by him to D was forgedby X. C can raise the defense of forgery sinceit was his signature that was forged. (2001 BarQuestion)

Q: Can a collecting bank debit the accountof the depositor when the checks indorsedto it (bank) were forged?

A: Yes, because the depositor of a check asindorser warrants that it is genuine and in allrespect what it purports to be. Thus, when tilechecks deposited had forged indorsementsand the collecting bank, as a consequence ofsuch forgery, was made to pay the draweebank, the collecting bank can debit the accountof the depositor for his breach of warranty (Jai-Alai Corporation Of The Philippines v. BPI,G.R. No. L-29432, Aug. 6, 1975).

Q: Phebean, the drawer issued a check toJames. James, subsequently indorsed it toTrude. When Trude is about to encash thecheck, the drawee Union Bank refused toencash it due to insufficiency of funds.Trude sued James for payment of money,James alleged that the suit should bedismissed because Phebean is anindispensable party. Does James'argument hold water?

A: No. There is no privity between the drawerand the holder. The drawer is merelysecondarily liable. As indorser, the buyerwarranted that upon due presentment, thechecks were to be accepted or paid, or both,according to their tenor, and that in case they

UN I V E R 5 I TV 0 F 5 ANT 0 TOM A 5 ~~. 107PaCll{taa de CDerecfio Civ i] .• "


were dishonored. she would pay thecorresponding amount. After an instrument isdishonored by non-payment, indorsers ceaseto be merely secondarily liable; they becomeprincipal debtors whose liability becomesidentical to that of the original obligor. (Tuazonv. Heirs of Bartolome Ramos. GR. No.156262, July 14,2005).

Q: Treasury warrants were indorsed by Aand B. These were presented forencashmsnt by PNB. Subsequently, thesewerel dishonored by the Insular Treasurer.Because of the dishonor, PNB applied A'sdeposit in the PNB for payment of thewarrant. Is the application of the deposit ofA properly enforced?

A: No. The general indorser of a negotiableinstrument engages that if it be dishonoredand the necessary proceedings of dishonor beduly taken. he will pay the amount thereof tothe holder. In this connection. it has been heldthat notice of dishonor is necessary in order tocharge an indorser and that the right of actionagainst him does not accrue until the notice isgiven (Gullas v. PNB, GR. No. L-43191. Nov.13. 1935)

Q: What is the order of liability among theindorsers?

A:1. Among themselves - Liable prima

facie in the order in which theyindorse (Sec. 68)

2. To the holder - In any order

Note: Every indorser is liable to all indorserssubsequent to him. but not those indorsers priorto him.

Q: Cannel a indorsed a check to Linas.Paolo stole the check from Linas, forgedthe latter's signature and indorsed it toJohan. Denver Bank encashed the checkupon presentment thereof by Johan. Whois the party liable?

A: The bank is the party liable. It is the primaryduty of the bank to know that the check wasduly indorsed by the original payee and. whereit pays the amount of the checks to a thirdperson who has forged the signature of thepayee. the loss falls on such bank who cashedthe checks. A bank engaged in business isinvested with public interest and it·is its duty topretect its clients and all persons who transactbusinesswith it. (Traders Royal Bank v. RadioPhilippine Network, G.R. No. 138510. Oct. 10.2002)

108

Q: What is the liability of an agent or brokerwho neqotlatas . an instrument withoutindorsement?

A: He incurs all the liabilities prescribed to ageneral indorser unless he discloses the nameof his principal and the fact that he is actingonly as an agent. (Sec. 69)

Note: Parol evidence is not admissible to relievean agent or broker whose endorsement bringshim within the above liability.

PRESENTMENT FOR PAYMENT .Q: What is presentment for payment (PP)?

A: The presentation of an instrument to theperson primarily liable for the purpose ofdemanding and receiving payment.

Q: How should presentment be made?

A:GR: Instrument must be exhibited to theperson from whom payment is demanded;when' paid. it must be delivered to personpaying it. (Sec. 74) .

XPN: When exhibition is excused:1. Debtor does not demand to see the

instrument and refuses payment onsome other grounds; or

2. Instrument is lost or destroyed.Q: What is the liability of a bank paying acertificate of deposit payable to bearerwithout requiring its surrender?

A: The princlple that payment. in order todischarge a debt. must be made to someoneauthorized to receive it. is applicable to thepayment of certificates of deposit. Thus. abank will be protected in making payment tothe holder of a certificate indorsed by thepayee. unless it has notice of the invalidity ofthe indorsement or the holder's want of title.Tile bank remains liable to the holder if it paidthe certificate of deposit payable to bearerwithout requiring its surrender (Far East Bani,& Trust Company v. Querimit. G.R. No.148582. Jan. 16,2002).

Q: AS issued a promissory note forP1,000.00 payable to CD or his order. CDindorsed the note in blank and deliveredthe same to EF. GH stole the note from EFand presented it to AB for payment. Whenasked by AS, GH said CD gave him thenote in payment for two cavans of rice. AStherefore paid GH P1,OOO.OOon the samedate. EF discovered that the note of AB


was not in his possession and he went toAB. It was then that EF found out that ABhad already made payment on the note.Can EF still claim payment from AB? Why?

A: No. EF cannot claim payment from AB. EFis not a holder of the promissory note. Tomake presentment for payment, it is necessaryto exhibit the instrument, which EF cannot dobecause he is not in possession thereof. (2002Bar Question)

Q: When is PP necessary?

A: PP is only necessary to charge personssecondarily liable (Sec. 70). But PP is notnecessary in the following instances:

1. As to drawer, where he has no rightto expect or require that the draweeor acceptor will pay the instrument .(Sec. 79)

2. As to indor.ser where the instrumentwas made or accepted for hisaccommodation and he has noreason to expect that the instrumentwill be paid if presented (Sec. 80)

3. When dispensed with under Sec. 82,such as:a. where, after the exercise of

reasonable diligence,presentment cannot be made;

b. where the drawee is a fictitiousperson;

c. by waiver of presentment,express or implied;

d. when the instrument has beendishonored by non-acceptance

Q: What is the rule if the instrument is, byits terms, payable at a special place (at abank or at an office or at a residence butnot in an unspecified place like ManilaCity)?

A: If he is able and willing to pay it there atmaturity, such ability and willingness areequivalent to a tender of payment upon hispart. (Sec. 70)

Q: PN is the holder of a negotiablepromissory note. The note was originallyissued by.RP to XL as payee. XL indorsedthe note to PN for goods bought by XL. Thenote mentions the place of payment on thespecified maturity date as the office of thecorporate secretary of PX Bank duringbanking hours. On maturity date, RP was atthe aforesaid office ready to pay the notebut PN did not show up. What PN later didwas to sue XL for the face value of thenote, plus interest and costs. Will the suitprosper? Explain.

A: Yes. The suit will prosper as far as the facevalue of the note is concerned, but not withrespect to the interest due subsequent to thematurity of the note and the costs of collection.RP was ready and willing to pay the note atthe specified place of payment on the specifiedmaturity date, but PN did not show up. PN losthis right to recover the interest duesubsequent to the maturity of the note and thecosts of collection. (2000 Bar Question)

Q: What are the requisites for a sufficientPP?A:

1. Made by the holder, or his agent;2. At a reasonable hour on a business

day;3. At a proper place;4. To the person primarily liable, or if he

is absent or inaccessible, to anyperson found at the place where thepresentment is made (Sec. 72)

Note: Where the person/s primarily liable is/are:1. Dead - payment must be made to his

personal representative (Sec. 76)2. Liable as partners and no place of

payment specified - payment may bemade to any of them though there hasbeen a dissolution of the firm (Sec. 77)

3. Several persons, not partners, and noplace of payment is specified - paymentmust be made to all of them (Sec. 78)

Q: Is the bank liable to the payee fordepositing and encashing the crossedchecks to an unauthorized person?

A: The effects of crossing a check relate to themode of its presentment for payment. UnderSec. 72 of the NIL, presentment for payment,to be sufficient, must be made by the holder orby some person authorized to receive on hisbehalf. Who the holder or authorized persondepends on the instruction stated on the faceof the check. The checks here had beencrossed and issued "for payee's account only"This only signifies that the drawers hadintended the same for deposit only by theperson indicated (Associated Bank v. CA, GR.No. 89802, May 7, 1992).


Pacu[tati tie <Derecfio Cioi] ~i·l09

NEGOTIABLE INSTRUMENTS LA \X/

Q: When must presentment for payment bemade?

I~"~';~'I'II=!~I•• 111'11;11;i.];~:.1;~::h"j ~ ~. 11111 ~ ~ IIIGR: On the day it falls due.(Sec. 85)

I XPN: If the due date falls onI a Saturday, presentmentPayable at a

must be made on the nextfixed or Monday.determinablefuture time

Note: If presentment forpayment is made beforematurity; it will not result toa discharge of theinstrument (Sec. 50).

PromissoryWithin a reasonable timenote payable after its issue.on demandWithin a reasonable timeafter the last negotiationthereof (Sec. 71).

Bill ofNote: "Last negotiation"exchangemeans the last transfer forpayable onvalue. Subsequent transfersdemandbetween banks forpurposes of collection arenot negotiations within Sec.71.

Note: Reasonable time is meant not more than 6months from the date of issue. Beyond saidperiod, it is unreasonable time and the checkbecomes stale.

Q: What is the order of preference withregard to the place of presentment?

A:1. Specified place in the instrument;2. Address of the person to make the

payment if given in the instrument;3. Usual place of business or residence

of the person to make the payment;4. Wherever he can be found; or5. At his Last known place of business

or residence (Sec. 73).

Q: When is the delay in makingpresentment excused?

A:1. When caused by circumstances

beyond the control of the holder; and2. Not imputable to his default,

misconduct, or negligence (Sec. 81).

Note: Only the delay in presentment isexcused and not the presentment itself.

110 i Iteam:G$lI.OOi

Hence, as soon as the cause of delay ceasesto operate, presentment must be made withreasonable diligence (Sec. 81).

Q: How must presentment be made wherethe instrument is payable at a bank?

A: Must be made during banking hours,unless the person to make payment has nofunds there to meet it at any time during theday, in which case presentment at any hourbefore the bank is closed on that day issufficient. (Sec. 75)

Q: What is the effect When presentment isnot made?

A: Drawer and the indorsers are dischargedfrom their secondary liability unless suchpresentment is excused.

i . .. . NOTICE OF DISHONOR I

Q: When is a PN considered dishonored?

A:1. If not accepted;2. Not paid when presented; or3. Where presentment is excused,

instrument is overdue and unpaid.(Sec. 83)

Q: What is the liability of personsecondarily liable when instrumentdishonored?

A: After the necessary proceedings fordishonor had been duly taken, an immediateright of recourse to all parties secondarilyliable thereon accrues to the holder. (Sec. 84)

Q: What is notice of dishonor?

A: Given by the holder to the partiessecondarily liable, drawer and each indorser,that the instrument was dishonored by non-payment or . non-acceptance by thedrawee/maker.

Note: Persons primarily liable need not be givennotice of dishonor because they are the oneswho dishonored the instrument.


Q: What are the purposes for requiringnotice of dishonor?

A:1. To inform parties secondarily liable

that the maker or acceptor has failedto meet his engagement.

2. To advise them that they are requiredto make payment.

Q: What is the effect of failure to givenotice of dishonor?

A:GR: Any person to whom such notice is notgiven is discharged, but he will still be liablefor breach of warranties pertaining to theinstrument.

XPN:1. Waiver (Sec. 109)2. Notice is dispensed with (Sec. 112)3. Not necessary to drawer (Sec. 114)4. Not necessary to indorser (Sec. 115)

Q: To whom must notice be given?

A:1. The drawer; or2. His agent (Sec. 97);3. Where party is dead - to a personal

representative or sent to the lastresidence or last place of business ofthe deceased (Sec. 98);

4. When the parties to be notified arepartners - notice to anyone partnerthough there has been a dissolution(Sec. 99);

5. Notice to joint parties who are notpartners must be given to each ofthem (Sec. 100);

6. Where a party has been adjudged abankrupt - to the party himself or tohis trustee or assignee (Sec. 101).

Q: What is the form and contents of anotice of dishonor?

A:1. Oral; or2. In writing3. It may be given by personal delivery,

or by mail (Sec. 96);4. Must contain the following:

a. Description of the instrument;b. Statement that it has been

presented for payment or foracceptance and that it has beendishonored (If protest isnecessary, notice must alsocontain a statement that it hasbeen protested).

c. Statement that the party givingthe notice intends to look for theparty addressed for payment.

Note: A written notice need not be signed, andan insufficient notice may be supplemented orvalidated by verbal communication. Amisdescription of the instrument does not vitiatethe notice unless the party to whom the notice isgiven is in fact misled thereby. (Sec. 95)

Q: Who gives the notice?

A:1. Holder;2. Another in behalf of the holder;3. Any party to the instrument who may

be compelled to pay and who, upontaking it up, would have a right toreimbursement from the party towhom notice is given. (Sec. 90)

Q: Who benefits from the notice given by oron behalf the holder?

A:1. All holders subsequent to the holder

who has given notice; and2. All parties prior to the holder but

subsequent to the party to whomnotice has been given and againstwhom they may have a right ofrecourse (Sec. 92).

Q: Who benefits from the notice given bythe party entitled to give notice?

A:1. The holder; and2. All parties subsequent to the party to

whom notice is given (Sec. 93).

Q: The instrument was dishonored in thehands of the agent. To whom and whenmay he give notice?

A:1. To the parties secondarily liable -

Within the time fixed by Secs. 102-104, and 107, otherwise, they aredischarged;

2. To his principal - The principal mustgive notice to parties secondarilyliable as if he were the holder. (Sec.94)


Pacu{tad de (])erecfio Civif ~.~ 111


Q: When should the notice be given?

A:1. GR:' .As soon as instrument was

dishonored (Sec. 102) - Party isallowed one entire day for thepurpose of giving notice.

XPN: Delay is excused (Sec. 113)

Note: An instrument cannot bedishonored by non-payment until afterthe maturity

2. Parties reside in the same placea. Place of business - Before close

of business hours on the. dayfollowing

b. Residence - Before the usualhours of rest on the day following

c. By mail - Deposited in the postoffice in time to reach him in theusual course on the day following(Sec. 103)

3. Parties reside in different placesa. By mail - Deposited in the post

office in time to go by mail(actual departure in the course ofmail from the post office in whichthe notice was deposited) theday following the day ofdishonor.

b. If no mail - At a convenient hour(of the sender) on that day, bythe next mail thereafter

c. Other than by post office (e.g.personal messenger) - Withinthe time that notice would havebeen received in due course ofmail, if it has been deposited inthe post office within the timespecified in (a) (Sec. 104)

4,. Time of notice to antecedent parties -

'

I Same time for giving notice that theholder has after the dishonor (Sec.107)

Note: Actual receipt of the party within the timespecified by law is sufficient though not sent inthe places specified above. (Sec. 108)

112

Q: What is the effect of lack of notice ofdishonor on the instrument which ispayable in installments?

A:1. No acceleration clause - Failure to

give notice of dishonor on a previousinstallment does not dischargedrawers and indorsers as tosucceeding installments.

2. With acceleration clause - It dependsupon whether the clause is automaticor optional.a. Automatic - failure to give notice

of dishonor as to a previousinstallment will discharge thepersons secondarily liable as tothe succeeding installments;

b. Optional - if not exercised, therule would be the same as ifthere is no acceleration clause. Ifexercised, the rule would be thesame as if the installmentcontains an automaticacceleration clause. (TownSavings Bank v. CA, G.R. No.106011, June 17,1993)

Q: When is notice of dishonor notnecessary?

A:1. Waiver of notice (Sec. 109);2. Waiver of protest (Sec. 111);3. When after due diligence, notice

cannot be given (Sec. 112);4. Drawer in cases under Sec. 114;5. Indorser in cases under Sec. 115;

and6. Where due notice of dishonor by non-

acceptance has been given (notice ofdishonor by non-payment notnecessary) (Sec. 116).

Q: When may waiver of notice be given?

A:1: Before the time of giving notice has

arrived; or2. After the omission to give due notice.

(Sec. 109)

Q: What are the ways to give a waiver ofnotice?

A: It can either be:1. Express; or2. Implied (e.g. Payment by an indorser

after he learns of the default of themaker admission of liability afterdishonor). (Sec. 109)


Q: Who are affected by the waiver ofnotice?

A:1. All parties (if embodied on the face of

the instrument); or2. Particular indorser (if written above

the signature of such indorser) (Sec.110).

Q: With regard to the drawer, when can anotice of dishonor be dispensed with?

A:1. When drawer and drawee is the

same person;2. Drawee is fictitious or does not have

the capacity to contract;3. Drawer is person to whom the

instrument is presented for payment(he is the one who dishonored theinstrument);

4. Drawer has no right to expect orrequire that the drawee or acceptorwill honor the instrument.

5. Drawer has countermanded thepayment (e.g. stop payment order)(Sec. 114)

Q: HA issued to AV, as security for piecesof jewelry to be sold on commission basis,2 post-dated checks. Thereafter, the AVnegotiated the check to TQ. HA failed tosell the jewelry, so she returned them to AVbefore the maturity of the checks. As thechecks can no longer be returned, HAwithdrew all her funds from the draweebank. After dishonour, HA contends thatthe holder failed to give her a notice ofdishonor. Is notice of dishonor necessaryin this case?

A: After withdrawing her funds, HA could nothave expected her checks to be honored. In .other words, she was responsible for thedishonor of her checks, hence, there was noneed to serve her notice of dishonor. (StateInvestment House, Inc. v. CA, GR. No.101163, Jan. 11, 1993)

Q: With regard· to the indorser, when is itnot necessary to give a notice of dishonor?

A:1. Drawee is fictitious or has no

capacity to contract, and indorser wasaware of these facts at the time heindorsed the instrument;

2. Indorser is person to whom theinstrument is presented for payment;or

3. Instrument was made or accepted forhis accommodation (Sec. 115)

Q: What is the effect of omission of aprevious holder to give notice of dishonorby non-acceptance?

A: It does not prejudice the rights of a holderin due course subsequent to the omission topresent the instrument to the drawee foracceptance and notify the drawer andindorsers if acceptance is refused. (Sec. 117)

. DISCHARGE' ,," , <:\~ ,Q: What is discharge?

A: It is the release of all parties, whetherprimary or secondary, from the obligationsarising thereunder. It renders tile instrumentwithout force and effect, and consequently, itcan no longer be negotiated.

Q: What are the methods for discharge ofinstrument?

A:1. Payment by principal debtor:

a. By or on behalf of principaldebtor

b. At or after its maturityc. To the holder thereofd. In good faith and without notice

that the holder's title is defective2. Payment byaccommodated party3. Intentional cancellation of instrument

by the holder (by expressly stating itin the instrument or when theinstrument is torn up, burned ordestroyed)

4. Any act which discharges a simplecontract for the payment of moneyunder Art. 1231 of the NCCspecifically remission, novation, andmerger.

Note: Loss of the negotiableinstrument will not extinguish liability;compensation is not available so longas an obligation is evidenced by anegotiable instrument. (CommercialLaw Review, Villanueva, 200ged)

I

5. Reacquisition by principal debtor inhis own right. Reacquisition must be:a. By the principal debtorb. In his own rightc. At or after date of maturity

(instrument is discharged; ifmade before, it may berenegotiated) (Sec. 119).


Pacu[taa de (])erecfio Civil ~.~ 113

NEGOTIABLE INSTRUMENTS LA \'II

Q: What are the methods of discharge ofsecondary parties?

Q: What are the effects of renunciation?

A:1. Any act which discharges the

instrument;2. Intentional cancellation of his

signature by the holder;3. Discharge of prior party which may be

made when signature is stricken out4. Valid tender of payment by a prior

party;5. Release of the principal debtor,

unless holder expressly reserves hisright of recourse against the saidsubsequent parties

6. Extension of time of payment, unless:a. Extension is consented to by

such partyb. Holder expressly reserves his

right of recourse against suchparty (Sec. 120).

Q: What are the effects of payment bypersons secondarily liable?

A:1. Instrument is not discharged;2. It only cancels his own liability and

that of the parties subsequent to him;31 GR: Instrument may be renegotiated;

XPN:a. Where it is payable to the order

of a third person, and has beenpaid by the drawer; and

b. Where it is paid by theaccommodated party

Note: (a) and (b) has the sameeffect as payment by the partyprimarily liable.

4. Person paying is remitted to hisformer rights (as regards priorparties) and he may strike out hisown and all subsequentindorsements. (Sec. 121)

Q: What is renunciation?

A: The act of surrendering a claim or rightwith or without recompense (a personaldefense).

Q: How is renunciation by holder made?

A:1. Must be written;2. If oral, the instrument must be

surrendered to the person primarilyliable. (Sec. 122)

114

A:1. Made in favor of principal debtor

made at or after the maturity (madeabsolutely and unconditionally) of theinstrument discharges theinstrument (Sec. 122);

2. Made in favor of a secondary partymay be made by the holder before, ator after maturity - discharges only thesecondary parties and all subsequentto him (Sec. 122);

3. Renunciation does not affect therights of a holder in due coursewithout notice. (Sec. 120)

Q: What is the rule regarding cancellation?

A: It is presumed intentional. It is inoperative ifunintentional, or under a mistake or without theauthority of the holder. But where aninstrument or any signature appears to havebeen cancelled, burden of proof lies on theparty who alleges that the cancellation wasmade unintentionally, or under a mistake orwithout authority. (Sec. 123).

Q: What is a material alteration?

A: Any change in the instrument which affectsor changes the liability of the parties in anyway.

Q: What constitutes a material alteration?

A: Any alteration which changes the:1. Date;2. Sum payable, either principal or

interest;3. Time or place of payment;4. Number or relations of the parties;5. Medium or currency in which

payment is to be made; or5. Adds a place of payment when no

place of payment is specified, or anyother change or addition which altersthe effect of the instrument in anyrespect. (Sec. 125)

Note: The change in the date of indorsement isnot material where the date is not necessary to fixthe maturity of the instrument.


Q: What is the effect of material alterationwhich is not apparent?

A:1. Avoids the instrument except against:

a. A party who has made thealteration;

b. A party who authorized orassented to the alteration; or

c. The indorsers who indorsedsubsequent to the alteration(because of their warranties)

2. If negotiated to a HIDC, he mayenforce the payment thereofaccording to its original tenor againstthe party prior to the alteration. Hemay also enforce payment thereofagainst the party responsible for thealteration for the altered amount.

3. If negotiated to a NHIDC, he cannotenforce payment against the partyprior to the alteration. He mayhowever enforce payment accordingto the altered tenor from the personwho caused the alteration and fromthe indorsers. (Sec. 124)

Q: A check for P50,OOO.OO was drawnagainst drawee bank and made payable toXYZ Marketing or order. The check wasdeposited with payee's account at ABCBank which then sent the check forclearing to drawee bank.

Drawee bank refused to honor the check onground that the serial number thereof hadbeen altered.

XYZ Marketing sued drawee bank.

1. Is it proper for the drawee bank todishonor the check for the reason.that it had been altered? Explain.

2. In instant suit, drawee bankcontended that XYZ Marketing aspayee could not sue the draweebank as there was no privitybetween them. Drawee theorizedthat there was no basis to make itliable for the check. Is thiscontention correct? Explain.

A:1. No. An alteration is said to be

material if it alters the effect of theinstrument. It means an unauthorizedchange in an instrument that purportsto modify in any respect the obligationof a party or an unauthorized additionof words or numbers or other change

to an incomplete instrument relatingto the obligation of a party. Thealteration of the serial number of acheck did not change the relationsbetween the parties nor the effect ofthe instrument. Hence, the alterationon the serial number of a check is nota material alteration. (InternationalCorporate Bank VS. CA, GR No.141968, Feb. 12, 2001)

2. Yes. As a general rule, the drawee isnot liable under the check becausethere is no privity of contract betweenXYZ Marketing, as payee, and ABCBank as the drawee bank. However,if the action taken by the bank is anabuse of right which caused damagenot only to the issuer of the check butalso to the payee, the payee has acause of action under quasi-delict.(1999 Bar Question)

. BILL OF·EXCHANGE . , .

Q: What is a bill of exchange (BOE)?

A: It is an unconditional order in writingaddressed by one person to another, Signedby the person giving it, requiring the person towhom it is adressed to pay on demand or at afixed or determinable future time a sum certainin money to order or bearer. (Sec. 126)

Note: A bill of itself does not operate as anassignment of the funds in the hands of thedrawee available for the payment thereof, and thedrawee is not liable on the bill unless and until heaccepts the same. (Sec. 127)

Q: What are tile types of BOE:

A:1. Draft - It is drawn by a bank, issued

at the solicitation of a stranger whopurchases and pays for it. It is anorder for payment of money.

2. Trade acceptance - It is drawn by theseller on the buyer of goods sold andaccepted by such purchaser bysigning it as a drawee.

3. Banker's acceptance - The acceptoris a bank engaged in the business ofgranting banker's acceptance credit.It is lending its credit to the buyer.

4. Treasury warrants - It bears on itsface an order for payment out of aparticular fund and is notunconditional. It is not a negotiableinstrument.

5. Money order - Drawn by one postoffice upon another post office for an

UNIVERSITY OF SANTO TOMAS ''''''''-'.115Pacu(tad de !J)erecno Civif .•.


amount of money deposited at thefirst office by the person purchasingthe money order, and payable at thesecond office to the payee. Therestrictions and limitations imposedon money orders makes it notnegotiable. .

6. Certificate of deposit - A writtenacknowledgment by a bank of depositpayable to the depositor, bearer ororder.

7. Bonds - A promise, under seal, topay money.

8. Bank notes - PN of issuing bankpayable to bearer on demand andintended to circulate as money.

9. Due bills - An instrument where oneperson acknowledges hisindebtedness to another. (Villanueva,Commercial Law Reviewer, 2009 ed.)

Q: When maya bill be treated as a PN atthe option of the holder?

A:1. If the drawer and the drawee are the

same2. If the drawee is a fictitious person3. If the drawee is incapacitated to

contract (Sec. 130)

Q: What is the fictitious-payee rule?

A: When the payee is fictitious or not intendedto be the true recipient of the proceeds of theBOE, the BOE is considered as a bearerinstrument and as such it does not requireindorsement to be validly negotiated. It isnegotiable by mere delivery. On the otherhand, if a BOE is payable to a specified payee,it is an order instrument which requiresindorsement from the payee or holder before itmay be validly negotiated but it maynevertheless be considered as a bearerinstrument if it is payable to the order of afictitious or non- existing person, and such factis known to. the person making it so payable.

. Thus, checks issued to "Prinsipe Abante" or"Si Malakas at si Maganda," who are wellknown characters in Philippine mythology, arebearer' instruments because the namedpayees are fictitious and non-existent. (PNB v.Rodriguez, GR. No. 170325, Sept. 26, 2008)

116

Q: May a BOE addressed to two or moredrawees?

A: A bill may be addressed to two or moredrawees jointly, whether they are partners ornot, but not to two or more drawees in thealternative or in succession. (Sec. 128)

ACCEPTANCEQ: What is acceptance of a bill?

A: A Signification by the drawee of his assentto the order of the drawer (Sec. 132)

Q: What is the effect of acceptance?

A: Upon acceptance, the bill, in effectbecomes a note. The drawee who therebybecomes an acceptor assumes the liability ofthe maker (which is primary liability) and thedrawer, that of the first indorser.

Q: What are the requisites for acceptance?

A:1. In writing, except . constructive

acceptance and to a foreign billpayable in another state (unless theother state requires for writtenacceptance);

2. Signed by the drawee (without it, heis not liable);

3. Must express a promise to paymoney (not goods); and

4. Delivered to the holder (beforedelivery or notification, acceptor mayrevoke or cancel his acceptance).

Q: What is the time allowed for the draweeto make the acceptance?

A: The drawer has 24 hours afterpresentment to decide whether or not he willaccept the bill. The acceptance, if given, datesas of the day of presentation. (Sec. 136)

Note: Drawee bank is not entitled to 24 hours todecide whether or not to pay a check since acheck is presented for payment, not acceptance.

Q: What are the kinds of acceptance?

A:1. General Assents without

qualification to the order of the drawer(Sec. 139).

. Note: A holder may refuse to accept aqualified acceptance and if he does notobtain an unqualified acceptance, he


may treat the bill as dishonored by non-acceptance.

a. Qualified - An acceptance which inexpress terms varies the effect ofthe bill as drawn (Sec. 139).

b. Conditional - makes payment bythe acceptor dependent on thefulfillment of a condition thereinstated.

c. Partial - an acceptance to pay partonly of the amount for which thebill is drawn.

d. Local - an acceptance to pay onlyat a particular place.

e. Qualified as to timef. The acceptance of some one or

more of the drawees but not of all.(Sec. 141)

2. Constructive/implieda. Drawee to whom the bill is

delivered for acceptancedestroys it; or

b. Drawee refuses, within 24 hoursafter such delivery, or within suchtime as is given him, to return thebill accepted or non-accepted

3. Extrinsic - the acceptance is written.on a paper other than the bill itself. Tobe binding upon the acceptor:a. Acceptance must be shown to

the person to whom theinstrument is negotiated; and

b. Such person must take the billfor value on the faith of suchacceptance (Sec. 134).

4. Virtual- conditions:a. Unconditional promise in writing

to accept a billb. Promise made before it is drawnc. Any person who, upon faith

thereof, received the bill for.value. (Sec. 135)

Q: What is the effect of accepting aninstrument with a qualified acceptance?A:

GR: When the holder takes a qualifiedacceptance the drawer and indorsers aredischarged from liability on the bill.

XPN:1. When· they have expressly or

impliedly authorized the holder totake a qualified acceptance, or

2. Subsequently assent thereto3. Implied assent (when they did not

express their dissent to the holderwithin a reasonable time when they

received a notice of qualifiedacceptance). (Sec. 142)

Q: When mayan incomplete bill beaccepted?

A: Acceptance may be made before the billhas been signed by the drawer or whileotherwise incomplete, or after it is overdue, oreven after it has been dishonored by non-acceptance or non-payment. (Sec. 138)

Q: In satisfaction of a judgment debt, thedebtor tendered payment partly in cash andthe rest in cashier's check. The cashier'scheck was certified by the drawee bank.What is the effect of the certification by thedrawee bank?

A: Certification implies that the check is drawnupon sufficient funds in the hand of thedrawee, that they have been set apart for itssatisfaction and that they shall be so appliedwhenever the check is presented for payment.Where a check is certified by the bank onwhich it is drawn, the certification is equivalentto acceptance (New Pacific Timber v. Seneris,GR No. L-41764, Oec. 19, 1980)

Q: What is presentment for acceptance(PA)?

A: Production or exhibition of a bill ofexchange to the drawee for his acceptance orpayment (also includes presentment forpayment).

Q: What are the rules as to PA?

A:GR: PA is not necessary to render anyparty to the bill liable. (par.2, Sec. 143)

XPN:1. Payable after sight, or when it is

necessary in order to fix the maturityof the instrument;

2. Expressly stipulated that it shall bepresented for acceptance; or

3. Where the bill is drawn payableelsewhere than at the residence orplace of business of the drawee (Sec.143).

Note: The holder must either present it foracceptance or negotiate it within a reasonabletime, otherwise, the drawer and all indorsers aredischarged. (Sec. 144)

U N I VE R SIT Y 0 F 5 ANT 0 TOM AS

'Facu(tad de (])erecno Civit ~.~ 117

NEGOTIABLE INSTRUMENTS LA \\1

Q: How must PA be made?

A:1. By or on behalf of the holder;2. At a reasonable hour on a business

day;3. Before the bill is overdue; and4. To the drawee or some person

authorized to accept or refuse toaccept on his behalf. When:a. Addressed to 2 or more drawees

not partners - To all (exceptwhen one was given authority)

b. Drawee is dead - To hispersonal representative

Note: Where drawee is dead, PAis not required.

c. Drawee is bankrupt or insolventor has made an assignment forthe benefit of creditors - To himor to his trustee or assignee.(Sec. 145)

Q: When may delay in making PA beexcused?

A:1. Bill drawn payable elsewhere than at

the place of business or theresidence of the drawee; and

2. Holder has no time, with the exerciseof reasonable diligence, to presentthe bill for acceptance beforepresenting it for payment on the day

. that it falls due. (Sec. 147)

Q: When is presentment excused?

A:1. Drawee is dead, or has absconded,

or is a fictitious person not havingcapacity to contract by bill;

2. After exercise of reasonablediligence, presentment cannot bemade; or

3. Although presentment has beenirregular, acceptance has beenrefused on some other ground. (Sec.148)

Q: When is a bill dishonored by non-acceptance?

A:1. When it is duly presented for

acceptance and such an acceptanceis refused or cannot be obtained; or

2. When presentment for acceptance isexcused, and the bill is not accepted.(Sec. 149)

118

Q: What is the duty of the holder where billis not accepted?

A: The person presenting it must treat the billas dishonored by non-acceptance or he losesthe right of recourse against the drawer andindorsers. (Sec. 150)

Q: What are the rules when a bill isdishonored by non-acceptance?

A:1. Right of recourse against all

secondary party accrues to theholder;

2. No presentment for payment isnecessary since dishonor of theinstrument by non-payment is to beexpected;

3. If the instr.ument is accepted after ithas been dishonored by non-acceptance presentment for paymentis necessary upon maturity; and

4. In case of non-payment, holder mustgive the corresponding notice ofdishonor; otherwise, secondaryparties are discharged.

PROTEST

Q: What is protest?

A: Formal instrument executed by a notarypublic or other competent persons certifyingthat the facts necessary to the dishonor of theinstrument (non-acceptance/non-payment)have taken place.

Q: When is protest required?

A:1. Mandatory for foreign bill of exchange

which has been dishonored by non-acceptance or non-payment forevidentiary purposes (if not, drawerand indorsers are discharged)

2. For inland bills of exchange, checks,promissory notes only if required(Sec. 118), excepta. Where bill has been accepted for

honor, it must be protested forpayment to the acceptor forhonor;

b. Where bill contains a referee incase of need, it must beprotested for non-paymentbefore it is presented forpayment to referee in case ofneed. (Sec. 167)


Q: What are the requisites for a protest?

A:1. Must be made by:

a. Notary public; orb. Any respectable resident of the

place where the bill isdishonored, in the presence of 2or more credible witnesses.(Sec. 154)

2. Must be annexed to the bill or mustcontain a copy thereof;

3. Must be under the hand and seal ofthe notary making it; and

4. Must specify:a. Time and place of presentment;b. The fact that presentment was

made and the manner thereof;c. The cause or reason for

protesting the bill; andd. Demand made and the answer

given (if any) or the fact that thedrawee or acceptor could not befound. (Sec. 153)

Q: When should the protest be made?

A: On the day of the dishonor, unlessexcused. But the certificate may besubsequently made. (Sec. 155)

Q: Where should the protest be made?

A:GR: At the place where it is dishonored.

XPN: Where a bill drawn payable at theplace of business or residence of someperson other than the drawee has beendishonored by non-acceptance, it must beprotested for non-payment at the placewhere it is expressed to be payable, and nofurther presentment for payment to, ordemand on, the drawee is necessary. (Sec.156)

Q: Can protest be dispensed with?

A: Yes, by any circumstances which woulddispense with notice of dishonor. (See Sees.109-118)

Q: When is the delay in noting orprotesting excused?

A:1. When caused by circumstances

beyond the control of the holder; and2. Not imputable to his default,

misconduct, or negligence.

Note: When the cause of delay ceases tooperate, the bill must be noted or protested withreasonable diligence (Sec. 159).

Q: What are the distinctions betweenprotest and notice of dishonor?

A:~PROTEST --:;;-~tICE'OF' ~.'.'

DISHONORRequired in any

negotiableinstrument, otherthan a foreiqn bill

Required only incase of dishonor of

a foreign bill

Made within thetimes prescribed inSees. 102-104, 107

Always written Oral or writtenIncludes

presentment, noticeof dishonor, and all

stepsaccompanying

dishonor

Only to such notice

By notary publicBy a party or his

aqentMade at the place

of dishonorPlace of dishonor

not essential

Made on the day ofdishonor

Q: What is a protest for better security?

A:1. One made by the holder of a bill;2. After it has been accepted;3. But before it matures;4. Made against the drawer and

indorsers;5. The acceptor has:

a. been adjudged a bankrupt or aninsolvent; or

b. made an assignment for thebenefit of the creditors (Sec. 158)

Note: The purpose of it is to notify the drawer orindorsers that the acceptor is bankrupt orinsolvent, therefore he cannot pay, and that theyshould make the arrangement to pay. It is purelyoptional and its omission will not affect theholder's remedy against the drawer andindorsers.

UNIVERSITY OF SANTO TOMAS~i .•·~ 119Fa cu.It a d' de IDerecfio Ci'viC


Q: Can guarantors .and sureties, be heldjointly and severally liable, in the absenceof protest on the bill?

A: There are well-defined distinctions betweenthe contract of an indorser and that of aguarantor/surety of a commercial paper. Thecontract of indorsement is primarily that oftransfer, while the contract of guaranty is thatof personal security. The liability of aguarantor/surety is broader than that of anindorser. Unless the bill is promptly presentedfor payment at maturity and due notice ofdishonor given to the. indorser within areasonable time, he will be discharged fromliability thereon.· On the other hand, exceptwhere required by the provisions of thecontract of suretyship, a demand or notice ofdefault is not required to fix the surety'sliability. He cannot complain that the creditorhas not notified him in the absence of a specialagreement to that effect in the contract ofsuretyship. Therefore, no protest on the exportbill is necessary to charge guarantors/suretiesjointly and severally liable since they heldthemselves liable upon demand in case theinstrument is dishonored. (Allied BankingCorp. v. CA, G.R. No. 125851, July 11,2006)

Q: When may protest be made on a copy orwritten particulars thereof?

A: When a bill is lost or destroyed or iswrongfully detained from the person entitled tohold it. (Sec. 160)

.:'.: AqC.E~TANCEFOR HONOR

. (Acceptance Supra Protest)

Q: What is an acceptance supra protest?

A:1.- An undertaking by a stranger to a bill

I after protesti a. For the benefit of any party liable

thereon; orb. For the honor of the person for

whose account the bill is drawn;2. Which acceptance inures also to the

benefit of all parties subsequent to·the persons for whose honor it isaccepted; and

3. Conditioned to pay the bill when itbecomes due if the original draweedoes not pay it.

Note: Acceptance for honor may be for part onlyof the sum for which the bill is drawn; and wherethere has been an acceptance for honor for oneparty, there may be a further acceptance by a

120

different person for the honor of another party.(Sec. 161)

Q: What is the purpose of acceptance forhonor?

A: To preserve the credit of the parties to theinstrument or some party to it for whose honoracceptance was made.

Q: What are the requisites?

A:1. Bill is protested for dishonor by non-

acceptance or for better security;2. Acceptor for honor must be a

stranger to the bill;3. Bill is not overdue at the time of

acceptance for honor; and4. Holder must consent to fhe

acceptance for honor. (Sec. 161)

Q: What are its formal requisites?

A:1. Must be in writing;2. Must indicate that it is an acceptance

for honor;3. Signed by the acceptor for honor;4. Must contain an express or implied

promise to pay money; and5. The accepted bill for honor must be

delivered to the holder.

Q: For whose honor is an acceptance forhonor made?

A: Where an acceptance for honor does notexpressly state for whose honor it is made, it isdeemed to be an acceptance for the honor ofthe drawer. (Sec. 163)

Q: What is the effect of acceptance forhonor?

A: Holder's rights are suspended (becausethe holder can go against the precedingparties after the acceptor for honor does notpay)

Q: What is the right of the acceptor forhonor upon payment of the bill?

A: The acceptor for payment is subrogated tothe rights which the parties to the billsubsequent to the party for whose honor hehas accepted may have as regards the latterand all prior parties. (Sec. 175)


Q: What conditions need to be fulfilledbefore an acceptor for honor becomesliable to pay the bill?

A:1. The bill is duly presented for

payment;2. It was not paid for by the drawer;3. It was protested for non-payment;

and or is given to him supra protest;4. Notice of dishonor (for non-payment)

(Sec. 165)

Q: Within which time should presentmentfor payment to the acceptor be made?

A:1. If it is to be presented in the place

where the protest for non-paymentwas made, it must be presented notlater than the day following itsmaturity;

2. If it is to be presented in some otherplace than the place where it wasprotested, it must be forwarded withinthe time specified in Sec. 104(mailing). (Sec. 168)

Q: What must the holder do after theacceptor for honor does not pay the bill?

A: The holder must protest the bill for non-payment by the acceptor for honor in order tohold the drawer and indorsers whose liabilitieshave not yet become fixed because of theacceptance for honor. (Sec. 170)

Note: At this time, there would have been threeprotest on the bill, namely: protest for dishonor fornon-acceptance, protest for non-payment by thedrawee and protest for non-payment by theacceptor for honor.

Q: What are the distinctions between anacceptance for honor and ordinaryacceptance?

A:"-':ACCEPTANCe-FOR' ~~ORDINARY

HONOR-' ACCEPTANCEThere must be Protest notprevious protest required

Acceptor: stranger Acceptor: draweeHolder's consent Consent not

required requlredAcceptor: secondarily Acceptor:

liable primarily liableBill not dischargedupon payment by Bill is discharged

acceptance for honor

" PAYMENT FOR HONOR .:~ . '

,. " ' (Payment Supra Protest) .r:

Q: What is payment supra protest?

A: Payment made by a person, whether aparty to the bill or not, after it has beenprotested for non-payment, for the benefit ofany party liable thereon or for the benefit of theperson for whose account it was drawn (Sec.171).


A:1. Bill has been dishonored by non-

payment;2. It has been protested for non-

payment;3. Payment supra protest is made by

any person, even by a party thereto;4. The payment is attested by a notarial

act of.honor which must be appendedto the protest or form an extension ofit (Sec. 172); and

5. The notarial act must be based on thedeclaration made by the payee forhonor or his agent of his intention topay the bill for honor and for whosehonor he pays. (Sec. 173)

UNIVERSITY OF SANTO TOMAS ~~':"~

Pacu{taa de Der echo Civif '. 121


A:Q: What are the distinctions between payment for honor and acceptance for honor?

PAYMENT FOR HONOR ACCEPTANCE FOR HONORProtest: non-payment Non-acceptance or for better security

Bill is overdue Not overdueConsent of holder is not required; he cannot refuse Consent is required. Because the rights of the

holder are suspended.Acceptor: secondarily liable Acceptor: primarily liable

Notarial act of dishonor is necessary Not necessaryOnly 1 payor for honor May be several acceptors

Effects: (Secs. 164"165)Effects: (Secs. 175 and 177) 1. The acceptor for honor is liable to the

1. All parties subsequent to the party for holder and to all parties to the billwhose honor it is paid are discharged but subsequent to the party for whosethe payor for honor is subrogated for, and honor he has accepted.succeeds to, both the rights and duties of 2. The acceptor for honor, by suchthe holder as regards the party for whose acceptance, engages that he will, onhonor he pays and all parties liable to the due presentment, pay the billlatter. according to the terms of his

2. The payor for honor, on paying to the acceptance provided it shall not haveholder the amount of the bill and the been paid by the drawee and providednotarial expenses incidental to its dishonor, also that it shall have been dulyis entitled to receive both the bill itself and presented for payment and protestedthe protest. for non-payment and notice of

dishonor given to him.

Q: What is the preference of partiesoffering to pay for honor?

A: Where two or more persons offer to pay abill for the honor of different parties, the personwhose payment will discharge most parties tothe bill is to be given the preference. (Sec.174)

. . . . BILLS IN SET ..

Q: Define bills in set.

A: One composed of several parts, each partbeing numbered and containing a reference tothe other parts, the whole of the partsconstituting but one bill.

!Q: What is its purpose?

A: Usually availed of in cases where a bill hadto be sent to a distant place through someconveyance. If each part is sent by differentmeans of conveyances, the chance that atleast one part of the set would reach itsdestination would be greater.

Q: What are the rights of holders to whomparts are negotiated separately?

A:1. If both are HIDC, holder whose title

first accrues is considered the trueowner of bill.

2. But the person who accepts or paysin due course shall not be prejudiced.(Sec. 179)

Q: What are the obligations of a holder whoindorses 2 or more parts of the bills in set?

A:1. Be liable on every such part;2. Every indorser subsequent to him is

liable on the part he has himselfindorsed, as if such parts wereseparate bills. (Sec. 180)

Q: What happens when the acceptor paysthe bill without requiring the part bearinghis acceptance to. be delivered to him?

A: He is liable to the holder thereon if that partat maturity is outstanding in the hands of aholder in due course. (Sec. 182)

Note: The drawee is required to accept only onepart of a bill drawn in a set and the acceptancemay be written on any part. But should thedrawee accept more than one part and they arenegotiated to holders in due course, he is liable toevery holder of the different parts as if such partswere separate bills. If all the parts are in thehands of the same holder, the drawee is liableonly for one part. (Sec. 181)


Q: What is the effect of discharging onepart of a set?

A: Where anyone part of a bill drawn in set isdischarged by payment or otherwise, thewhole bill is discharged, except as otherwiseprovided by tile NIL. (Sec. 18:1)

I " " . CHECKS' .- . .

Q: What is a check?

A: It is a bill of exchange drawn on a bank andpayable on demand (Sec. 185). It must bepresented for payment within a reasonabletime after its issue or the drawer shall bedischarged from liability thereon to the extentof the loss caused by the delay. (Sec. 186)

It does not operate as an assignment to anypart of the funds to the credit of the drawerwith the bank, and the bank is not liable to theholder, unless and until it accepts or certifiesthe check. (Sec. 189)

Q: What are the different kinds of checks?

A:1. Cashier's or manager's checl< -

Drawn by the bank's cashier ormanager, as the case may be, uponthe bank itself and deemed acceptedby the act of issuance.

2. Traveler's ctieck - Upon which theholder's signature must appear twice,one to be affixed by him at the time itis issued and the second counter-signature, to be affixed by him in thepresence of the payee before it ispaid, otherwise, it is incomplete.

3. Certified check - Bears upon its facean agreement by the drawee bankthat the check will be paid onpresentation ..

4. Memorandum check - "Memo" iswritten across its face, signifying thatdrawer will pay holder absolutelywithout need of presentment.

Q: What is a crossed check? What are theeffects of crossing a check? Explain.

A: A crossed check is a check with two (2)parallel lines, written diagonally on the upperright corner thereof. It is a warning to thedrawee bank that payment must be made tothe right party; otherwise the bank has noauthority to use the drawer's funds depositedwith the bank. To be assured that it will avoidany mistake in paying to the wrong party,banks adopted the policy that crossed checks

must be deposited in the payee's aocount.When withdrawal is made, the banks can besure that they are paying to the right party. Thecrossing becomes a warning also to whoeverdeals with the said instrument to inquire as tothe purpose of its issuance. Otherwise, ifsomething wrong happens to the paymentthereof, that person cannot claim to be aholder in due course. Hence, he is subject tothe personal defense on the part of the drawerthat there is breach of trust committed by thepayee in not complying with the drawer'sinstruction. (2005 Bar Question)

Q: What is a stale check?

A: A check which has not been presented forpayment within a reasonable time after itsissue. It is valueless and thus, should not bepaid. A check becomes stale 6 months fromdate of issue.

Q: What is the effect of a stale check?

A: The drawer and all indorsers aredischarged from liability thereon. (Sec. 188)

Q: What is a memorandum check?

A: A memorandum check is an evidence ofdebt against the drawer and although may notbe intended to be presented, has the sameeffect as an ordinary check and if passed on toa third person, will be valid in his hands likeany other check. (People v. Nita fa n, G.R. No.75954, Oct. 22, 1992)

Q: A check was dishonored due to materialalteration. Debtor made partial payment incash, Creditor filed an action againstdrawee bank for the amount. Is the creditorentitled?

A: No. If a bank refuses to pay a check(notwithstanding the sufficiency of funds), thepayee-holder cannot, as provided underSections 185 and 189 of the NIL, sue thebank. The payee should instead sue thedrawer who might in turn sue the bank. This isso because no privity of contract existsbetween the drawee-bank and the payee.(Villanueva v. Nite, G.R. No. 148211, July 25,2006)

Q: When will the delivery of a checkproduce the effect of payment even ;if thesame had not been encashed?

A: If the debtor was prejudiced by tilecreditor's unreasonable delay in presentment.Acceptance of a check implies an undertakingof due diligence in presenting it for payment. If

U N I V E R 5 I T Y 0 F SAN ToT 0 MAS • ~':'~. 123'Facu(taa de (])erecfio CiviC '9


no such presentment was made, the drawercannot be held liable irrespective of loss orinjury sustained by the payee. Payment will bedeemed effected and the obligation for whichthe check was given as conditional paymentwill be discharged. (Pia Barretto Realty Corp.v. CA, G.R. No. 132362, June 28, 2001)

124

Academics CommitteeCh"il/m:wl/: Abraham D. Gcnuino II

Via-Cbairfor .Acadcmics: Jeannie /\. Laurentinor/"it:e-CbtJir JfJr.Admill C'"" Filltllla!: Aissa Coline 1--1. J .una

t/ia.'-Ch~irjf)r J.J!}'o/d & f)eJ~'~f1:Loise Rae G. Na val

Mercantile Law Committee.l"lIblcd I lead: 11(1), T. Aillragul')'

A XXi. Jllbjed Head: Manil),n Rose S. Soteio

Members:I.'elwin Marc T. Baldia

Airccn M. CachoSocrates llcnjic I. MarbilRon Chl'rril' S. Ml'ndoza

Ed1son .lames I,', PagalibuanMavbclline ~J. Santiago


SPECIAL COMMERCIAL LAWS

Q: What is the law governing letter of credit(LC)?

A: Articles 567 to 572 of the Code ofCommerce on Letters of Credit are obsolete.However, in the absence of any provision in

. the Code of Commerce, commercialtransaction shall be governed by the usagesand customs generally observed. (Sec. 2,Code of Commerce)

Q: What is LC?

A: It is any arrangement, however named ordescribed, whereby a bank (issuing bank),acting at the request and on the instructions ofa customer (applicant) or on its own behalf,binds itself to:

1. Pay to the order of, or accept and paydrafts drawn by a third party(Beneficiary), or

2. Authorize another bank to payor toaccept and pay such drafts, or

3. Authorizes another bank to negotiate,against stipulated document(s),

Provided, the terms and conditions of thecredit are complied with. (Art. 2, UniformCustoms & Practice for Documentary Credits.)

Note: They are in effect absolute undertakings topay the money advanced or for the amount forwhich the credit is' given on the faith of theinstrument.

Q: What is the purpose of LC?

A: To ensure certainty of payment. The selleris assured of payment because the bankintervenes and makes the commitment to pay.This addresses problems arising from seller'srefusal to part with his goods before being paidand the buyer's refusal to part with his moneybefore acquiring the goods, thus, facilitatingcommercial transactions.

Q: What are the essential conditions of LC?

A:1. Issued in favour of a definite person

and not to order.

Note: The Uniform Commercial Practice forDocumentary,Credits allows leiters of creditto be payable to order

2. Limited to a fixed or specifiedamount, or to one or more amounts,

but with a maximum stated limit(Article 568, Ibid).

Note: If any of these essential conditions isnot present,' the instrument is merelyconsidered as a letter of recommendation.

Q: What is the duration of LC?

A:1. Upon the period fixed by the parties;

or2. If none is fixed:

a. 6 months from its date if used inthe Philippines;

b. 12 months if used abroad (Art572, ibid).

Q: What are the kinds of LC?

A:COMMERCIAL STANDBY LETTERSLETTERS OF OF CREDIT

CREDIT .Involve non-sale

transactions.Involve contracts of

sale.Payable upon

certification by thebeneficiary of theapplicant's NON-

performance of theagreement.

(Transfield v. LuzonHydro Corp., GR

No. 146717, Nov. 22,2004)

Payable uponpresentation by theseller-beneficiary of

documents that showhe has performed his

contract.

Q: Is irrevocable letter of credit andconfirmed letter of credit synonymous?

A: An irrevocable letter of credit is notsynonymous with a confirmed letter of credit.In an irrevocable letter of credit, the issuingbank may not, without the consent of thebeneficiary and the applicant, revoke itsundertaking under the letter, whereas, in aconfirmed letter of credit, the correspondentbank gives an absolute assurance to thebeneficiary that it will undertake the issuingbank's obligation as its own according to theterms and condition of the credit. (PrudentialBank and Trust Company v. lAC, GR No.74886, Dec. 8, 1992)

U N I V E R 5 I T Y 0 F SAN ToT 0 MAS ~ .•..~ •• 125Pacu{tad de (j)ereclio Civil ,V'

SPECIAL COI\1MERCIAL LA \XIs: LEITERS OF CREDIT

Q: Can a court order the release to theapplicant the proceeds of an irrevocableletter of credit without the consent of thebeneficiary?

A: No, such order violates the irrevocablenature of the letter of credit. The terms of anirrevocable letter of credit cannot be changedwithout the consent of the parties, particularlythe beneficiary thereof. (Phil. Virginia TobaccoAdministration v. De Los Angeles, GR. No. L-27829, Aug. 19, 1988)

Q: Who are the parties to a Letter of Credittransaction?

A:1. Applicant/Buyer/Importer - procures

the letter of credit, purchases thegoods and obliges himself toreimburse the issuing bank uponreceipt of the documents title.

2.. Issuing Bank - One which, whether apaying bank or not, Issues the letterof credit and undertakes to pay theseller upon receipt of the draft andproper documents of title from theseller and to surrender them to thebuyer upon reimbursement.

3. Beneficiary/Seller/Exporter Inwhose favor the instrument isexecuted; One who delivers thedocuments of title and draft to theissuing bank to recover payment.

The number of parties may be increased.Modern letters of credit are usually involvebank-to-bank transactions. The followingadditional parties may be:

1. Advising/notifying bank Thecorrespondent bank (agent) of theissuing bank through which it advisesthe beneficiary of the LC.

I

IConfirming bank - bank which, uponthe request of the beneficiary,confirms the LC issued.

3. Paying bank - bank on which thedrafts are to be drawn, which may bethe issuing bank or another bank notin the city of the beneficiary.

4. Negotiating bank - bank in the city ofthe beneficiary which buys ordiscounts the drafts contemplated bythe LC, if such draft is to be drawn onthe opening bank not in the city of thebeneficiary.

126 !team:bSII.ij

Q: What are the stages of LC?

A:1. Contract of sale between the buyer

and seller;2. Application for LC by the buyer with

the bank;3. Issuance of LC by the bank;4. Shipping of goods by the seller;5. Executuion of draft and tender of

documents by the seller;6. Redemption of draft (payment) and

obtaining of documents by the issuingbank; and

7. Reimbursement to the bank andobtaining of documents by the buyer.

Q: Explain the three (3) distinct butintertwined contract relationships that areindispensable in .a letter of credittransaction.

A:1. Between the applicant/buyer/importer

and the beneficiary/seller/exp0l1er _The applicantlbuyel·/importer is theone who procures the letter of creditwhile the beneficiary/seller/exporter isthe one who in compliance with thecontract of sale ships the goods to thebuyer and delivers the documents oftitle and draft to the issuing bank torecover payment for the goods. Theirrelationship is governed by thecontract of sale.

2. Between the issuing bank ami thebeneficiary/sellellexporter Theissuing bank is the one that issues theletter of credit and undertakes to paythe seller upon receipt of the draft andproper documents of title and tosurrender the documents to the buyerupon reimbursernent. Theirrelationship is governed by the termsof the documents of title.

3. Between the issuing benk and theapplicant/buyer/importer Theapplicant/buyerlimporter obligeshimself to reimburse the issuing bankupon receipt of the documents of title.Their relationship is governed by theterms of the application andagreement for the issuance of theleiter of credit by the bank. (2002 BarQuestion)


Q: What are the types of correspondentbanks?

A:

Serves as an agentof the issuing bank;

Warrants theapparent

(Appearance tounaided senses)

authenticity of theLetter of Credit.

(Bank of America NT& SA v. CA, G.R.No. 105395, Dec.

10, 1993)

Does not incur anyobligation more than

just notifying theseller/beneficiary of

the opening of the LCafter it has

determined itsapparent authority.

(Bank of America NT& SA v. CA, G.R. No.

105395, Dec. 10,1993)

Not liable fordamages unless thedocument on its face

'On"·"<"'I" fake.

Lends credencethe LC issued by alesser-known bank.

Buys the seller'sdraft and later on

sells the draft to theissuing bank.

Depends on thestage of negotiation,

thus:

1. Before negotiation- No liability with

respect to the seller.Merely suggests its

willingness tonegotiate.

2. After negotiation -A contractual

relationship will thenarise, making the

bank liable.

May either beissuing bank or any

other bank in theplace of the

Direct obligaticin.

Q: In letters of credit in bankingtransactions, distinguish the liability of aconfirming bank from a notifying bank.

A: In case anything wrong happens to theletter of credit, a confirming bank incurs liabilityfor the amount of the letter of credit, while anotifying bank does not incur any liability.(1994 Bar Question)

Q: Is an issuing bank a guarantor?

A: No, the concept of guarantee vis-a-vis theconcept of irrevocable LC is inconsistent witheach other. LCs are primary obligations andnot security contracts and while they aresecurity arrangements, they are not convertedthereby into contracts of guaranty. (MWSS v.Hon. Dewey, G.R. No. 160732, June 21,2004)

Q: What is the independence principle?

A: The relationship of the buyer and the bankis separate and distinct from the relationship ofthe buyer and seller in the main contract; thebank is not required to investigate if thecontract underlying the LC has been fulfilled ornot because in transactions involving LC,banks deal only with documents and not goods(Bank of the Philippine Islands v. De RenyFabric tndustrtes, tnc., L-2481, Oct. 16, 1970).ln effect, the buyer has no course of actionagainst the issuing bank.

Q: What is the exception to theindependence principle?

A: The "Fraud exception rule." It provides thatthe untruthfulness of a certificateaccompanying a demand for payment under astandby letter of credit may qualify as fraudsufficient to support an injunction againstpayment. (Transfield v. Luzon Hydro, G.R. No.146717, Nov. 22, 2004)

Q: What is the effect of the buyer's failureto procure an LC to the main contract?

A: The LC is independent from the contract ofsale. Failure of the buyer to open the Letter ofCredit does not prevent the birth of the SalesContract. (Reliance Commodities, Inb. v.Daewoo Industrial Co. Ltd., GR. No. 10'0831,Dec. 17, 1993) The opening of the LC is only amode of payment. The LC is not an essentialrequisite to the contract of sale.

Q: In a contract of loan secured by astandby LC, can the partial payments madeon the loan be added in computing theissuing bank's liability under its ownstandby letter of credit?

A: No, although these payments could result inthe reduction of the actual amount, which,could ultimately be collected from the issuingbank, the latter's separate undertaking underits letters of credit remain. This is because theletter of credit is an absolute and primaryundertaking which is separate and distinct


PacuCtaa de (j)erecfio Cioi]

SPECIAL COM:MERCIAL LAWS: LETTERS OF CREDIT

from the contract underlying it. (Insular Bank ofAsia & America v. lAC, Nov. 17, 1988)

Q: What is the doctrine of strictcompliance?

A: The documents tendered by theseller/beneficiary must strictly conform to theterms of the letter of credit. The tender ofdocuments must include all documentsrequired by the letter. Thus, a correspondentbank which departs from what has beenstipulated under the LC acts on its own riskand may not thereafter be able to recover fromthe buyer or the issuing bank, as the case maybe, the money thus paid to the beneficiary.(Feati Bank and Trust Company v. CA, G.R.No. 940209, Apr. 30, 1991)

Q: When is the bank entitled toreimbursement?

A: Once the issuing bank shall have paid thebeneficiary after the latter's compliance withthe terms of the LC. Presentment foracceptance to the customer/applicant is not acondition sine qua non for reimbursement.(Prudential Bank v. lAC, G.R. No. 74886, Dec.8, 1992)

Q: What is the consequence of paymentupon an expired LC?

A: An issuing bank which paid the beneficiaryof an expired letter of credit can recover thepayment from the applicant which obtained thegoods from the beneficiary to prevent unjustenrichment. (Rodzssen Supply Co. v. Far EastBank and Trust Co, G.R. No. 109087, May 9,2001)

Q: Should the marginal deposit made bythe customer, in possession of the bank befirst deducted from the principalindebtedness before computing theinterest?

A: Yes, since it is supposed to be returnedupon compliance with his obligation. Indeed, itwould be onerous to compute interest andother charges on the face value of the letter ofcredit which the issuing bank issued, withoutfirst crediting or setting off the marginal depositwhich the importer paid to it. Requiring theimporter to pay the interest on the entire letterof credit without deducting first his marginaldeposit would be a clear case of unjustenrichment by the bank. (Abad v. CA, G.R.42735, Jan. 22, 1990)

128

Q: Ricardo mortgaged his fishpond to ACBank to secure a P1 Million loan. In aseparate transaction, he opened a letter ofcredit with the same bank for $500,000.00in favor of HS Bank, a foreign bank, topurchase outboard motors. Likewise,Ricardo executed a Surety Agreement infavor of AC Bank. The outboard motorsarrived and were delivered to Ricardo, buthe was not able to pay the purchase pricethereof. Can AC Bank take possession ofthe outboard motors? Why?

A: If what Ricardo executed is a trust receipt,AC Bank can take possession of the outboardmotors so that it can exercise its lien and sellthem (Section 7, Trust Receipts Law). If whatRicardo executed is a surety agreement, AC'Bank cannot take possession of the outboardmotors, because it has no lien on them.

Alternative Answer:No. The opening of a Letter of Credit did notvest ownership of the outboard motors in thebank in the absence of a trust receiptagreement. A letter of credit is a rnere financialdevice developed by merchants as aconvenient and relatively safe mode of dealingwith the sales of goods to satisfy theseemingly irreconcilable 'interests of a seller,who refuses to part with his goods before he ispaid, and a buyer, who wants to have controlof the goods before paying. (TrenstietdPhilippines, Inc. v. Luzon Hydro Corporation,G.R. No. 14671~ Nov. 22, 200~

A: Can AC Bank also foreclose themortgage over the fishpond? Explain.

A: AC Bank can also foreclose the mortgageover the fishpond if Ricardo fails to pay theloan. (2005 Bar Question)


Q: What is a trust receipt transaction?

A: It is any transaction between the entrusterand entrustee:

1. Whereby the entruster who owns orholds absolute title or securityinterests over certain specified goods,documents or instrument, releasesthe same to the possession ofentrustee upon the latter's executionof a TR agreement.

2. Wherein the entrustee binds himselfto hold the designated goods in trustfor the entruster and, in case ofdefault, to sell such goods,documents or instrument with theobligation to turn over to the entrusterthe proceeds to the extent of theamount owing to it or to turn over thegoods, documents or instrument itselfif not sold. (Sec. 4, P.O. 115)

Q: What is a trust receipt (TR)?

A: It is the written or printed document signedby the entrustee in favor of the entrustercontaining terms and conditions substantiallycomplying with the provisions of PO 115.

Q: What are the two views regarding TR?

A:1. As a commercial document (Sec. 4,

P.O. 115)

2. As a commercial transaction - It is a·separate and independent securitytransaction intended to aid infinancing importers and retail dealerswho do not have sufficient funds.(Nacu v. CA, G.R. No. 108638, Mar.11, 1994) .

Q: Who are the parties?

A:1. En truster - Lender, financer or

creditor. Person holding title over thegoods documents or instruments(GOI) subject of a trust receipttransaction; releases possession ofthe goods. upon execution of trustreceipt. (Sec. 3[c))

2. Entrustee - Borrower, buyer, importeror debtor. Person to whom the goodsare delivered for sale or processing intrust, with the obligation to return the

proceeds of sale of the goods or thegoods themselves to theentruster.(Sec. 3[b))

Q: What are the rights and obligations ofthe parties?

Toproceeds of thesale;

To the return ofthe goods,documents orinstruments (GOI)in case they couldnot be sold; and

May cancel thetrust and takepossession of andsell GOI at apublic or privatesale. (Sec. 7, P.O.11

To give a 5-daynotice to theentrustee of hisintention to sell ata public auction.(Sec.7,P.D.115)

To receive the surplus fromthe public sale. (Sec. 7,PO 115)

GOI in trust for theentruster and to dispose ofthem strictly in accordancewith the terms of TR;

To receive the proceeds ofthe sale for the entrusterand to turn over the sameto the entruster to theextent of amount owing tothe entruster;

To insure GOI against lossfrom fire, theft, pilferage orother casualties.

To keep GOI or theproceeds thereof, whetherin money or whatever form,separate and capable ofidentification as property ofthe entruster;

To return GOI to theentruster in case they couldnot be sold or upon demandof the entruster; and

To Qbserveall other


Pacu(taa ae CDerecfio Civii ~i~129

SPECIAL COMIvfERCIAL LAWS: TRUST RECEIPTS

Q: What are the alternative obligations ofan entrustee?

A:1. Entregarla - Obligation to return to

the entruster the proceeds of the saleof the goods.

2. Oevolvera - Obligation to return thegoods themselves to the entruster, incase the goods are not sold.

Q: What is the nature of a TR?

A: A trust receipt is a security agreement,pursuant to which a bank acquires a securityinterest in the goods. (Vintola v. IBAA, G.R.No.L-73271, May 29, 1987)

Q: Who is the owner of the articles subjectof the TR?

A: The entrustee. A trust receipt has twofeatures, the loan and security features. Theloan is brought about by the fact that theentruster financed the importation or purchaseof the goods under TR. Until and unless thisloan is paid, the" obligation to pay subsists. Ifthe entrustee is made to appear as the owner,it was but an artificial expedierit, more of legalfiction than fact, for if it were r~ally so, it coulddispose of the goods in any manner that itwants, which it cannot do. To consider theentn.lstee as the true owner from the inceptionof the transaction would be to disregard theloan! feature thereof. (Rosario Textile MillsCorp. v. Home Bankers Savings and TrustCompany, G.R. No. 137232. June 29, 2005)

Q: Who shall bear the loss of goods whichare the subject of TR?

A: The entrustee. Loss of goods, documentsor instruments which are the subject of a TR,pending their disposition, irrespective ofwhether or not it Was due to the fault ornegligence of the entrustee, shall notextinguish his obligation to the entruster for thevalue thereof (Sec. 10, PD. 115).

Q: As between the entruster and thecreditors of the entrustee, who has a betterright over the goods?

A: The entruster. His security interest ingoods, documents, or instruments pursuant tothe written terms of a trust receipt shall bevalid as against all creditors of the entrusteefor the duration of the trust receipt agreement.(Sec. 12, P.Od 115)

130

Q: Who can defeat the rights of theentruster over the goods?

A: A purchaser in good faith. He acquiresgoods, documents or instruments free from theentruster's security interest. (Sec. 11, P. D.115)

Q: Is the entruster liable as principal or asvendor under any sale or contract to sellmade by the entrustee?

A: No, the entruster holding a security interestshall not, merely by virtue of such interest orhaving given the entrustee liberty of sale or-other disposition of the goods, documents orinstruments under the terms of the trust receipttransaction be responsible as principal or asvendor under any sale or contract to sell madeby the entrustee. (Sec. 8, P.D. 115)

Q: What acts or omissions are penalizedundet the TR Law?

A: The TR Law declares the failure to turnover goods or proceeds realized from salethereof, as a criminal offense under Art.315(I)(b) of RPC (estafa). The law is violatedwhenever the entrustee or person to whomtrust receipts were issued fails to: (a) returnthe goods covered by the trust receipts; or (b)return the proceeds of the sale of said goods.(Metropolitan Bank v. Tonda, G.R. No.134436, Aug. 16,2000).

Q: Does P.O. 115 violate the prohibition inthe Constitution against imprisonment fornon-payment of a debt?

A: No. What is being punished is thedishonesty and abuse of confidence in thehandling of money or goods to the prejudice ofanother regardless of whether the lalter is theowner or not. It does not seek to enforcepayment of the loan. Thus, there can be noviolation of a right against imprisonment fornon-payment of a debt. (People v. Nitafan,G.R. No. 81559, Apr 6, 1992)

Q: Is lack of intent to defraud a bar to theprosecution of these acts or omissions?

A: No. The mere failure to account or returngives rise to the crime which is malumprohibitum. There is no requirement to proveintent to defraud (Ching v. Secretary ofJustice, G.R. No. 164317, Feb. 6, 2006;Colinares v. CA, G.R. No. 90828, Sept. 5,2000; Ong v. CA, G.R. No. 119858, Apr. 29,2003). (2006 Bar Question)


Q: What is the effect of insufficiency ofproof of delivery of goods?

A: Estafacannot lie. (Ramos v. CA, GR. No.L-3992-25, Aug. 21, 1987)'

Q: What will happen to the criminal action ifthe entrustee complied with his obligationunder the TR agreement?

A:1. If compliance occurred before the

criminal charge,there is no criminalliability.

2. If compliance occurred after thecharge even before conviction, thecriminal action will not beextinguished.

Q: In the event of default by the entrusteeon his obligation under the trust receiptagreement, is it absolutely necessary forthe entruster to cancel the trust and takepossession of the goods to be able toenforce his right thereunder?A: The law uses the word "may" in granting tothe entruster the right to cancel the trust andtake possession of the goods. Consequently,the entrustee has the discretion to avail ofsuch right or seek any alternative action, suchas a third party claim or a separate civil actionwhich it deems best to protect its right, at anytime upon default or failure of the entrustee tocomply with any of the terms and conditions ofthe trust agreement (South City Homes, Inc. v.BA Finance Corporation, GR. No, 135462,Dec. 7, 2001).

Q: Can the repossession of the goods bythe entruster be considered as payment?

A: No, payment would legally result only afterthe entruster has foreclosed on the securities,sold the same and applied the proceeds,thereof to the entrustee's obligation. Since thetrust receipt is a mere security arrangement,the repossession by the entruster cannot beconsidered payment of the loan/advancesgiven to the entrustee under the letter ofcredit/trust receipt. (PNB v. Pineda, GR. No.46658, May 13, 1991)

Q. Mr. A filed an application for an. Irrevocable Domestic LC with the SOSBank in favor of LS Parts for the purchaseof assorted scrap irons. The applicationwas approved. Thereafter, Mr. A executed atrust receipt

Mr. A failed to comply with theirundertaking under the trust receipt. Thebank filed both criminal and civil cases

against Mr. A. The court proceeded with thecivil case independently from the criminalcase. The court rendered judgment in favorof the bank. Is the court correct inproceeding independently although acriminal case is also instituted?

A: Yes, the complaint against Mr. A was basedon the failure of the latter to comply with hisobligation as spelled out in theTR. This breachof obligation is separate and distinct from anycriminal liability for "misuse and/ormisappropriation of goods or proceedsrealized from the sale of goods, documents orinstruments released under trust receipts",punishable under Section 13 of the TrustReceipts.Law. Being based on an obligation excontractu and not ex delicto, the civil actionmay proceed independently of the criminalproceedings instituted against petitionersregardless of the result of the latter.(Sarmiento v. CA, GR. No. 122502, Dec. 27,2002)

Q. What is the effect of novation of 'il trustagreement?

A. Where the entruster and entrustee enteredinto an agreement which provides forconditions incompatible with the trust receiptagreement, the obligation under the trustreceipt is extinguished, Hence, the breach inthe subsequent agreement does not give riseto a criminal liability under P.O. 115 but onlycivil liability. (Philippine Bank v. Ong, GR. No.133176, Aug. 8, 2002)

Q: What are the defenses to negatecriminal liability of the entrustee?

A:1. Compliance with the terms of the trust

receipt either by payment, return ofthe proceeds or return of the goods.

2. The transaction does not fall underPO 115. (Colinares v. CA, GR. No.90828, Sept. 5, 2000, Consolidated v.CA, GR. No. 114286, Apr. 19,2001)Note:' In these cases, the executionof a TR was made after the goodscovered by it had been purchased,making the buyer the owner thereof.The transaction does not involve atrust· receipt but a simple loan eventhough the parties denominate thetransaction as one of a trust receipt.

3. Non-receipt of the goods or whereproof of delivery of goods covered bya trust receipt to the accused is


Pacu[taa de CDerecfto Civif ~i~131

SPECIAL COMMERCIAL LAWS: TRUST RECEIPTS

insufficient. (Ramos v. CA, GR. No.L-3992-25, Aug. 21, 1987)

4 Cancellation of the trust receiptagreement and taking intopossession of the goods by theentruster.Note: Mere repossession of thegoods will extinguish criminal liability.

5. Compromise by parties before filingof information in court. (Ong v. CA,G.R. No. 119858, Apr. 29, 2003)

6. Novation before the filing of thecriminal complaint.

7. Loss of goods without fault of theentrustee.

8. Consignment.

Q: Can deposits in a savings accountopened by the buyer subsequent to the TRtransaction be applied to outstandingobligations under the TR account?

A: No, the receipt of the bank of a sum ofmoney without reference to the trust receiptobligation does not obligate the bank to applythe money received against the trust receiptobligation. Neither does compensation arisebecause compensation is not proper when oneof the debts consists in civil liability arisingfrom criminal. (Metropolitan Bank and TrustCo. v. Tonda, G.R. No. 134436, Aug. 16,2000)

Q: What is the order in the application ofproceeds or the TR transactions?

A:1.2.

3.

Expenses of the sale;Expenses derived fromgoods;Principal obligation.

storing the

Q: Is the entrustee liable for the deficiency?

A: Yes, but any excess shall likewise belong tohim. (Sec. 7, =o. 115)

Q: Are LC and TR negotiable instruments?

A: Letters of credit and trust receipts are notnegotiable instrument, but drafts issued inconnection with letters of credit are negotiableinstruments. Hence, while the presumption ofconsideration under the negotiable instrumentlaw may not necessarily be applicable to trustreceipls and leiters of credit, the presumptionthat the drafts drawn in connection with theletters of credit have sufficient considerationapplies. (Lee v. CA, G.R. No. 117913, Feb. 1,2002)

132

Academics CommitteeChaifpet:r(JII: Abraham D. CClluill(l 11

l/ic'e-Chllirjf)T .4tlJrfemit:r: Jeannie A. Laurcntino[/i,"-Cboirjill" Admill ~'" Finan,»: lIi"a Celinc If. Luna

I/itr-C/lairjill" Layollf e::-/)cJi~lI: Loise Rae C. Naval

Mercantile Law CommitteeJubjed l lcad: Holy T. i\llll'aguc)'

A.r.rf. Jllb/cd Head: Manilyn Rose S. Sotelo

Members:Edwin Marc T Baldi"

Airccn M, CachoSocrates Bcnjie I. MarbilRon Cherric S. Mendoza

L~dison -' ames I'. Pagalila~JanMaybcllinc M, Santiago

~~ .•..~~ ...",.


Q: What is the purpose of Bulk Sales Law(BSL)?

A: To prevent fraudulent transfer of goods by amerchant to the prejudice of his creditors.

Q: When is a sale considered as a sale inbulk?

A: Any sale, transfer, mortgage or assignment:1. of stock of goods, wares,

merchandise, provisions andmaterials other than in the ordinarycourse of trade and the regularprosecution of business of thevendor, mortgagor, transferor orassignor;

2. of all, or substantially all, of thebusiness or trade;

3. of all, or substantially all, of thefixtures and equipment used in andabout the business (Sec. 2, BSL)

Q: What is meant by "substantially ali"?

A: When the business could not continue withits operation after the sale.

Q: Stanrus .Inc., a department store withoutlets in Makati, Mandaluyong, andQuezon City, is contemplating to refurbishand renovate its Makati store in order tointroduce the most modern and state of theart equipment in merchandise display. Tocarry out its plan, it intends to sell all of theexisting fixtures and equipment (displaycases, wall decorations, furniture,counters, etc.) to Crossroads DepartmentStore. Thereafter, it will buy and install newfixtures and equipment and continueoperations. Crossroads wants to knowfrom you as counsel whether the intendedsale ls.vbulk.sate".

A: Yes. The sale involves all fixtures andequipment, not in the ordinary course of tradeand the regular prosecution of business ofStanrus, Inc. (Sec. 2, Act 3952, as amended)

Q: What are the duties of a seller if thetransaction is within the coverage of thelaw?

A:1. To execute, and deliver to the buyer,

a verified written statement of:a. the names and addresses of all

creditors to whom he may beindebted;'

b. amount of indebtedness due orowing, or to become due orowing;

c. the addresses of creditors;d. due dates of the obligations

(Sec. 3, BSL).

2. To make a full detailed inventory, at.Ieast ten days before the transfer ofany stock of goods, wares,merchandise, provisions or materials,in bulk (Sec. 5, BSL);

3. To notify every creditor whose nameand address is set forth in the verifiedstatement at least ten days beforetransferring possession thereof,personally or by registered mail, ofthe price, terms conditions of thesale, transfer, mortgage, orassignment (Sec. 5, BSL);

4. To apply the purchase or mortgagemoney, pro rata, to the payment ofthe bona fide claim or claims of thecreditors of the vendor or mortgagor,as shown by such sworn statement(Sec. 4, BSL);

5. To register the statement with theOTI. (Sec. 9, BSL) (1995, 1997 BarQuestion)

Q: When may the requirements not becomplied with under the law?

A: If such vendor, mortgagor, transferor orassignor, produces and delivers a writtenwaiver of the provisions of the BSL from Iliscreditors. (Sec. 2, BSL)

Q: What are the exempt transactions?

A:1. The sale or transfer is in the

regular/ordinary course of trade orbusiriess;

2. Sale of not all or substantially all ofthe business of the vendor;

3. A sale in bulk but with written waiverof the provisions of the BSL from allthe sellers creditors;

4. A sale by an executor, administrator,receiver, assignee or courtrepresentative;

5. Sale by virtue of a judicial order;6. Sale of property exempt from

execution;7. Sale by a manufacturer;8. Sale of a foundry shop; or9. Sale of services. (1993 Bar

Question)


Pacu{taa de Werecno CiviC .'133

SPECIAL COMMERCIAL LAWS: BULK SALES LAW

Q: Who are covered under the tenncreditors?

A: It covers all of the seller's creditors at thetime of the sale or mortgage. They need not bejudgment creditors and that their claim neednot be due. Creditors whose claims came intoexistence subsequent to the sale are notentitled to the benefits of the statute.

Q: Pursuant to a writ of execution issuedby the Regional Trial Court in "ExpressBank v. Don Rubio," the sheriff levied andsold at public auction 8 photocopyingmachines of Don Rubio. Is the sheriffs salecovered by the Bulk Sales LaW?

A: No. The sale by sheriff at public sale is nota sale by a merchant. Section 8 of the BulkSales Law itself provides that it has noapplication to executors, administrators,receivers, assignees in insolvency, or publicofficers, acting under process. The Bulk SalesLaw only applies to the sale or encumbranceof a merchant of goods, merchandise orcommodity done "in bulk" as defined by thelaw itself. (2006 Bar Question)

Q: wJen is the seller criminally liable?i

A: The seller will be criminaly liable and thetransaction is void if there is:

1, Failure to prepare and deliver asworn listing of creditors;

2. Failure to apply proceeds pro-rata tolisted creditors;

3. Failure to include names of allcreditors and the correct amount duein the statement; or

4. Sale for no or nominal consideration.

Q. In case the buyer violated the BSL, Whatremedies are available to the seller?

A: The seller may recover the amount paid ifthe sale was made in fraud of creditors andsue for damages.

Q: A is a merchant engaged in the sale of avariety of goods and merchandise.Because of the economic crisis, heincurred indebtedness to X, Y and Z.Thereafter, A· sold to B all the stock ofgoods and merchandise. What stepsshould A undertake to effect a valid sale inbulk of his goods to B?

A: A must prepare an affidavit stating thenames of all his creditors, in this case, X, Yand Z, their addresses, the amount of theircredits and their maturity. A should give theaffidavit to B who, in turn, should furnish a

134

copy to each creditor and notify the creditorsthat there is a proposed bulk sale in order toenable the latter to protect their interests.

Q: What is the right of creditors X, Y and Zif A failed to comply with theprocedure/steps required by law under theprevious question letter (a) hereof?

A: The recourse of X, Y and Z is to questionthe validity of the sale from A to B so as torecover the goods and merchandise to satisfytheir credits. (2001 Bar Question)

Q: Suppose A submitted a false statementon the schedule of his creditors. What isthe effect of such false statement as tovendee B.

A: If the vendee does not have knowledge ofthe falsity of the schedule, the sale is valid.However, if the vendee has knowledge of suchfalsity, the sale is void because he is in badfaith.

Q: What are the remedies available to thecreditors in case of violation of the BSL?

A:1. The creditor's proper remedy is one

against the goods to subject them topayment of a debt, such asexecution, attachment, garnishmentor by a proceeding in equity.

2. An ordinary action to obtain moneyjudgment against the purchaser bythe creditors in violation of BSL ifpurchaser has disposed of theproperty held in trust.


Q: What is the applicability of theWarehouse Receipts Law (WRL)?

A. The WRL applies to all warehouses,whether public or private, bonded or not. In allother cases where receipts are not issued bythe warehouseman, the Civil Code (Art. 1507-1520) applies.

Q: Who is a warehouseman?

A: A person, natural or juridical, lawfullyengaged in the business of storing of goods forprofit. (Sec. 58, WRL)

Q: What is a warehouse?

A: The building or place where goods aredeposited and stored for profit.

Q: What is a warehouse receipt?

A: A written acknowledgment by thewarehouseman that he has received and holdscertain goods therein described in hiswarehouse for the person to whom thedocument is issued. The warehouse receipthas two-fold functions, that is, it is a contractand a receipt (Telengtan Bros. & Sons v. CA,GR No. L-110581, Sept 21, 1994).

Q: Distinguish Warehouse Receipts Lawfrom Documents Of Title under Civil Code.

A:. 'WAREHOUSE DOCUMENTSOF

. RECEIPTSLAW TITLE UNDERCIVIL. CODE

Warehouse receiptsissued by a

warehouseman

Other receipts ofdocuments issued in

bailment contractsother than

warehouse receipts

Q: Who may issue warehouse receipt?

A:1. A warehouseman, whether public or

private, bonded or not. (Sec. 1)2. A person authorized by a

warehouseman.

Q: What is the form of a warehouse receiptand what are its essential terms?

A: It need not be in particular form but mustembody within its written or printed terms:

1. The location of the warehouse;2. The date of the issue;3. The consecutive number of the

receipt;4. A statement whether the goods

received will be delivered to bearer,to a specified person or to a specifiedperson or his order;

5. Fees;6. A description of the goods;7. The signature of the warehouseman;8. If the receipt is issued for goods of

which the warehouseman is theowner, either solely or jointly or incommon with others, the fact of suchownership; and

9. A statement of the amount ofadvances made and of liabilitiesincurred for which the warehousemanclaims a lien. (Sec. 2)

Q: What is the effect when the goodsdeposited are incorrectly described? .

A: It does not make the receipt ineffectivewhen the identity of the goods is fullyestablished by evidence. Thus, theindorsement and delivery shall constitutesufficient transfer of the title of the goods.(American Foreign Banking Corp. v, Herridge,GR No. L-21005, Dec. 20, 1924).

Q: What are the effects of omission of anyof the essential terms?

A:1. A warehouseman shall be liable to

any person injured thereby for alldamages caused by the omission;

2. Validity of receipt not affected;3. Negotiability of receipts not affected;4. Contract is converted to ordinary

deposit. (Gonzales V. Go Fiong &Luzon Surety Co., GR No. 91776,Aug. 30, 1958)


Pacu(tad de De re clto Civi! ~i·13S

SPECIAL COMIvIERCIALLAWS: WAREHOUSE RECEIPTS LA\\!

IQ: What terms may and may not beinsert~d?

A: A warehouseman may insert in a receiptissued. by him any other terms and conditionsprovided that such terms and conditions shallnot be:

1.

2.

Contrary to the Warehouse ReceiptsLaw. (Sec. 3)Terms reducing the required diligenceof the warehouseman. (Ibid.)Contrary to law,. morals, goodcustoms, public order or public policy.Those exempting the warehousemanfrom liability for misdelivery or for notgiving statutory notice in case of saleof goods.Those exempting the warehousemanfrom liability for negligence.

3.

4.

5.

Q: What are the kinds of warehousereceipt?

A:1. Negotiable warehouse receipt2. Non-negotiable warehouse receipt

Q: What is a negotiable warehouse receipt?

A: It is a receipt in which it states that thegoods received will be delivered to the beareror to the order of any person named in suchreceipt (Sec. 5). It is negotiated by eitherdelivery or indorsement plus delivery.

Note: No provision shall be inserted in anegotiable receipt that it is non-negotiable. Suchprovision, if inserted, shall be void. A negotiablewarehouse receipt cannot be converted into non-negotiable. (Sec. 5)

Q: Who may negotiate?

A:1. The owner thereof; or2. Any person to whom the possession

or custody of the receipt has beenentrusted by the owner, if, by theterms of the receipt, the goods aredeliverable to the order of the personto whom the possession or custody ofreceipt has been entrusted or in suchform that it may be negotiated bydelivery (Sec. 40).

136

Q: What happens if the indorsement isnecessary but the negotiable receipt wasonly delivered?

A:1. The transferee acquires title against

the transferor;2. There is no direct obligation of the

warehouseman; and3. The transferee can compel the

transferor to complete the negotiationby indorsing the instrument.Negotiation takes effect as of the timewhen the indorsement is actuallymade.

Q: X deposited 1000 sacks of wheat flourwith Luzon Warehouse Company, for whichhe was issued a negotiable receipt. Y wasable to get hold of the receipt, forged thesignature of X, presented the receipt toLuzon Warehouse and was able towithdraw the wheat flour. What are therights of X?

A: If under the terms of the negotiablewarehouse receipt, the goods are deliverableto the depositor or to his order, X may proceedagainst Luzon Warehouse and/or Y. Withoutthe valid indorsement of X to the holder or inblank, the warehouseman is liable to X forconversion in the misdelivery. If, however, bythe terms of the negotiable warehouse receipt,the goods are deliverable to bearer (eitherbecause it is so expressed in the warehousereceipt or because of a blank indorsement by aperson to whose order the goods aredeliverable) X may only proceed against Y.The warehouseman is not liable for conversionwhere the goods are delivered to a person inpossession of a bearer negotiable instrument.

Q: What is the rule when more than onenegotiable receipt is issued for the samegoods?

A: A warehouseman shall be liable for alldamages caused by his failure to do so to anyone who purchased the subsequent receipt forvalue supposing it to be an original, eventhough the purchase be after the delivery ofthe goods by the warehouseman to the holderof the original receipt (Sec. 6).

Note: The word "duplicate" shall be plainly placedupon the face of every such receipt, except thefirst one issued (Sec. 6).


Q: What are the warranties on a warehousereceipt?

A: A person who, for value, negotiates ortransfers a receipt by indorsement or delivery,including one who assigns for value a claimsecured by a receipt, unless a contraryintention appears warrants:

1. Receipt is genuine;2. Legal right to negotiate or transfer it;3. No knowledge of defects that may

impair tile validity or worth of thereceipt;

4. That he has a right to transfer title totile goods and that the goods aremerchantable or fit for a particularpurpose when ever such warrantieswould have been to transfer without areceipt of goods represented thereby.(Sec. 44)

Note: The indorsee does not guarantee that thewarehouseman will comply with his duties. (Sec.4~ .

A creditor receiving the warehouse receipt givenas a collateral makes no warranty. (Sec. 46)

Q: What is a non-negotiable warehousereceipt?

A: It is a receipt in which it states that thegoods received delivered to tile depositor or toany other specified person (Sec. 4).

Q: What is required in a non-negotiablereceipt?

A: It shall have plainly placed upon its face bythe warehouseman issuing it "non-negotiable,"or "not negotiable." (Sec. 7)

Note: Failure to mark "non-negotiable" shallmake it negotiable (if the holder purchased it forvalue supposing it to be negotiable).

Q: How is it transferred?

A: A non-negotiable warehouse receipt maybe transferred by its delivery to the transfereeaccompanied by a deed of assignment,donation or other form of transfer.

Q: What is the effect of indorsement?

A: Even if the receipt is indorsed, thetransferee acquires no additional right (Sec.39)


Pacu{taa ae (j)erecfzo Civif

SPECIAL COMMERCIAL LAWS: WAREHOUSE RECEIPTS LAW

Q: Distinguish negotiable warehouse receipt from non-negotiable warehouse receipt.

A:1_~I::(eJ:enI.:c':~=lW!';:~=!.;['l·l-"j=l~L=ttj~I"

May be a~uired through n~otiatiori May be acquired through transfer or assignment

Rights of the holder of the receipt:

1. If indorsed:

a. Acquires title to the goods as theperson negotiating. (Sec. 41)

b. Acquires the direct obligation of thewarehouseman to hold possession ofthe goods for him as if thewarehouseman directly contractedwith him. (Ibid.)

2. If not indorsed: He may compelindorsement; otherwise, he wouldacquire title as that of an assignee(Section 43).

Rights of transferee:

1. Acquires title to the goods subject to theterms of any agreement with the transferor.(Sec. 42)

2. Acquires the right to notify thewarehouseman of the transfer and therebyacquires the direct obligation of thewarehouseman to hold possession of thegoods for him. (Sec. 42)

Note: Prior to notice, the title of the transferee may bedefeated by the levy of an attachment or executionupon the goods by a creditor of the transferor or by anotification to the warehouseman by the transferor or asubsequent purchaser from the transferor of asubsequent sale of the goods by the transferor. (Sec.42)

Defeats the lien of the seller of the goodscovered thereQt.{Sec. 49J Acquires the title as that of his transferor.Good covered cannot be garnished, attached orlevied on execution by execution, unless:

1. Receipt is surrendered.2. Its negotiation is enjoined by the court.3. The goods are impounded by the court.

(Sec. 25)

Note: This shall not apply if the persondepositing is not the owner of the goods or onewho has no right to convey title to the goodsbinding upon the owner.

Pending notification to the warehouseman, goodscan be.

Reason: Absent such notice, both thewarehouseman and the sheriff have a right toassume that the goods are still owned by the personwhose name appears in the receipt.

Protects the purchaser in good faith and forvalue. The assignee only steps into the shoes of the

assignor.

Q: A Warehouse Company received forsafekeeping 1000 bags of rice from amerchant. To evidence the transaction, theWarehouse Company issued a receiptexpressly providing that the goods bedelivered to the order of said merchant. Amonth after, a creditor obtained judgmentagainst the said merchant for a sum ofmoney. The sheriff proceeded to levy onthe rice and directed the Warehouse Com-pany to deliver to him the deposited rice.What advice will you give the WarehouseCompany? Explain your answer.A: The merchant delivered the 1000 bags ofrice to the Warehouse Company and anegotiable receipt was issued therewith. Therice cannot thereafter, while in the possessionof the Warehouse Company, be attached bygarnishment or otherwise, or be levied uponunder an execution unless the receipt be first

138 /team:bIIN

surrendered to the warehouseman, or itsnegotiation enjoined. The WarehouseCompany cannot be compelled to deliver theactual possession of the rice until the receipt issurrendered to it or impounded by the court.

Q: Assuming that a week prior to the levy.the receipt was sold to a rice mill on thebasis of which it filed a claim with thesheriff. Would the rice mill have betterrights to the rice than the creditor? Explainyour answer.

A: Yes. The rice mill, as a holder for value ofthe receipt, has a better right to the rice thanthe creditor. It is the rice mill that cansurrender the receipt which is in its possessionand can comply with the other requirementswhich will oblige the warehouseman to deliverthe rice, namely, to sign a receipt for the


delivery of the rice, and to pay thewarehouseman's liens and fees and othercharqss (1999 Bar Question)

Q: Jojo deposited several cartons of goodswith SN Warehouse Corporation. Thecorresponding warehouse receipt wasissued to the order of Jojo. He endorsedthe warehouse receipt to EJ who paid thevalue of the goods deposited. Before EJcould withdraw the goods, Melchorinformed SN Warehouse Corporation thatthe goods belonged to him and were takenby Jojo without his consent. Melchor wantsto get the goods, but EJ also wants towithdraw the same. Who has a better rightto the goods? Why?

A: EJ has better right to the goods. The goodsare covered by a negotiable warehouse receiptwhich was indorsed to EJ for value. Thenegotiation to EJ was not impaired by the factthat Jojo took the goods without the consent ofMelohor, as EJ had no notice of such fact.Moreover, EJ is in possession of thewarehouse receipt and only he can surrenderit to the warehouseman. (Sec. 8, WRL)

Q: If SN Warehouse Corporation isuncertain as to who is entitled to theproperty, what is the proper recourse of thecorporation? Explain

A: Since there is a conflicting claim ofownership or title, SN Warehouse Corporationshould file a complaint in interpleader requiringEJ and Melchor to interplead. The matterinvolves a judicial question as to whose claimis valid. (2005 Bar Question)

Q: What is the rule where a warehousereceipt is transferred to secure payment ofa loan by way of pledge or mortgage?

A: The pledgee or mortgagee does notautomatically become the owner of the goodsbut merely retains the right to keep and withthe consent of the owner to sell them so as tosatisfy the obligation from the proceeds for thesimple reason that the transaction is not a salebut only a mortgage or pledge. Likewise, if theproperty is lost without the fault or negligenceof the mortgagee or pledgee, then said goodsare to be regarded as lost on account of thereal owner, mortgagor or pledgor (PNB v.Sayo, Jr., GR. No. 129198, July 9, 1998).

Q: Does the non-payment by the originaldepositors of the purchase price render thefurther negotiation of the receipt invalid?

A: No, the negotiation of the warehousereceipt by the buyer of goods purchased fromand deposited to the warehouseman is valideven if the warehouseman who issued thenegotiable warehouse receipt was not paid bythe buyer. The validity of the negotiationcannot be impaired by the fact that theowner/warehouseman was deprived of thepossessicin of the same by fraud, mistake orconversion. (PNB v. Noah's Ark SugarRefinery, GR. No. 107243, Sept. 1, 1993)

Q: What are the obligations of awarehouseman?

A:1. To take care of the goods entrusted

to his safekeeping; and

·2. To deliver them to the holder ofthe receipt or the. depositorprovided there is demand by thedepositor accompanied by either:a. An offer to satisfy the

warehouseman's lien;b. An offer to surrender the receipt,

if negotiable with suchindorsements as would benecessary for the negotiation ofthe receipts; or

c. A readiness and willingness tosign, when the goods aredelivered, an acknowledgementthat they have been delivered,if such signature is requestedby the warehouseman (Sec. 8)

Q: Should the demand be made in order tohave the delivery by the warehouseman?

A:GR: Yes, the demand should be made inorder before the duty to deliver the goodswill arise.

XPN: When the warehouseman hasrendered it beyond his power to deliver thegoods.


PacuCtaa de Derech o Civil

SPECIAL COM1vfERCIALLAWS: WAREHOUSE RECEIPTS LAW

Q: To whom should the goods bedelivered?

A:1. To the person lawfully entitled to the

possession of the goods, or hisagent;

2. To the person entitled to deliveryunder a non-negotiable instrument orwith written authority; or

3. To the lawful order of a negotiablereceipt. (person in possession of anegotiable receipt) (Sec. 9)

Q: When is refusal to deliver by thewarehouseman justified?

A:1. If the warehouseman's lien is not

satisfied by the claimants (Sec. 31);

2. Where the goods have already beensold to satisfy the warehouseman'slien or because of their perishable orhazardous nature (Sec. 34);

3. If the warehouse receipt is negotiatedback to him.

4. When the holder does not satisfy theconditions prescribed in Section 8.

5. The failure was not due to any faulton the part of the warehouseman:a. Upon request by or on behalf of

the person lawfully entitled; (Sec.10);

b. If he had information that thedelivery about to be made was toone not lawfully entitled; (Ibid.)

c. If several persons claim thegoods; (Sec. 17)

d. If the warehouseman needsreasonable time to ascertain thevalidity of the claim if someoneother than the depositor claimstitle to the goods; (Sec. 18)

e. If the goods are lost, despiteordinary care by thewarehouseman.

140

Q: What if the receipts are lost ordestroyed?

A: A court of competent jurisdiction may orderthe delivery of the goods only:

1. Upon satisfactory proof of the loss ordestruction of the receipt; and

2. Upon the giving of a bond withsufficient sureties to be approved bythe court. (Sec. 14)

Note: The delivery of the goods under an order ofthe court shall not relieve the warehousemanfrom liability to a person to whom the negotiablereceipt has been or shall be negotiated for valuewithout notice of the proceedings or of thedelivery of the goods. (Sec. 14)

Q: What is the rule on mixture of goods?A:

GR: Warehouseman shall keep thedifferent goods under different receipts.

XPN: If authorized by agreement or bycustom, a warehouseman may minglefungible goods with other goods of thesame kind and grade although of differentownership. (Sec. 23)

Q: When does the duty to insure the goodsarise?

A:1. Where the law provides;2. Where it was an inducement for the

depositor to enter into the contract;3. Established practice; or4. Where the warehouse receipt

contains a representation to thateffect.

Q: What is conversion?

A: An unathorized assumption and exercise ofthe right of ownership over goods belonging toanother through the alteration of their conditionor the exclusion of the owner's right (Bouvier'sLaw Dictionary)

Q: What are the instances where awarehouseman is liable for conversion?

A:1. Where the delivery is made to person

other than those authorized;

2. Even if delivered to persons entitled,he may still be liable for conversion ifprior to delivery:a. He had been requested not to

make such delivery; or


b. He had received notice of theadverse claim or title of a thirdperson.

Q: Give the effects of alteration of thereceipt on the liability of thewarehouseman.

A:1. Alteration immaterial whether

fraudulent or not, whether authorized'or not, the warehouseman is liableon the altered receipt according to itsoriginal tenor

2. Authorized material alteration - thewarehouseman is liable accordingto the terms of the receipt as altered

3. Material alteration innocently made -the warehouseman is liable on thealtered receipt according to itsoriginal receipt

4. Material alteration fraudulentlymade - warehouseman is liableaccording to the. original tenor ofthe receipt to a purchaser of thereceipt for value without notice, andeven to the a1\erer and subsequentpurchasers with notice except thatas regards to the last two,the warehousem an's liability is limitedonly to delivery as he is excused fromany liability

Q: What is covered by the warehouseman'slien over the goods deposited or on theproceeds thereof?

A:1. Charges for storage and preservation

of the goods (insurance and othersmay be included as long as it isstipulated);

2. Money advanced, interest, insurance,transportation, labor, weighing,coopering and other charges andexpenses in relation to such goods;

3. Charges and expenses for notice,and advertisements of sale, and forsale of the goods where default hadbeen made in satisfying thewarehouseman's lien. (Sec. 27)

Q: What are the remedies available to awarehouseman to enforce hiswarehouseman's lien?

A:1.

.:.,'

2.

By refusing to deliver the goods untilthe lien is satisfied;By causing the extrajudicial sale ofthe property and applying theproceeds of the value of the lien;

Note: Where the sale was i madewithout the publication required andbefore the time provided by law, suchsale is void and the purchases of thegoods acquires no title to them.

3. By filing a civil action for collection ofthe unpaid charges or by way ofcounterclaim in an action to recoverthe property from him or such otherremedies allowed by law for theenforcement of a lien againstpersonal property or to a creditoragainst his debtor, for the collectionfrom the depositor of all the chargeswhich the depositor has boundhimself to pay.

Q: Against whose goods may the lien beenforced?

A:1. Goods belonging to the person who is

liable as debtor; and2. Goods belonging to others which

have been deposited at any time bythe debtor with authority to make avalid pledge. (Sec. 28)

Q: How may the warehouseman lose hislien?

A:1. By surrendering possession thereof,

or2. By refusing to deliver the goods when

a demand is made with which he isbound to comply. (Sec. 29)

Note: Where a negotiable receipt is issued, withthe exception of the charges for the storageor preservation of goods for which anegotiable receipt has been issued, the lienexists only for other' charges expressly

, ',. enumerated in the receipt so far as they arewritten although the amount of the said chargeisn't stated.

Loss of lien does not mean that thewarehouseman does not have any other remedy.


Pacu[tarf de Der ec Iio Civif

SPECIAL COMMERCIAL LAWS: WAREHOUSE RECEIPTS LAW

Q: What are the instances where awarehouseman is criminally liable for hisacts?

A:1. Issuance of receipts for goods not

received. (Sec. 50)Issuance of receipt containing falsestatement. (Sec. 51)Issuance of duplicate negotiablewarehouse receipt not marked assuch. (Sec. 52)Issuance of a negotiable warehousereceipt of which he is an ownerwithout_stating such fact ofownership. (Sec. 53)Delivery of goods without obtainingnegotiable warehouse receipt. (Sec.54)Negotiation of receipt for mortgagedgoods. (Sec. 55)

2.

3.

4.

I

51

I6)

Q: What are the other acts for whichwarehouseman is liable?

A:1. Failure to stamp "duplicate" on copies

of negotiable receipt (Sec.6)2. Failure to place "non-negotiable" or

"not-negotiable" on a non-negotiablereceipt (Sec. 7)

3. Misdelivery of goods(Sec. 10)4. Failure to effect cancellation of a

negotiable receipt upon delivery ofthe goods (Sec. 11)

5. Issuing receipt for non-existing goodsor misdescribed goods (Sec. 20)

6. Failure to take care of the goods(Sec. 21)

7. Failure to give notice in case of saleof goods to satisfy lien (Sec. 33) orbecause the goods are perishable orhazardous (Sec. 34)

142

Academics Corrunrttce .Uwirpenoll: Abraham D. Celluill() II

Vice-Chair]or .Academi,»: Jeannie A, Laurentinof/i~1:-(/J(jirJ;Jr Admine»: Finance: Aissa Celinc ll. Luna

Vi,r-Cbairjill' La),o,,' C:,.. De.r1~1I: Loise Rae C. Naval

Mercantile Law Cornrn itrce.\'ubied lIead' Hoty '1'. Amj)aguey

A"-J/ ... )lIb/ed I lead: Maniivn Rose S. S()tei"

Members:I ':dwin Marc T Ilaldia

Airccn M. CachoSocrates I\cnjic I. MarbilRon Chcrric S. Menciu%a

L':dison.lamcs te. l'ag<llitauol1Maybcllin« M. Santiago


Q: When is the law applicable?

A: The GBWA applies to a warehousemanengaged in the business of receivingcommodity for storage, including contracts ortransactions:

1. Wherein the warehouseman isobligated to return the very samecommodity delivered to him or to payits value;

2. Wherein the commodity delivered isto be milled for and on account of itsowner; or

3. Wherein the commodity delivered iscommingled with commoditydelivered by or belonging to otherpersons and the warehouseman isobligated to return commodity of thesame kind or to pay its value (Sec.2)

Note: The kinds of commodity to be depositedmust be those which may be traded or dealt inopenly and legally. Thus, illegal and prohibitedgoods may not be validly received (Sec.2)

Q: What are the obligations of a. warehouseman under this law?

A: A warehouseman cannot receive goods forstorage, milling or commingling withoutperforming the following:

1. He must secure a license from theDepartment of Trade and Industry;

2. He must file cash, real estate orsurety bond in an amount not lessthan 33% of the market value of themaximum quantity or commodity tobe received.

3. He must not discriminate and mustopen his warehouse to the public;

4. In case of damage to the goodsbecause the warehouseman acceptsgoods in excess of the capacity of hiswarehouse, the latter is liable in theamount equivalent to double tilemarket value of the goods.

5. The goods must be insured againstfire.

Academics CommitteeClwirperflJlJ: Abraham D. (;cnuino II

f ·'i((l-Chair.Jfu· AtaJl:llllt:C J<..:annit: A. Laurcn tinoVit"C-CI.lairjo1' .,qdmiJl ~',;",1-'IJltlna: :\iss:l Celinc r I. Luna

r 'iw-Chair./or Li..'Y01l11i:.....J)e,flgn: LDisc Rae C;. Naval

Mercantile Law Committeej'"b/,d Head: Holy T il1l1pagucy

Aut . .l"lIbl'(/ ['-/c"d: Manilyn Rose S. Sotelo


Airccn M. CachoSocrates Benjie 1. ilbrbilR ••n Chcrric S. Mendoza

Edison JamLs I", PagalilauanMaybellinc IVI.Santiago


'Facu It a d: de (])erecfio Civif

SPECIAL COMMERCIAL LA \\IS: TRUTH IN LENDING ACT

Q: What is the purpose of Truth in LendingAct (TILA)?

A: To protect persons from a lack ofawareness of the true cost of credit and toprevent the uninformed use of credit.

Q: When does TILA apply?

A: It applies to creditors who extend loans,sales on installments and other credittransactions.

Note: It applies only to cases involving extensionof credit and not to transactions made on cashbasis!

IQ: What are the items required to bedisdosed?

A:1. In credit sales:

a. Cash price or delivered price;b. Credit for down-payment or

trade-in;c. Total amount to be financed;d. Charges not incident to the sale;e. Finance charges - amounts to

be paid by the debtor incident tothe extension of credit such asinterests, discounts, collectionfees, credit investigation feesand attorney's fees;

f. Percentage of the financecharges 0 the amount to befinanced;

g. Effective interest rate;h. Repayment program; andi. Default or delinquency charges

or late payments. (Sec. 4, TlLA)

2. In consumer loans:a. Amount of credit;b. Charges;c. Amount to be financed;d. Amount of finance charge;e. Effective interest rates;f. Percentage of finance charge

and amount to be financed;g. Default or delinquency charges;

andh. Description of security.

Note: This disclosure requirement is notapplicable to bank deposits and insurancecontracts.

144

Q: When and how should disclosure bemade?

A: Prior to the consummation of thetransaction and in a clear statement in writing.

Q: What are the credit transactions coveredbyTILA?

A:1. Loans, mortgages, deeds of trust,

advances and discounts;2. Conditional sales contracts, any

contract to sell, or sale or contract ofsale of property or services, either forpresent or future delivery, underwhich part or all of the price ispayable subsequent to the making ofsuch sale or contract;

3. Any rental-purchase contract;4. Any contract for the hire, bailment or

leasing of property;5. Any option, demand, lien, pledge or

other claim against, or for delivery of,property or money;

6. Any purchase, or other acquisition of,or any credit upon the security of, anyobligation or claim arising out of any'of the foregoing; and

7. Any transaction or series oftransactions having a similar purposeor effect. (Sec. 3)

Q: What transactions are not covered byTILA?

A:1. Those which do not involve the

payment of any finance charges bythe debtor; and

2. Where the· debtor is the onespecifying a definite and fixed set ofcredit terms such as bank deposits,insurance contracts, sale of bonds,etc.


Q: What is the effect of non-compliancewith TllA?

Q: May the lender collect handling chargeswhere the promissory notes executed donot contain any. stipulation pertaining tothe payment of such handling charges?

A: .No, banks and non-bank financialintermediaries authorized to engage in quasi-banking functions are required to strictlyadhere to the provisions of the TllA. Wherethe promissory note signed by the borrowersdo not contain any stipulation on the paymentof handling charges, the bank cannot collectthe same even though a CB Circular 504authorized banks to collect handling chargeson loans over P500,OOO.(Consolidated Bankv. CA, G.R. No. 91494, July 14, 1995)

Q. What is the effect of the violation on thecontract?

Charges not itemizedcannot be collected. Ifalready paid, can be

recovered

as provided insubsec. (a),

nothing shall affect thevalidity or

enforceability of anycontract or

transactions.

Liable in amountof P100 or in anamount equal totwice the finance

charged required bysuch creditor,

whichever is thegreater, except thatsuch liability shallnot exceed P2,000

on any credittransaction.

be by notless than P1,000 ormore than P5,OOOorimprisonment for notless than 6 months,nor more than one

or both.

Q: Dana Gianina purchased on a 36 monthinstallment basis the latest model of theNissan Sentra Sedan car from the JobelCars Inc. In addition to the advertisedselling price, the latter imposed financecharges consistinq of interests, fees andservice charges. It did not, however, submitto Dana a written statement setting forththerein the information required by theTruth in lending Act (R.A. 3765).Nevertheless, the conditional deed of salewhich the parties executed mentioned thatthe total amount indicated therein includedsuch finance charges.

Has there been substantial compliance ofthe aforesaid Act?

A: There was no substantial compliance withthe Truth in lending Act. The law provides thatthe creditor must make a full disclosure of thecredit lost. The statement that the total amountdue includes the principal and the financialcharqes, without specifying the amounts dueon each portion thereof would be insufficientand unacceptable.

A: A violation of the Truth in lending Act willnot adversely affect the validity of the contractitself.

Q. In the event of a violation of the Act,what remedies may be availed of by Dana?

A: It would allow Dana to refuse payment offinancial charges or, if already paid, to recoverthe same. Dana may also initiate criminalcharges against the creditor. (1991 BarQuestion)

Q: Embassy Appliances sells home theatercomponents that are desiqned andcustomized as entertainment centers forconsumers within the medium-to-high pricebracket. Most, If not all, of these packagesare sold on installment basis, usually bymeans of credit cards allowing a maximumof 36 equal monthly payments. Preferredcredit cards of this type are those Issuedby banks, which regularly hold mall-widesales blitzes participated in by applianceretailers like Embassy Appliances. You area buyer of a home theater center atEmbassy Appliances. The salesclerk whois attending to you Simply swipes yourcredit card on the electronic approvalmachine (which momentarily prints outyour charge Slip since you have unlimitedcredit), tears the slip from the machine,hands the same over to you for yoursignature, and without more, proceeds .toarrange the delivery and installation of yournew home theater system. You know youwill receive a statement on your credit cardpurchases from the bank containing anoption to pay only a minimum amount,which is usually 1/36 of the total price youwere charged for your purchase. DidEmbassy Appliances comply with the

U N I V E R 5 I T Y OF 5 ANT 0 TOM A 5 ~ ~'. 145Pacu{taa ae De re ch o Civit .•.

SPECIAL COMMERCIAL LAWS: TRUTH IN LENDING ACT

provisions of the Truth In Lending Act (RA.3765)?

A: There is no need for Embassy Appliancesto comply with the Truth In Lending Act. Thetransaction is not a sale on Installment basis.Embassy Appliances Is a seller on cash basis.It is the credit card company which allows thebuyer to enjoy the privilege of paying the priceon installment basis. (2000 Bar Question)

Q: When must an action for violation of theTruth in Lending Act be brought?

A: Within 1 year from the date of theoccurrence of the violation.

146

Academics CommitteeC//(Jirj>CIJIIII: Abraham D.·( icnuinr. II

!/iLr-Ch£lirj()r ./.'(C}(IL'mi~:r:.l cannic /\. J .au rcu rino1/"ia'·LhairJ'u- /Idmill e.'.'"I'i"IIUlh!:: Ai s sa Ccliru- II. Luna

I/i,,'-Chairjill' l ayou; e.'" Oe.r(~Il: 1 .oisc Rae (;. Na val

Mercantile Law CommitteeJ/lbjcd 1/,,,,/, [[oIl' T. 1\l11l'aguey

/r.•..•t. .\J(bjed Hearl- Mnnilyn Rose S. Sotclo

Members:I,dwin Mnrc T. Ihldia

Airccn IVI. CachoSocrates Belliie r. Mm-hilROil Chcrric S. IVlclldoza

Edisoll.ialllcs F. P;lgaljlauallMnybcllin« M. Santiago

".---.,l'("~ ~- •


Q: What is real estate mortgage (REM)?

A: It is a contract whereby the debtor securesto the creditor the fulfillment of a principalobligation, specially subjecting to such securityimmovable property or real rights overimmovable property which obligation shall besatisfied with the proceeds of the sale of saidproperty or rights in case the said obligation isnot complied with atthe time stipulated.

Q: What is the nature of REM?

A: It is a real right following the property, suchthat in subsequent transfers by the mortgagor,the transferee must respect the mortgage. Aregistered mortgage lien is consideredinseperable from the property inasmuch as it isa right in rem.

Q: What laws govern REM?

A:1. Act 3135 - Extrajudicial foreclosure;

when a special power of attomey isattached/inserted to REM contract;

2. Rule 68, Rules of Court - When thecontract is silent as to the manner offoreclosure, judicial;

3. Sec. 47, R.A. 8791 (General BankingLaw of 2000) - Mortgagee/bidder is abank.

Q: What are the alternative remedies of themortgagee?

A:1. Mortgagor is living

a. Foreclosurea. judicial (Rule 68, ROC)b. Extrajudicial (Act 3135)

b. Ordinary action for collection ofmoney - effect is waiver of REM

2. Mortgagor is deada. Waive the mortgage and claim

the entire debt from the estate ofthe mortgagor as an ordinaryclaim;

b. Judicial foreclosure; andc. Rely on the mortgage. (Sec. 7,

Rule 86. ROC)d. Extrajudicial foreclosure (Act

3135) before it is barred byprescription without right to file aaclaim for any deficiency. (Vda.

De Jacob v. CA, G.R. No. 88602,Apr. 6, 1990)

Q: What are the methods of forced salesarising from failure to pay mortgage debt?

A:1. Extrajudicial foreclosure sale under

Act No. 3135.2. Judicial foreclosure sale under Rule

68 of the Rules of Court.3. Ordinary execution sale under Rule

39.

Q: What are the stages in extra-judicialforeclosure?

A:1. Execution of contract of loan and

REM agreement with thecorresponding SPA.

2. Default of the mortgagor-debtor eitherby:a. non-payment; orb. violation of the terms of the loan

or REM agreement.

3. Filing of petition for sale witll clerk ofcourt who acts as ex-officio sheriff(A.M No. 99-10-05-00). Afterwards,the clerk of court will raffle it amongthe sheriffs, who shall conduct theforeclosure sale once given theauthority to do so.

Note: Petition is filed where theproperty is located. In case themortgaged properties are located indifferent provinces, the venue of theextrajudicial foreclosure proceedings isthe place where each of the mortgagedproperty is located.

A mortgage action prescribes in 10years from the time the right of actionaccrues, that is, from the time themortgagor defaults in the payment ofhis obligation to the mortgagee and notfrom the date of the execution of themortgage contract. (Cando v. SpousesOlazo, G.R. No. 160741, Mar. 22, 2007)

4. Compliance with certain jurisdictionalrequirements:a. Publication - in a newspaper of

general circulation once a weekfor 3 consecutive weeks; and

U N I V E R 5 I T Y 0 F SAN ToT 0 MAS ~-u,;..••147Pacu(tad de (])erecfio Ci-oi] •.

SPECIAL COMMERCIAL LAWS: REAL ESTATE MORTGAGE

b. Posting - of the notice of sale fornot less than 20 days in at least3 public/conspicuous places inthe province or municipalitywhere property is located.

Note: A certificate of posting is notindispensable for the validity of anextra judicial foreclosure sale ofreal property. What the lawrequires is the posting of the noticeof sale and not the certificate ofposting. (Development Bank of thePhils. v. CA G. R. No. 125838 June10, 2003)

5. Foreclosure - the remedy available tothe mortgagee by which he subjectsthe mortgaged property to thesatisfaction of the obligation to securewhich the mortgage was given. (59G.J.S.482)

6. Registration of sale with the RD -This pertains to the annotation of thesale to the TCT on file with the RD.

7. Redemption The mortgagorreacquires or buys back the property,which may have passed under themortgage.

8. Consolidation of title - By filingaffidavit with RD. The Affidavit ofConsolidation of Title must indicatethe relevant dates to showmortgagor's failure to redeem withinthe allowable time. This enables themortgagee to acquire full ownership

. over the property. HiS inchoate rightripens to full ownership.

9. Cancellation of the title of themortgagor and Issuance of a new titlein favor of mortgagee - The basis ofwhich is the order of court confirmingthe sale. .

Petition for a writ of possession -There is no need to file an ejectmentsuit. Here, the mortgagee employsforce to oust the mortgagor from theproperty. This writ may be evenissued during redemption periodprovided the mortgagee issued abond, but the grant of which isdiscretionary on the part of the court.But if the petition for the writ is filedafter the expiration of the redemptionperiod, the issuance of which isministerial on the part of the court.This writ can be issued without theissuance of a bond; in fact it can even

148

be issued ex parte. The writ cannotbe suspended even by the filing ofthe mortgagor of an action to annulthe foreclosure sale.

Q: Is there a need for personal notice?

A: No, (GSIS v. CA, G.R. No. 40824, Feb. 23,1989) unless so stipulated.

Q: What is meant by "once a week for threeconsecutive weeks"?

A: A period of 7 days, inclusive of the first dayof publication. The publication must be made 7days apart (PNB v. CA, G.R. No. 108870, July14, 1995) .

.Q: What happens when the foreclosure saleis postponed?

A: The notice of sale must be republishedonce a week for three consecutive weeksotherwise, foreclosure is invalid. (Tambuntingv. CA, G.R. No. L-48278, Nov. 8, 1988)

Q: Is the rule on republication absolute?

A:GR: Yes.

XPN:1. The sale was not finished and is

continued the following day untilcompleted; or

2. When there is waiver.

Q: What is the effect of clerical errors in thenotice?

A: Clerical errors in the name of the mortgagorand the technical description in the notice ofsale are not sufficient to annul a foreclosure.(Langkaan Realty Development v. UCPB, G.R.No. 139437, Dec. 8, 2000)

Q: Can the notices required by law bewaived?

A: No, the parties have absolutely no right towaive the posting and publicationrequirements under Act 3135. xxx Notices aregiven to secure bidders and prevent sacrificeof property. (PNB v. NepomucenoProductions, G.R. No. 139479, Dec. 27, 2002)


Q: How is the foreclosure sale conducted?

A: Highest bidder wins, if mortgagee wins,there is no need to pay cash to the mortgagor,and thus, the bid price would simply be appliedto the amount of the obligation. If thehighest bidder is not the mortgagee, then thepurchaser needs to pay cash and remit hispayment to the mortgagee.

Q: What are the statutory requirements forthe foreclosure sale?

A: It shall be made in public auction, between9:00 AM and 4:00 PM, under direction of anyof the following persons:

1. Sheriff;2. Municipal judge; or3. Auxiliary municipal judge of the

municipality in which the sale has tobe made; or

4. Notary public of said municipality.(Sec. 4, Act 3135)

Note: At the sale, creditor, trustee, or any personauthorized to act for the creditor may participatein the bidding. Also, any other person may bidunless the contrary is expressly provided in themortgage or trust deed under which the sale ismade. (Sec. 5, Act 3135)

Q: Would failure to implead subordinatelien holders to the mortgage as defendantsin foreclosure proceedings would renderthe proceedings not valid?

A: No. Appropriate relief could be granted bythe court to the mortgagee in the proceeding,without affecting the rights of the subordinatelien holder. The effect of the failure on the partof the mortgagee to make the subordinate lienholder a defendant is that the decree offoreclosure in a suit to which the holders of asecond lien are not parties leaves the equity ofredemption in favor of such lien holders'unforeclosed and unaffected. (Loyuko, et al. v.CA, G.R. No. 102696, July 12, 2001)

Q: When must the buyer exercise the rightof redemption?

A: One year from the date of registration ofcertificate of sale.

Note: The exercise of the right of redemption isan implied admission of the regularity of theforeclosure sale and estops the mortgagor fromlater impugning its validity on that ground.Redemption is inconsistent with the claim of theinvalidityof the sale.

Q: When does the one year period forredemption not apply?

,A: It does not apply to real estate mortgagesconstituted by juridical persons in favor of abank, quasi-bank or trust entity. Rigl,t toredeem can only be exercised until b:ut notafter the registration of the certificate of 9ale or3 months from foreclosure, whichever isearlier, under the following conditions:

1. Mortgagor must be a juridical personthat is either a partnership or acorporation;

2. Mortgagee is a bank, quasi-bank ortrust entity; and

3. Foreclosure is done extra judicially.

Q: Primetime Corporation (the Borrower)obtained a P10 million, five-year term loanfrom Universal Bank (the Bank) in 1996. Assecurity for the loan and as required by theBank, the Borrower gave the followingcollateral security in favor of the Bank: (1) areal estate mortgage over the land andbuilding owned by the Borrower andlocated in Quezon City; (2) the joint andseveral promissory note of Mr. PrimoTlrnbol, the President of the Borrower; and(3) a real estate mortgage over theresidential house and lot owned by Mr.Timbol, also located in Quezon City.Because of business reverses, neither theBorrower nor Mr. Timbol was able to paythe loan. In June 2001, the Bankextrajudicially foreclosed the two realestate mortgages, with the Bank as theonly bidder in the foreclosure sale. OnSeptember 16,2001, the certificates of saleof the two properties in favor of the Bankwere registered with the Register of Deedsof Quezon City. Ten months later, both theBorrower and Mr. Timbol were able to raisesufficient funds to redeem their respectiveproperties from the Bank, but the Bankrefused to permit redemption on theground that the period for redemption hadalready expired, so that the Bank now hasabsolute ownership of both properties. TheBorrower and Mr. Timbol came to youtoday, September 15, 2002, to find out if theposition of the Bank is correct. What wouldbe your answer? State your reasons.

A: With respect to the real estate mortgageover the land and building owned by theBorrower, Primetime Corporation, a juridicalbody, the period of redemption is only three (3)months, which period already expired. As tothe real estate mortgage over the residentialhouse and lot owned by Mr. Timbol, the periodof redemption is one (1) year from the gate ofregistration of the certificate of sale, Iwhich

U N I V E R 5 I T Y 0 F 5 ANT 0 TOM A 5 ~. 149'Fac u.It a d. tie (])erecho Ci-oil '",

SPECIAL COMMERCIAL LAWS: REAL ESTATE MORTGAGE

period has not yet expired in this case. (2002Bar Question)

Q: What is the difference between the rightof redemption and repurchase?

A: The right to redeem a foreclosed propertybecomes functus officio on the date of expiryand Its exercrse after the period is not reallyone of redemption but a repurchase.Distinction must be made because redemptionIS by force of law; the purchaser at publicauction is bound to accept redemption.Repurchase however of foreclosed property,after redemption period, imposes no suchobligation. After expiry, the purchaser mayormay not resell the property but no law willcompel him to do so and he is not bound bythe said bid price; it is entirely within hisdiscretion to set a higher price, for after all, theproperty already belongs to him as owner.(Prudencio v. CA, G.R. No. L-34539, July 141986) ,

Q: What is the rule as to the redemptionprice in case the mortgagee is a bankinginstitution?

A: . Where the mortgagee is a bankingInstitution, the redemption price is the amountfixed by the court in the order of execution orthe amount due under the mortgaged deed.(Tolentino v. CA, G.R. No. 171354 Mar 72007) , .,

IQ: What is the redemption price in case ofaccornodatlon mortgagors?

A: Accommodation mortgagors are not liablefor the payment of the loan of the debtor. Theliability of the accommodation mortgagorsextends only up to the loan value of theirmortgaged property and not to the entire loanitself. Hence, it is only just that they beallowed to redeem their mortgaged property bypaying only the winning bid price thereof (plusinterest thereon) at the public auction sale.(Belo v. PNB, G.R. No. 134330, Mar. 1, 2001)

Q: What is the effect of filing an action toannul the foreclosure sale during the one-year redemption period?A: It will not toll the running of the one-yearredemption period. (MBTC v. Spouses Tan, etai, G.R. No. 159934, June 26, 2008)

Note: A judicial action instituted for the solepurpose of determining the amount of theredemption price, if filed before the expiration ofthe original period to redeem, has the effect of avalid exercise of the right to redeem and willsuspend the running of the period of redemption

150 Iteam:'B

even if unaccompanied by a simultaneous tenderof the redemption price.

However,.before this rule can be mad~ to apply, itIS essential that the judicial action was institutedby the mortgagor in good faith and not merelydesigned to delay the redemptive periodindefinitely. (Heirs of Norberto Quisumbing v.PNB, GR No. 178242, Jan. 20, 2009)Q: Who is the owner of the mortgagedproperty?

A: During the redemption period, themortgagor is still the owner. Hence, he maystili execute attributes of ownership during saidperiod such as executing a second mortgageon the same subject property.

Q: The mortgagee introducedimprovements in the property sought to beredeemed. Will the cost of improvementsbe imputed to the redemption price?

A: No, to rule otherwise would defeat thepurpose of the law.

Q: What is the remedy if the mortgagorfailed to redeem but nonetheless refuses tosurrender the certificate of title?

A: The court may order the Register of Deedsto register the final deed of sale becauseotherwise the buyer will never be able toconsolidate his title. (San Juan v. CA, G.R. No.110055, Aug. 20, 2001)

Q: Is a mortgagee, who foreclosed andpurchased the mortgaged real property of adelinquent debtor, entitled to a writ ofpossession over the property despite thefact that the premises are in thepossession of a lessee and whose leasehas not terminated.

A: The mortgagee is entitled to the issuance ofa writ of possession even if the property is inthe possession of a lessee whose lease hasnot expired unless the lease had beenpreviously registered in the Registry ofProperty or unless despite non-registration, themortgagee had prior knowledge of theexistence and duration of the lease (actualknowledge being equivalent to registration).(Ibasco v. Caguioa, G.R. No. L-62619, Aug.19, 1986)

Note: The buyer at the extra-judicial foreclosureof real property is not entitled to possession if it isin the possession of an agricultural tenant, who isentitled to security of tenure. (PNB v. CA, GRNo. 105760, July 7, 1997)


Q: What are the remedies availing in favorof third parties adversely affected by theorder for the issuance of the writ ofpossession in favor of the winning bidder?

A:1. Terceria to determine whether the

sheriffs has rightly or wrongfully takenhold of the property not belonging tothe judgment debtor or obligor; and

2. An independent separate action tovindicate their claim of ownershipand/or possession over theforeclosed property. (China BankingCorporation v. Ordinaria, G.R. No.121943, Mar. 24, 2003)

Note: A third party in possession of theproperty who is claiming a right adverse tothat of the debtor/mortgagor may not bedispossessed on the strength of a mere exparte possessory writ, since to do so wouldbe tantamount to his summary ejectment.(Penson v. Spouses Maranan, G.R. No.148630, June 20, 2006)

The available remedies are cumulative.

Q: What is the effect of filing a collectioncase?

A: It is tantamount to abandonment of theremedy to foreclose the REM. The principleapplies even though the mortgage wasconstituted on the property of a third partymortgagor and the collection suit was filedbefore foreign courts.

Q: What are the stages in judicialforeclosure?

A:1. File a complaint against the

mortgagor - Don't forget to includesubsequent lien holders, otherwiseequity in redemption will not bedivested (Limp in v. lAC, G.R. No. L:7098, Sept. 29, 1988). The priorexecution of SPA is not requiredhere.

2. Hearing3. Judgment4. Entry of Judgment - This is the

reckoning point whereby the period ofequity of redemption is computed.

5. 90 - 120 days from entry of judgmentfor mortgagor to pay his debt, asdetermined by court.

6. Upon failure to pay, mortgagee mustfile a Motion for Execution foreclosingthe mortgage.

7. Execution sale8. Mortgagee to file Motion for

Confirmation of Sale - the purpose ofwhich is to declare the sale valid inaccordance with law.

9. Issuance of Order confirming the sale- order is appealable because it isnot an interlocutory order. Thus,mortgagee must wait until the finalityof the order.

10. Registration of the order confirmingthe sale.

11. Cancellation of the Title of themortgagor and issuance of new titleto the mortgagee - the basis of whichis the order of court confirming thesale.

12. Motion for writ of possession from thesame court that ordered theforeclosure.

Note: As compared with extra judicialforeclosure which needs a petition, only amotion is required in judicial foreclosurebecause the court already has jurisdictlonover the subject mortgage. This remedycould be availed of by the mortgagee, it themortgagor is still in the possession 0\ theproperty despite the issuance of a new

l·title

in his favor.Q: When can you exercise the right ofredemption if) judicial foreclosure?

A:GR: There is no right of redemption injudicial foreclosure, only equity ofredemption.

XPN: If mortgagee or bidder is a bank orcredit institution, mortgagor has one (1)more year from registration of orderconfirming the sale and the certificate ofsale to redeem the property.


'Fa cu.It.a d' ae Dere c Iio CiviC ~i~151

SPECIAL COMMERCIAL LA \,(!S: REAL ESTATE MORTGAGE

Q: What is equity of redemption?

A: The right of the mortgagor not to bedivested of the ownership of the mortgagedproperty and to stop the foreclosure sale bypaying the mortgage debt within 90 - 120 daysfrom entry of judgment and even beyond, untilfinality of order confirming the sale.

GR: only in JF ofREM

GR: there is no right ofredemption in judicialforeclosure, only equityin redemption. (HuertaAlba Resort v. CA, G. R.No. 128567, Sept. 1,2000)

XPN: EJFinvolving a bankas mortgagee anda juridical personas mortgagor.

XPN: If mortgagee orbidder is a bank orcredit institution,mortgagor has one (1)more year fromregistration of orderconfirming the sale andthe certificate of sale toredeem the property.

May be acquiredby a second

mortgagee in caseof sale of property.

mortgagor,successors-i n-i nterest

or any judgementcreditor of the

mo

EJ foreclosureAct3135-1 year fromdate of registration of

certificate of sale

In JF - 90-120days from entry ofjudgment or until

finality of orderconfirming sale. In banks - 3 months

from date of actual sale

entry ofjudgment but

before foreclosuresale; After

foreclosure salebut before

confirmation ofsale.

Only after foreclosuresale

152i

Academics CornmirrceC!/(j/!PeI:roll: Abrnhnm I). (;t:11Uill() II

I, ia-(}loirjfJr, Al(jckmi~:f: .Il'all nie /\. I .aun-ruinoI· "i(('-C//(jir./or /Idmin cie-.·{"·lItIIW!: t\issa Cclin« II. Luna

1/;a-Chair./fJr I ~!y(JJ(' e:'.....f)l'J,;'~Il: Ltlisl' Rae (;. Nil val

Mercantile Law CommitteeJlfhled J lead- Iioly 'I'. t\1llJ1agllc),

AUf. Slflyed Head: Manilvn Rnse S. Sotelo

Members:I,:dIVi" Mntc '!". Ihldia

Airccn M. CachoStocrates lknjie I. 1\larbiiRon Cherric S. [VlcllJO%:1

Edisun .lames 1". Pag:1.lilautlnMaybelline M. Santiago


Q: What is chattel mortgage?

A: By a chattel mortgage (CM), a personalproperty is recorded in the Chattel MortgageRegister as a security for the performance ofan obligation. (Sec. 2140, NCC)

Q: What laws govern the chattel mortgage?

A:1. Act No. 1508 also known as Chattel

Mortgage Law of 1906 (As amendedby Sec. 198, Revised AdministrativeCode, and by RA No. 2711,approved June 18, 1960);

2. RA 386 also known as the CivilCode of the Philippines;

3. Revised Administrative Code of 1987;4. Art. 319 of Act No. 3815 also known

as the Revised Penal Code; and5. P.D. 1521 also known as Ship

Mortgage Decree of 1978governing mortgage of vessels ofdomestic ownership.

Q: What are the characteristics of a CM?

A:·1. Accessory contract2. Formal obligation3. Unilateral

Q: What are the requisites for a validchattel mortgage?

A:1. Constituted to secure fulfillment of the

principal obligation;2. Mortgagor is the absolute owner of

the property;3. Mortgagor has free disposal of the

property, in the absence thereof, thathe be legally authorized for suchpurpose;

4. Affidavit of good faith;5. Registration with the Chattel

Mortgage Registry;6. That it involves a personal property

(Sec. 2085, NCC); and7. If necessary, additional registration in

the proper government agency.Q: What is an affidavit of good faith?

A: A· certificate included in the chattelmortgage contract executed by both mortgagorand mortgagee stating:

1. that the obligation is valid, just andsubsisting; and

2. not one entered into for purposes offraud.

Q: What is the effect of absence of affidavitof good faith?

A: It does not affect the validity of the chattelmortgage but the same will be unenforceableagainst third persons.

Q: What is the status of an unrecordedCM?

A: It is valid and binding between the partiesbecause the registration is necessary only forthe purpose of binding third person. (FilipinasMarble Corp. v. lAC, GR No. L- 68010, May30, 1986) However, knowledge is equivalent toregistration.

Q: What is the period within which to makeregistration?

A: There is no specific time within which achattel mortgage should be recorded but thelaw is substantially complied with if registrationis made:

1. before the mortgagor has compliedwith his principal obligation; and

2. no right of innocent third parties isprejudiced.

Q: What is the dual registration rule?

A:GR: The property must be registered twice;first, in the place where mortgagor residesand second, in the place where property issituated. (Sec. 4, Act 1508)

XPN: First, if the mortgagor resides in thesame place where the property is located;second, if the amount of the loan is aboveP 500,000.00, registration which should bemade in the city or municipality where theproperty is situated (Sec. 116, PD.. 1159)

Q: May machinery be the subject of a CM?

A: Yes, provided none of the following arepresent:

1. the machinery is installed by theowner;

2. intended by the owner of thetenement for an industry or workbeing carried on in a building or pieceof land; and

3. which tend directly to meet the needsof the said industry or work. (Art. 415rbi, NCC).

Note: Thus, a machinery installed by the lesseeon the leased premises may be the subject of aeM. (Davao Sawmill v. Castillo, GR No. L-40411, Aug. 7, 1935)


Facu it a d' tie Derec ho Ci'f)if~i~153

SPECIAL COMMERCIAL LAWS: CHATrEL MORTGAGE

Q: Can immovable properties be thesubject of a CM?

A: Immovable properties cannot be the propersubject of a CM. But a CM over immovableproperties is valid as between the parites onthe basis of estoppel but not against 3rd

persons. (Evangelista v. Alto Surety & Ins. Co.,G.R. No. L-11139, Apr. 23, 1958)

IQ: Can the CM cover after-acquiredproperties?

A: A I chattel mortgage shall be deemed tocover' only the property described therein andnot like or substituted property thereafteracquired by the mortgagor and placed in thesame depository as the property originallymortgage. (Sec. 7, Act 1508)

Q: When may after-acquired property beincluded?

A: Where the after-acquired property is inrenewal of, or in substitution for, goods on

.hand when the mortgage was executed, or ispurchased with the proceeds of the sale ofsuch goods. (Torres v. Limjap, G.R. No.34385, Sept. 21, 1931)

Q: Can the CM cover after-incurredobligations?

A: No, the affidavit of good faith in a CMmakes it obvious that the debt referred to inthe law is current, not an obligation that is yetmerely contemplated. (Acme Shoe v. CA, G.R.No. 103576, Aug. 22, 1996)

Q: What then is the status of a CM coveringafter-incurred obligations?

A: A promise expressed in a CM to includedebts that are yet to be contracted can be abinding. commitment that can be compelledupon. The security itself, however, does notcome into existence or arise until after a CMagreement covering newly contracted debt isexecuted either by concluding a fresh CM orby amending the old contract conformably withthe form prescribed by the CM law. Theremedy of foreclosure can only cover the debtsextant at the time of constitution and during thelife of the CM sought to be foreclosed.

154

Q: Can' the mortgagor dispose of themortgaged property?

A: The owner (mortgagOr) of the mortgagedproperty may validly transfer ownership thereofto a third person and such sale is valid andbinding even against the mortgagee.Nevertheless, the vendee must not act in badfaith for the sale to be valid. In spite of this, thesale is without prejudice to the owner'scriminal liability under Art. 319 of the RevisedPenal Code whether or not intent to defraud isattendant. (Servicewide Specialist v. lAC, G.R.No. 74553, June 8, 1989)

Q: What is the right of a subsequentattaching creditor?

A: A registered chattel mortgage lien attachesto the property wherever it may be. Asubsequent attaching creditor acquired theproperties in question subject to the creditor'smortgage lien as it existed thereon at the timeof the attachment. What may be attached inthis case is only the equity or right ofredemption of the mortgagor. (Allied BankingCorporation v. Salas, G.R. No. L-49091, Dec.13, 1988)

Q: A third party mortgaged his property tosecure the payment of the loan of another.Is he liable for the deficiency?

A: He does not become solidarily liable withthe borrower merely because of the executionof the mortgage. A Special Power of Attorneyauthorizing another to mortgage one's propertyas security of the latter's obligation does not initself make the person executing the same asco-mortgagor thereof. It is only upon default ofthe principal debtor that third party mortgagorbecomes liable and he is liable only to theextent of the property mortgaged. He is notliable to pay any deficiency. (Cerna v. CA,G.R. No. 48359, Mar. 30, 1993)


Q: Distinguish chattel mortgage frompledge.

A:

Binding if registered

Existing obligations atthe time the mortgage is

constituted.

May secureafter-incurredobligations so

long as thefuture debts are

accuratelydescribed.

XPN:1.Recto Law;2. In accommodation

mortgages, theaccommodationmortgagor is liableonly to the extent ofthe value of themortgaged property;

3. EJF due to death ofmortgagor. (Vda. DeJacob v. CA, G.R.No. 88602, Apr. 6,1

Goes to the mortgagor

May be oral

VoluntaryPledge- norecovery ofdeficiency.

Legal Pledge -still entitled torecovery ofdeficiency.

XPN: Stipulationto the

Q: When and how is foreclosure of CMconducted?

A: After 30 days from the time the condition isbroken:

1.2.

3.

At a public auction by a public officer;At a public place in the municipalitywhere the mortgagor resides, orwhere the property is situated;Provided at least 10 days notice ofthe time, place, and purpose of suchsale has been posted at two or morepublic places in such municipality.

Q: To what articles does foreclosure ofchattel mortgage extend to?

A: Foreclosure is limited to the items sold onlyand not to other items not subject of the salealthough also given as additional security. Theforeclosure of the latter items is null and void(Ridad vs. Filipinas Investment and FinanceCorporation, G.R. No. L-39806, Jan.27, 1983).

Q: Does the filing of criminal action forviolation of BP 22 by the mortgagee-creditor against the mortgagor bar thelatter from availing himself of other civilremedy of the foreclosure of REM?

A: Following the rule on the alternativeremedies of a mortgagee-creditor, the filing ofcriminal case for violation of B.P. 22 by themortgagee-creditor against the mortgagor willbar or preclude the former from availinghimself of the other civil remedies of theforeclosure of the real estate mortgagebecause pursuant to Sec. 1(b) of rule 111 ofthe 2000 Rules on Criminal Proceedure, he isdeemed to have availed himself of the remedyof collection of suit (Chieng v. SpousesSantos, G.R. No. 169647, Aug. 31, 2007).

Q: What is the order of application of theproceeds of the sale?

A: The proceeds of the sale are to be appliedfor payment in the following order:

1. Costs and expenses of keeping andsale;

2. Payment of the obligation secured bythe mortgage;

3. Claims of persons holdingsubsequent mortgages in their order;and

4. The balance, if any, shall be paid tothe mortgagor or person holdingunder him (Sec. 14, Act No. 1508)


Pacu(tad de Vereclio Civil

SPECIAL COl\1.MERCIAL LAWS: CHATTEL MORTGAGE

Q: When does the mortgagor incur criminalliability?

A:1. Knowingly removing any personal

property mortgaged under the ChattelMortgage Law to any province or cityother than the one in which it waslocated at the time of the execution ofthe mortgage without the writtenconsent of the mortgagee;

2. Selling or pledging personal propertyalready mortgaged or any part thereofunder the terms of the· ChattelMortgage Law without the consent ofthe mortgagee written on the back ofthe mortgage and duly recorded inthe chattel mortgage register. (Art.319, Revised Penal Code)

Note: The mortgagor is not relieved of criminalliability even if the mortgage indebteness isthereafter paid in full (US v. Kilayko, GR No. L-10891, Aug. 18, 1916), or the mortgagor-sellersubsequently informed the purchaser that thething sold had been mortgaged. (People v.Alvares, GR No. L-70446, Jan. 31, 1989)

Q: B obtained a loan and as securitymortgaged a parcel of land. While themortgage was subsisting, B leased for 50years the mortgaged property to LOC. Themortgagee was duly advised of the lease.Thereafter, LOC constructed on themortgaged property an officecondominium. B defaulted on his loan andmortgagee foreclosed the mortgage. At theforeclosure sale, the mortgagee Wasawarded the property. The correspondingCertificate of Sale was executed and afterthe lapse of one year, title Wasconsolidated in the name of mortgagee.Mortgagee then applied for the issuance ofa writ of possession not only over the landbut also the condominium building. Themortgagee contended that the mortgageincluded all accessions, improvements andaccessories found on the mortgaged prop-erty. LOC countered that it had built on themortgaged property with the priorknowledge of mortgagee which had re-ceived formal notice of the lease. Who hasa better right on the building?

A: The mortgagee has a better right than LOC.The mortgage extends to the improvementsintroduced on the land, with the declarations,amplifications, and limitations established bylaw, whether the estate remains in thepossession of the mortgagor or passes into thehands of a third person (Article 2127 CivilCode). The notice given by LOC to the

156

mortgagee was not enough to remove thebuilding from coverage of the mortgage con-sidering that the building was built after themortgage was constituted and the notice wasonly as regards the lease and not as to theconstruction of the building. Since themortgagee was informed of the lease and didnot object to it, the mortgagee became boundby the terms of the lease when it acquired theproperty as the highest bidder. Hence, themortgagee steps into the shoes of themortgagor and acquires the rights of the lessorunder Article 1678 of the Civil Code. Thisprovision gives the lessor the right toappropriate the condominium building but afterpaying the lessee half of the value of thebuilding at that time. Should the lessor refuseto reimburse said amount, the lessee mayremove the improvement even though the landwill suffer damage thereby.

Q: Is the mortgagee entitled to the leaserentals due from LOC under the leaseagreement?

A: LOC lease rentals belong to the mortgagor.However, the mortgage extends to rentals notyet received when the obligation becomes dueand the mortgagee may run after the saidrentals for the payment of the mortgage debt.(1999 Bar Question)

Academics Committee.Chairtcrso»: Abraham D. Genuino II

l/ja-CIJairjor .Academic»: Jeannie /\. LaurcntiunI/l~ __('-CJ/(/ir 1(11"/ldmill e..'no Finance: Aissa Cclinc II. Luna

l/1'r.C.h~irfiJr ifl),Of(1 iC' {)C.ri.s'.": Loise Rae (;. Naval

Mercantile Law Corn m ittceJabjed I-lead- Holy T. i\mpaguey

/1.1'.1'1 .• )f(bjed I lead: Manil)'n Rose S. Solcio

Members:Edwin Mnrc T. !laldio

Airccn M. CachoSocrates llelljie I. MarbilROil Cherric S. ~'lelldoza

L~dis()Il.lal11eS I'. I'ogalilauallMaybellinc ~..1. Santiago


Q: When does the Recto Law apply?

A:1. Sale of personal property, the price of

which is payable in two or moreinstallments;

2. Contracts purporting to be leases ofpersonal property with option to buy(Art. 1485, NCC)

Q: What are the requisites for the sale to becovered under the Recto Law?

A:1. Sale of personal property;

2. Payable in instalments; and

3. CM constituted over the sameproperty.

Note: It does not contemplate a sale on straightterm in which the balance, after payment of initialsum, should be paid in its totality at the timespecified in the promissory note. (Levy HermanosInc. v. Lazaro Bias Gervaci, G.R. No. 46306, Oct.27, 1939)

Q: Under the Recto Law, what are theremedies of the unpaid seller?

A:1. Exact fulfillment of the obligation,

should the vendee fail to pay (actionfor specific performance):

2. Cancel the sale, should the vendee'sfailure to pay cover two or moreinstallments (rescission); or

3. Foreclose the chattel mortgage onthe thing sold, should the vendee'sfailure to pay cover 2 or moreinstallments.

Q: Can the unpaid seller avail of allremedies?

A: No, the remedies are alternative and notcumulative.

Note: However, recovery of property through areplevin case preparatory to foreclosure will notbar the other remedies if there was no actualforeclosure. If seller-mortgagee opts to file anaction for specific performance, he shall bedeemed to have waived his right as a mortgageebut may still levy on the mortgaged property (onexecution).

The mortgagee's letter informing the mortgagor ofhis intent to foreclose is not yet a foreclosure ofthe chattel. A mere offer by the mortgagor tosurrender the chattel, not accepted by themortgagee, does not preclude the mortgageefrom bringing suit to recover the balance of thepurchase price. (Industrial Finance Corp v.Castor Tobias, G.R. No. L-41555, July 27 1977)

Q: Debtor, instead of paying, returned themortgaged property in satisfaction of itsindebtedness. Did the return of themortgaged property by the mortgagor tothe mortgagee constitute dation in paymentor dacion en pago?

A: No, under the principle of dacion en pago,mere delivery of mortgaged motor vehicle bymortgagor does not mean transfer ofownership to the mortgagee. Without theconsent to transfer ownership, what istransferred is merely possession of theproperty. Mortgagee is thus not estopped fromdemanding payment of unpaid obligation ofmortgagor by former's acceptance of deliveryof mortgaged property. (Fi/invest Credit Corp.v. Phil. Acetylene, GR No. 50449, Jan. 30,1982)

Q: Is a mortgagee/vendor of personalproperty sold on installments, after takingpossession of the property, legallyobligated to foreclose the chattel mortgageand sell it at public auction?

A: Yes, the taking of the mortgaged propertywithout proceeding to the sale of the same atpublic auction, but instead appropriating thesame in payment of the mortgagor'sindebtedness, is not lawful. The mortgageemust proceed to foreclose the mortgage.(Esguerra V. CA, GR No. 40062, May 3,1989)


Pacu[taa de CJ)ereclio Civif 'i~157

SPECIAL COMMERCIAL LAWS: RECTO LAW

Q: Arb the expenses incurred by themortqaqae in an action for replevinrecoverable from the mortgagor?

IA: Yes, the necessary expenses incurred inthe prosecution by the mortgagee of the actionof replevin so that he can regain possession ofthe chattel should be borne by the mortgagor.Recoverable expenses include expensesproperly incurred in effecting seizure of thechattel and reasonable attorney's fees inprosecuting the action for replevin. Theserepossession expenses are not part of theunpaid claim which cannot be recovered bythe foreclosure of the chattel mortgage on theproperty sold on installments under Article1484 of the Civil Code. (Agustin v. CA, G.R.No. 107846, Apr. 18, 1997)

158

Academics CommitteeOwilpenoll: Abraham D. (;enuino IJ

[/ia.C},airjfJr .-Lime/amid: .Jeannie j\, l.aurcntino]/i<"<'-Cwlijor /Idmill e:,.. hiw"v: /\issa eeline II. Lunn

Via'·C;/Jair./iJl" 1~!}'()l(t e:~·l)e.riJ!.lf: Loise Rae C-i, Naval

Mercantile Law CommitteeSlIhled I lead: I 1,,1)' T. /\ml'''gucy

/lJ.rI . .\"lIhl'd tlead: !'vlanil)'n Ruse S. SOlelo

Members:I":dwin Ma rc T. llaldia

t\ irecn M. CachoSoc rntcs lleniie I. MnrbilRon Chcrric S. I\:lcndoza

Edison {ames I;. Pagalilal.lanMnybcllinc M. Santiago


Q: What is the purpose of the law?

A: To protect buyers of real estate oninstallment payments against onerous andoppressive conditions. (Sec. 2, R.A. 6552)

Q: What transactions are covered by thelaw?

·A: All transactions or contracts involving thesale or financing of real estate on installmentpayments, including residential condominiumapartments but excluding industrial lots,commercial buildings and' sales to tenantsunder CARL, where the buyer has paid at leasttwo years of installments. (Sec. 3)

Q: After having paid at least 2 years ofinstallments, what rights are accorded tothe buyer by law in case he defaults in thepayment of succeeding installments?

A.1. To pay, without additional interest,

the unpaid installments due within thetotal grace period earned by him fixedat the rate of 1 month grace period forevery 1 year of instalment paymentsmade.

2. To be entitled to the refund, if thecontract is cancelled.

3. To sell his rights or assign the same,via a notarized deed, to anotherperson or to reinstate the contract byupdating the account during the graceperiod and before actual cancellationon he contract, (Sec. 5)

4. To pay in advance any instalment orthe full unpaid balance of thepurchase' price any time withoutinterest and to have such fullpayment of the purchase priceannotated in the certificate of titlecovering the property. (Sec. 6)

Q: What are the rights accorded to thebuyer who has paid less than 2 years ofinstallment?

A:1. To pay without additional interest the

unpaid instalments due within a graceperiod of 60 days from the date theinstalment became due.

2. To sell his right or to assign the sameor to reinstate the contract byupdating the account during the graceperiod and before actual cancellationof the contract. (Sec. 8)

Q: What is the extent of the refund?

A: The cash surrender value of the paymentson the property equivalent to fifty percent ofthe total payments made, and, after five yearsof installments, an additional five percent everyyear but not to exceed ninety percent of thetotal payments made.

Q: What shall be included in thecomputation of the total numblr ofinstallments made?

A: Down payments, deposits or options on thecontract shall be included.

Q: How is the grace period determined?

A: One month grace period for every one yearof instalment payments made. Provided, Thatthis right shall be exercised by the buyer onlyonce in every five years of the life of thecontract and its extensions, if any. (Sec. 3)

Q: What happens if the buyer fails to paythe installments due at the expiration of thegrace period?

A: The seller may cancel the contract after 30days from receipt by the buyer of the notice ofcancellation or the demand for rescission ofthe contract- by a notarial act

Q: When must the cancellation take place?

A: The actual cancellation of the contract shalltake place after 30 days from receipt by thebuyer of the notice of cancellation or thedemand for rescission of the contract by anotarial act and upon full payment of the cashsurrender value to the buyer. (Sec. 3)

UNI.VERSITY OF SANTO TOMAS

Fa cu.It a d: d« Der echo Ci ui]

SPECIAL COI:vIMERCIAL LAWS: BANI<JNG LAWS

'(C33~'3@a1M~M;tl.lf4@[']~~:UQ: Wh~t are the governing laws?

t

A:General banking lawsa. General Banking Law (R.A.

8791)b. New Central Bank Act (R.A

7653)

2. Special banking lawsa. New Rural Banks Act (R.A.

7353)b. Private Development Bank Act

(R.A. 4093)c. Savings and Loan Association

Act (R.A. 3779)d. Thrift Banks Act (R.A. 7906)

3. Other laws affecting banksa. Secrecy of Bank Deposits Law

(R.A. 1405)b. Unclaimed Balances Law (Act

3936)c. Philippine Deposit Insurance

Corporation Act (R.A. 3591)

Q: What are the three kinds of entities thatintroduce funds into the economy?

A:1. Banks;2. Quasi-Banks; and3. Finance Companies and other

financial intermediaries

Q: What are banks?

A: Entities engaged in the lending of fundsobtained through deposits

Q: What are the elements determinative ofa bank?

A:1. Must be authorized by law;2. Accepts fund, in the form of a deposit,

from the public; and3. Lends money to the public.

Q: What is a quasi-bank?

A: These are entities engaged in theborrowing of funds through the issuance,endorsement or assignment with recourse oracceptance of deposit substitutes for purposesof re-Iending or purchasing of receivables andother 'obligations.

I

160

Q: What are financial intermediaries?

A: Persons or entities whose principalfunctions include the lending, investing, orplacement of funds on pieces of evidence ofindebtedness or equity deposited with them,acquired by them or otherwise coursedthrough them, either for their own account orfor the account of others.

Q: What are deposit substitutes?

A: It is an alternative forrn of obtaining fundsfrom the public, other than deposits, throughthe issuance, endorsement, or acceptance ofdebt instruments, for the borrower's ownaccount, for the purpose of reiending orpurchasing of receivables and otherobligations. These instruments may include,but need not be limited to, banker'sacceptances, promissory notes, participations,certificates of assignment and similarinstruments with recourse, and repurchaseagreements.

Q: What are the classifications of banks?

A:1. Universal banks;2. Commercial banks;3. Thrift banks composed of:

a. savings and mortgage banks;b. stock savings and loan

associations;c. private development banks;

4. Rural banks;5. Cooperative banks;6: Islamic banks (Charter of AI AmanaiJ

Islamic Investment) ; or7. Other classifications of banks as

determined by the Monetary Board ofthe Bangko Sentral ngPilipinas. (2002 Bar Question)


Q: Differentiate universal banks, commercial banks and thrift banks.

1. Has the aut ty to exercisethe powers of a commercial bank.

2. To act as an investment house- a corporation that sells andguarantees sale of securities andshares of stocks. i.e. Petron willtap an investment house in orderto sell its stocks.

engageundertakings and, in additionto the general powers incidentto a corporation, may exerciseall such powers as may benecessary to carry on thebusiness of commercialbanking.

Note: Allied undertakings arethose activities or entitieswhich enhance or complement

Q: What are other powers which may benecessary in carrying on the business ofcommercial banking?

A:1. Accepting drafts and issuing letters of

credit;2. Discounting and negotiating

promissory notes, drafts, bills ofexchange and other instrumentevidencing debt;

3. Accepting or creating demanddeposits, receivinq other types ofdeposit and deposit substitutes;

4. Buying and selling FOREX and goldor silver bullion;

5. Acquiring marketable bonds andother debt securities;

6. Extending credit; and7. Determination of bonds and other

debt securities eligible for investmentincluding maturities and aggregateamount of such investment, subject to

1.To issue imported LC;

2.To accept or openchecking account exceptwith prior approval by theMonetary Board (MBrequires at least a netasset worth of 28M)

such rules as the Monetary Boardmay promulgate. (Sec. 24)

Q: What are the functions of a bank?

A:1. Loan function;2. Deposit Function; and3. Others.

Q: What are the classifications of loan?

A:1. Unclassified Loans - Those that do

not have greater-than-normal risk andthe borrower has apparent ability tosatisfy it in full and no loss in ultimatecollection is anticipated

2. Classified Loans - Those that haveextraordinary risks of loss incollection due to some defects suchas bad debts or those under litigation.

UNIVERSITY OF SANTO TOMAS f'''''''~Facul t a d' de De r e ch o Civd¥' 161

SPECIAL COMMERCIAL LAWS: BANKING LAWS

Q: What are the limitations imposed uponbanks with respect to its loan function?

A:1. GR: Single borrower's limit - The

total amount of loans, creditaccommodatioilS and guarantees thatthe bank could grant should at notime exceed 25% of the bank's networth. (Sec 35.1, General BankingLaw (GBL))

XPN:a. As the Monetary Board may

otherwise prescribe for reasonsof national interest

b. Deposits of rural banks withgovernment-owned orcontrolled financial institutionslike LBP, DBP, and PNB.

2. The total amount of loans, creditaccommodations and guaranteesprescribed in (a) may be increased byan additional 10% of the net worth ofsuch bank provided that additionalliabilities are adequately secured bytrust receipt, shipping documents,warehouse receipts and other similardocuments which must be fullycovered by an insurance. (Sec. 35.2,GBL)

3. Loans and other creditaccommodations secured by REMshall not exceed 75% of theappraised value of the real estatesecurity plus 60% of the appraisedvalue of the insured improvements(Sec. 37, GBL)

CM/intangible property such aspatents, trademarks, etc. shall notexceed 75% of the appraised value ofthe security (Sec. 38, GBL)

4. Loans being contractual, the period ofpayment may be subject to stipulationby the parties. In the case ofamortization, the amortizationschedule has no fixed period as itdepends on the project to be financedsuch that if it was capable of raisingrevenues, it should be at least once ayear with a grace period of 3 years ifthe project to be financed is not thatprofitable which could be deferred upto 5 years if the project was notcapable of raising revenues. (Sec. 44,GBL)

5. Loans granted to DOSRI:

162

a. Qirectorb. Qfficerc. .§tockholder, which should at

least 1% (if below 1% - notanymore covered)

d. Belated interests, such as DOS'sspouses, their relatives within thefirst degree whether byconsanguinity or affinity,partnership whereby DOS is apartner or a corporation whereDOS owns at least 20%.

Q:What are excluded from such loanlimitations?

A: Non-risk loans, such as:1. Loans secured by obligations of the

Bangko Sentral ng Pilipinas or thePhilippine Government;

2. Loans fully guaranteed by theGovernment;

3. Loans covered by assignment ofdeposits maintained in the lendingbank and held in the Philippines;

4. Loans, credit accomrnodations andacceptances under letters of credit tothe extent covered by margindeposits; and

5. Other loans or creditaccommodations which the MB mayspecify as non-risk items.

Q: What is joint and solidary signiture(JSS) practice?

A: A common banking practice requiring as anadditional security for a loan granted to acorporation the joint and solidary signature of amajor stockholder or corporate officer of theborrowing corporation (Security Bank v.Cuenca, G.R. No. 138544, Oct. 3, 2000)

Q: In case of DOSRI accounts, what are therequirementsthat must be complied with?

A:1. Procedural requirement - Loan must

be approved by the majority of all thedirectors not including the directorconcerned. CB approval is notnecessary; however, there is a needto inform them prior to the transaction.Loan must be entered in the books ofthe corporation. (Sec. 36)

2. Substantive requirement - Loan mustnot exceed the paid in contributionand unencumbered deposits. (Not toexceed 15% of the portfolio or 100%of the net worth, whichever is lower.)(Sec. 36 [4])


Q: What is the effect of non-compliancewith the foregoing requirements?

A: Violation of DOSRI is a crime and carrieswith ii penal sanction.

Q: What are the transactions covered bythe DOSRI regulation?

A: Tile transaction covered are loan and creditaccommodation. Not being a loan, the ceilingwill not apply to lease and sale. However, itshould still comply with the proceduralrequirement.

Q: What is the arms-length rule?

A: It provides that any dealings of a bank withany of its DOSRI shall be upon terms not lessfavorable to the bank than those offered toothers. [Sec. 36 (2)]

Q: Can the bank terminate the loan anddemand immediate payment if the borrowerused the funds for purposes other than thatagreed upon?

A: If the bank finds that the borrower has notemployed the funds borrowed for the purposeagreed upon between the bank and theborrower, the bank may terminate the loan anddemand immediate payment. (Banco de Oro v.Bayuga, GR No. L-4956B, Oct. 17, 1979)

Q: What is the deposit function of banks?

A: The function of the bank to receive a thing, .primarily money, from depositors with theobligation of safely keeping it and returning thesame.

Q: What are the kinds of deposits betweena bank and its depositors?

A:1. As debtor-creditor:

a. Demand deposits - all thoseliabilities of banks which aredenominated in the Philippinecurrency and are subject topayment in legal tender upondemand by representation ofchecks.

b. Savings deposits - the mostcommon type. of deposit and isusually evidenced by apassbook.

Note: The requirement ofpresentation of passbooks isusually included in the terms andconditions printed in the

passbooks. A bank is negligent if it. allows the withdrawal withoutrequiring the presentation ofpassbook (BPI v. CA, GR No.112392, Feb. 29,2000).

c. Negotiable order of withdrawalaccount (NOWA) - Interest-bearing deposit accounts thatcombine he payable on demandfeature of checks and investmentfeature of saving accounts.

d. Time deposit - an account withfixed term; payment of whichcannot be legally required withinsuch a specified number of days.

2. As trustee-trustor: Trust account - asavings account, established under atrust agreement containing fundsadministered by the bank for thebenefit of the trustor or anotherperson or persons.

3. As agent-principal.a. Deposit of checks for collectionb. Deposit for specific purposec. Deposit for safekeeping

Q: What are the types of deposit accounts?

A:1. Individual; or2. Joint:

a. "And" account - the signature ofboth co-depositors are requiredfor withdrawals.

b. "And/or" account - either one ofthe co-depositors may depositand withdraw from the accountwithout the knowledge consentand signature of the other.

Q: Is an anonymous account prohibited? .

A:GR: Anonymous accounts or those underfictitious names are prohibited (R.A. 9160as amended by by R.A. 9194; asp CircularNo. 251, July 21, 2000).

XPN: In case where numbered accounts isallowed such as in foreign currencydeposits. However, banks/non-bankfinancial institutions should ensure that theclient is identified in an official or otheridentifying documents (Sec. B, R.A. 6426as amended, FCDA).


PacuCtaa de <Derecfio Ci'(liC

SPECIAL COMMERCIAL LAws: BANKING LAWS

Q: What is the nature of a bank deposit?

A: All kinds of bank deposits are loan. Thebank can make use as its own the moneydeposited. Said amount is not being held intrust for the depositor nor is it being kept forsafekeeping. (Tang Tiong Tick v. AmericanApothecaries, G.R. No. 43682, Mar. 31, 1938)

Q: In the enforcement of obligationsconcerning deposit, will the remedy ofmandamus lie?

A: No, because all kinds of deposit are loans.Thus, the relationship being contractual innature, mandamus cannot be availed ofbecause mandamus will not lie to enforce theperformance of contractual obligations.(Lucman v. Alimatar Malawi, G.R. No. 159794,Dec. 19, 2006)

I

Q: Does the fiduciary nature of the bank-depositor relationship convert the contractbetween banks and depositors to a trustagreement?

A: No, thus, failure by the bank to pay thedepositor is failure to pay simple loan, and nota breach of trust. (Consolidated Bank andTrust Corp. v. CA, G.R. No. 138569, Sept. 11,2003)

Q: After procuring a checking account, thedepositor issued several checks. He wassurprised to learn later that they had beendishonored for insufficient funds.Investigation disclosed that deposits madeby the depositor were not credited to itsaccount. Is the bank liable for damages?

A: Yes, the depositor expects the bank to treathis account with utmost fidelity, whether suchaccount consist only of a few hundred pesosor of millions. The bank must record everysingle transaction accurately, down to the lastcentavo, and as promptly as possible. This hasto be done if the account is to reflect at anygiven time the amount of money the depositorcan dispose of as he sees fit, confident thatthe bank will deliver it as and to whomever hedirects. A blunder on the part of the bank,such as the dishonor of the check withoutgood reason, can cause the depositor not alittle embarrassment if not also financial lossand perhaps even civil and criminal litigation.(Simex Inti. v. CA, G.R. No. 88013, Mar. 19,1990)

164

Q: What is the effect when the teller gavethe passbook to a wrong person?

A: Banks must exercise high degree ofdiligence in insuring that they return thepassbook only to the depositor or hisauthorized representative. The tellers shouldknow that the rules on savings account providethat any person in possession of the passbookis presumptively the owner. If the teller givesthe passbook to the wrong person, they wouldbe clothinq that person presumptive ownershipof the passbook, facilitating unauthorizedwithdrawals by that person. For failing to returnthe passbook to authorized representative ofthe depositor, the bank presumptively failed toobserve such high degree of diligence insafeguarding the passbook and insuring itsreturn to the party authorized to receive thesame. However, the bank's liability is mitigatedby the depositor's contributory negligence inallowing a withdrawal slip signed by authorizedsignatories to fall into the hands of animpostor.

Q: If the bank was forbidden by CentralBank to do business, does it still have theobligation to pay interest on deposit?

A: No, because a bank lends money, engagesin international transactions, acquiresforeclosed mortgaged properties or theirproceeds and generally engages in otherbanking and financing activities in order that itcan derive income therefrom. Therefore,unless a bank can engage in those activitiesfrom which it can derive income, it isinconceivable how it can carry on as adepository obligated to pay interest on moneydeposited with it. (Fidelity & Savings andMortgage Bank v. Cenzon, G.R. No. L-46208,Apr. 5, 1990)

Q: What are the other services that a bankmay offer?

A:1. Receive in custody funds, documents

and valuable objects;2. Acts as financial agent and buy and

sell, by order of and for the account oftheir customers, shares, evidence ofindebtedness, and all types ofsecurities;

3. Make collections and payments forthe account of others (i.e. Globepayments) and perform such otherservices for their customers as arenot incompatible with bankingbusiness;

4. Upon approval by MB, act asmanaging agent, adviser, consultant


or administrator of investmentmanagement, advisory andconsultancy accounts; and

5. Rent out safety deposit boxes

Q: Is a safety deposit box a form of depositor lease?

A: Under the old banking law, a safety depositbox is a special deposit. However, the newGeneral Banking Law, while retaining therenting of safe deposit box as one of theservices that the bank may render, deletedreference to depository function. It is submittedthat because of these changes, the contractfor the use of a safe deposit box should be .governed by the law on lease. (Divina,Handbook on Philippine Commercial Law)

Q: What is net worth?

A: The total of the unimpaired paid-in surplus,retained earnings and undivided profit, net ofvaluation reserves and other adjustments asmay be required by the BSP (Sec. 24.2).

Q: What are the limitations on acquisitionof real properties?

A: The bank may acquire, hold and conveyreal property only under the followingcircumstances:

1. As it may be necessary for theconduct of its business;

2. As shall be mortgaged to it in goodfaith by way of security of debts, e.gforeclosure;

3. As shall be conveyed to it insatisfaction of "debts" previouslycontracted in the course of itsdealings, e.g. dacion en pago;

4. As it shall purchase at sales underjudgments, decrees, mortgages ortrust deeds, e.g. execution sales - tobe able to levy on attachment realproperty after decision became final.

Note: Any property acquired by virtueof which should be disposed of within5 years from acquisition.

Q: What are debts?

A: A loan, or that which results to civiltransactions by the bank in the course of itsdealings and does not refer to civil liabilityarising from crime. (Registry of Deeds v. ChinaBank, G.R. No. L- 11964, Apr. 28, 1962)

Q: Can a foreign-owned commerCial bankacquire ownership over a residential lot byvirtue of the deed of transfer executed in itsfavor to satisfy a civil liability arising from a·criminal offense?

A: Where the deed of transfer over a realestate is executed in favor of the foreign-owned bank to satisfy a civil liability arisingfrom an offense, the cannot acquire ownershipover such real estate since the "debts" referredto in the law are only those resulting fromprevious loans and similar transactions madeor entered into by commercial bank in theordinary course of its business.

Q: Is the stipulation that a bank will not beliable for damages in case of error or delayin transmitting through a telegraphictransfer valid?

A: No, it is against public policy. (PhilippineCommercial International bank v. CA, G.R. No.97785, Mar. 29, 1996)

Q: Does the bank need to exercise extra-ordinary diligence in all commercialtransactions?

A: No, the degree of diligence required ofbanks, is more than that of a good father of thefamily where the fiduciary nature of theirrelationship with their depositors is concerned,that is, depositary of deposits. But the samehigher degree of diligence is. not expected tobe exerted by banks in commercialtransactions that do not involve their fiduciaryrelationship with their depositors, such as saleand issuance of foreign exchange demanddraft. (Reyes v. CA, G.R. No. 118492,Aug. 15,2001)

Q: When may the Monetary Boardsummarily close a banking institution?

A: In case a bank or quasi-bank notifies theBangko Sentral or publicly announces a bankholiday, or in any manner suspends the.payment of its deposit liabilities continuouslyfor more than 30 days, the Monetary Boardmay summarily and without need for priorhearing close such banking institution andhearing close such banking institution andplace it under receivership of the PhilippineDeposit Corporation (Sec. 53, GBL).


PacuCtaa de Derecho CiviC ~.·165


Q: Who may file a criminal case forviolations of banking laws?

iA: It does not appear from the law that onlythe CJntral Bank or its respondent officials cancause! the prosecution of alleged violations ofbanking laws. Said violations constitute apublic offense, the prosecution of which is amatter of public interest and hence, anyone -even private individuals - can denounce suchviolations before the prosecuting authorities.(Perez v. Monetary Board, GR No. L-23307,June 30, 1967)

Q: What are the limitations on a person'sextent of ownership in a bank?

A:1. On Filipino individual/corp. -

GR: Can own up to 40% (individuallimit) of the voting stock of the bank.

XPN: In case of a corporation whoseshares of stocks is listed in the StockExchange or has been in operationfor at least 10 years - 60% but foronly 1 bank. (R.A. 7221)

2. On foreign individual/corp. - Foreignindividuals and non-bankcorporations may own or control up40% (aggregate limit) of the votingstock of a domestic bank. Thepercentage of foreign-owned votingstocks in a bank shall be determined:a. If individuals By their

citizenshipb. If corporations By the

citizenship of the controllingstockholders of the corporation,irrespective of the place ofincorporation. (Sec. 11)

166

Q: What are the powers, functions andobjectives of Bangko Sentral ng Pilipinas(BSP)?

A:1. Economic side

a. Policy direction in the areas ofmoney, banking and credit;

b. Promotes and maintains pricestability/monetary andstability/convertibility of the peso.

2. Supervisory sidea. Exercises supervision over

banks and quasi banks;b. Issues rules and regulations

involving the conducts of banks;and

c. Examination of banks and quasibanks to determine:i. compliance with the laws

and regulations;ii. solvency and liquidity; andiii. enforcing prompt corrective

actions.

Q: What is the Monetary Board?

A: The body through which the powers andfunctions of the Bangko Sentral are exercised.(Sec 6, NCBA)

Q: What are considered legal tender?

A:1. t-peso, 5-peso and 10-peso coins: in

amounts not exceeding P1,OOO.OO;2. 25 centavo coin or less: in amount

not exceeding Pi 00.00 (Circular No.537, 2006)

Q: What is the function of the BSP on adistressed bank?

A: Appointment of a conservator or receiver orclosure of the bank.

Q: Who is a conservator?

A: One appointed if the bank is in the staie ofilliquidity or the bank fails or refuses tomaintaina state of liquidity adequate to protectits depositors and creditors. The bank still hasmore assets than its liabilities but its assetsare not liquid or not in cash thus it cannot payits obligation when it falls due. The bank, notthe Central Bank, pays for fees.


Q: What are the 'powers of a conservator?

A:1, To take charge of the assets,

liabilities, and the managementthereof;

2. Recognize the management;3, collect all monies and debts due said

bank;4. Exercise all powers necessary to

restore its viability with the power tooverrule or revoke the actions of theprevious management and board ofdirectors of the bank or quasi-bank(First Philippine International Bank vs.CA, GR. No. 115849, Jan 24,1996J-

Note: Such powers cannot extend topost facto repudiation of perfectedtransactions. Thus, the law merelygives the conservator power torevoke contracts that are deemed teibe defective- void, voidable,unenforceable or rescissible. Hence,the conservator merely takes the

. place of the bank's board. .

5, To bring court actions to assail orrepudiate contracts entered into bythe bank.

Q: When is conservatorship terminated?

A:1. When Monetary Board is satisfied

that the institution can continue tooperate on its own and theconservatorship is no longernecessary.

2. When the Monetary Board, on thebasis of the report of the conservatoror of its own findings, determine thatthe continuance in business of theinstitution would involve probablelosses to its depositors or creditors, inwhich case the provisions of Section30 shall apply.

Q: Who is a receiver?

A: One appointed if bank is already insolventwhich means that its liabilities are greater thanits assets.

Q: Is the receiver authorized to transactbusiness in connection with the bank'sassets and property?

A: No, the receiver only has authority toadminister the same for the benefit of itscreditors, (Abacus Real Estate DevelopmentCenter, Inc, v. Manila Banking Corp, GR. No.162270, ApT- 6, 2005)

Q: An intra-corporate case was filed beforeRTC, on the other hand, another complaintwas filed before BSP to compel a bank todisclose its stockholdings invoking thesupervisory power of the latter- Is there aforum shopping?

A: None. The two proceedings are of differentnature praying for different relief. Thecomplaint filed with the BSP was an invocationof its supervisory powers over bankingoperations which does not amount to a judicialproceeding. (Suan v. Monetary Board, A.C.No. 6377, Mar. 12,2007)


Pacu{taa de (j)ereclio Ci ui] ~i~167


Q: Distinguish between the grounds for conservatorship, receivership and liquidation and theireffects.A:r.r.rn~~;m

to pay liabilities ase.g: bank run, rumors, etc.

2. Assets are less than its liabilities; 2. Bank cannot be rehabilita-ted3. Cannot continue business without

causing damage;4. Violation of a cease and desist;5. "Bank holiday" for more than 30 days

(Section 30)

2. Unwilling-ness tomaintain condition ofliquidity;

1.Juridicalpersonality isretained.

1. Juridical personality s retained with conservator-ship2. Suspension of operation /stoppage of

business;3. Assets deemed in custodia legis

(Domingo v. NLRC, G.R. 156761, Oct 17,2006

2. Perfectedtransacttions cannotbe repudiated;

Q: What is the close now-hear laterdoctrine?

Q: What is the rule of promissory estoppel?

A: The law does not contemplate prior noticeand hearing before the bank may be directedto stop operations and placed underreceivership. The purpose is to preventunwarranted dissipation of the bank's assetsand as a valid exercise of police power toprotect the depositors, creditors, stockholdersand the general public. (Central Bank of thePhilippines v. CA, G.R. No. 76118 Mar. 30,1993)

Q: Where will the' claims against theinsolvent bank be filed?

!A: Where liquidation is undertaken with judicialintervention, all claims against the insolventbank should be filed in the liquidationproceeding. It is not necessary that a claim beinitially disputed in a court or agency before itis filed with the liquidation court. (Ong v. CA,G.R. No. 112830, Feb. 1, 1996)

Note: The judicial liquidation is intended toprevent multiplicity of actions against theinsolvent bank.

Where it is the bank that files a claim againstanother person or legal entity, the claim shouldbe filed in the regular courts.

168

A: The doctrine was applied in one casewhere the SC held that the CB may notthereafter renege on its representation andliquidate the bank after majority stockholdersof the bank complied with the conditions andparted with value to the profit of CB, whichthus acquired additional security for its ownadvances, to the detriment of the bank'sstockholders, depositors and other creditors.(Ramos v. Central Bank of the Philippines,G.R. No. L-29352, Oct. 4, 1971)

Q: Can the closure and liquidation of abank, which is considered an exercise ofpolice power, be the subject of judicialinquiry?

A: While the closure and liquidation of a bankmay be considered an exercise of policepower, the validity of such exercise of police

. power is subject to judicial inquiry and couldbe set aside if it is either capricious,discriminatory, whimsical, arbitrary, unjust or adenial or due process and equal protectionclauses of the Constitution. (Central Bank v.CA, G.R. No. L-50031-32, July 27, 1981)


Q: Should the issue of whether or not theMonetary Board's resolution is arbitrary beonly raised in a separate action?

A: No. While resolutions of tile MonetaryBoard forbidding a bank to do business onaccount of a condition of insolvency andappointing a receiver to take charge of thebank's assets or determining whether the bankmay be rehabilitated or should be liquidatedare by law "final and executory." However,they can be set aside by the court on onespecific ground - if the action is plainly arbitraryand made in bad faith. Such contention can beasserted as an affirmative defense of acounterclaim in the proceeding for assistancein liquidation. (SaiLid v. Central Bank, G.R. No.L-17630, Aug. 19, 1986)

Q: Can a final and executory judgmentagainst an insolvent bank be stayed?

A: Yes, after the Monetary Bank has declaredthat a bank is insolvent and has ordered it tocease operations, the assets of the insolventbank are held in trust for the equal benefit ofall creditors. One cannot obtain an advantageor preference over another by attachment,execution or otherwise .. The final judgmentagainst .the bank should be stayed as toexecute the judgment would unduly depletethe assets of the banks to the obviousprejudice of other depositors and creditors.(Lipana v. Development Bank of Rizal, GR.No. L-73884, Sept. 24, 1987)

Q: Upon maturity of the time deposit, thebank failed to remit. By reason of punitiveaction taken by Central Bank, the bank hasbeen prevented from performing bankingoperations. Is the bank still obligated topay the time deposits despite the fact thatits operations were suspended by theCentral Bank?

A: The suspension of operations of a bankcannot excuse non-compliance with theobligation to remit the time deposits ofdepositors which matured before the bank'sclosure. (Overseas Bank of Manila v. CA, GR.No. 45886, Apr. 19, 1989)

Q: Can the liquidator of a distressed bankprosecute and defend suits against thebank and foreclose mortgages for and inbehalf of the bank while the issue onreceivership and liquidation is stillpending?

A: Yes. The Central Bank is vested with theauthority to take charge and administer themonetary and banking systems of the country

and this authority includes the power toexamine and determine the financialconditions of banks for the purpose of closureon the ground of insolvency. Even if the bankis questioning the validity of its closure, duringthe pendency of the case the liquidator cancontinue prosecution suits for collection andforeclosure of mortgages, as they are actsdone in the usual course of administration ofthe bank. (Banco Filipino v. Central Bank, G.R.No. 70054, Dec: 11, 1991)

Q: What is the purpose?

A:1. To encourage deposit in banking

institutions; and2. To discourage private hoarding so

that banks may lend such funds andassist in the economic developmentof the country.

Q: What are the prohibited acts under thelaw?

A:1. Examination/inquiry/looking into all

deposits of whatever nature withbanks or banking institutions in thePhilippines (including investment inbonds issued by the government) byany person, government official oroffice (Sec. 2)

2. Disclosure by any official or employeeof any banking institution to anyauthorized person of any informationconcerning said deposit (Sec. 3).

Q: What are the kinds of deposits covered?

A:1. All deposits of whatever nature with

banks or banking institutions found inthe Philippines; or

2. Investments in bonds issued by thePhilippine government, its branches,and institutions. (Sec. 2, R.A. 1405)

Q: Are trust funds covered by the tenn"deposit?"

A: Yes, the money deposited under the trustagreement is intended not merely to remainwith the bank but to be invested. by itelsewhere. To hold that this type of account isnot protected by R.A. 1405 would encourageprivate hoarding of funds that could otherwisebe invested by banks in other ventures,

UN I V E R5 I T V 0 F 5 ANT 0 TOM A 5 f-':'--. 169PacuCtaa de iIJerecfio Ci·viC ·V-

SPECIAL CUMMERCIALLAws: BANKING LAWS

contrary to the policy behind the law. (Ejercitov. Sandiganbayan, G.R. No. 157294-95, Nov.30,2006)

Note: Despite such pronouncement that trustfunds are considered deposits, trust funds remainnot covered byPDIC.

Q: What are the instances where accountscan be inquired into?

A:1. Upon written consent of the depositor

(Sec. 2)

2. In cases of impeachment (Sec. 2)

3. Upon order of competent court incases of bribery or dereliction of dutyof public officials (Sec. 2)

4. In cases where the money depositedor invested is the subject matter oftile litigation (Sec. 2)

Upon order of the Commissioner ofInternal Revenue in respect of thebank deposits of a decedent for thepurpose of determining suchdecedent's gross estate (Sec. 6[F][1],NlRC)

6. Upon the order of the Commissionerof Internal Revenue in respect ofbank deposits of a taxpayer who hasfiled an application for compromise ofhis tax liability by reason of financialincapacity to pay his tax liability (Sec.6[f}[1],NIRC)

7. In case of dormant accounts/depositsfor at Ieast 10 years under theUnclaimed Balances Act (Sec. 2, ActNo. 3936). .

8. When the examination is made by theBSP to insure compliance with theAML Law in the course.of a periodicor special examination

9. With court order:a. In cases of unexplained wealth

under Sec. 8 of the Anti-Graftand Corrupt Practices Act (PNBv. Gancayco, L-18343, Sept. 30,1965)

b. In cases filed by theOmbudsman and upon thelatter's authority to examine andhave access to bank accountsand records (Marquez v.

170

Desierto, GR 138569, Sept. 11,2(03)

10. Without court order: If the AMLCdetermines that a particular deposit orinvestment with any bankinginstitution is related to the following:HK-MAD

a. Hijacking,b. lSidnapping,c. Murder,d. Destructive 8rson, ande. Violation of the Dangerous Qrugs

Act. (2004, 2006 Bar Question)

Q: What are the requisites before theOmbudsman may examine deposits?

A:1. There is a pending case before court

of competent jurisdiction;2. The account must be ·clearly

identified; and3. There is notice upon the account

holder and bank personnel of theirpresence during inspection.

Note: The inspection must cover only theaccount identified in the pending case.(Marquez v. Desierto, G.R.No. 138569,Sept. 11, 2003) .

Q: Does garnishment of a bank depositviolate the law?

A: No, the prohibition against examinationdoes not preclude its being garnished forsatisfaction of judgment. The disclosure ispurely incidental to the execution process andit was not the intention of the legislature toplace bank deposits beyond the reach ofjudgment creditor. (PCIB v. CA, G.R. No.84526, Jan. 28, 1991)

Q: Can a bank be compelled to disclose therecords of the accounts of a depositorunder the investigation for unexplainedwealth?

A: Since cases of unexplained wealth aresimilar to cases of bribery, dereliction of duty,no reason is seen why it cannot be exceptedfrom the rule making bank depositsconfidential. In this connection, inquiry intoillegally acquired property in anti-graft casesextends to cases where such property isconcealed by being held or recorded in thename of other persons. This is also becausethe Anti-Graft and Corrupt Practices Act, bankdeposits shall be taken into consideration indetermining whether or not a public officer has


acquired property manifestly out of proportionwith his lawful income. (PNB v. Gancayco,G.R. No. L-18343, Sept. 3Q, 1965)

Q: In an action filed by the bank to recoverthe money transmitted by mistake, can thebank be allowed to present the accountswhich it believed were responsible for theacquisition of the money?

A: Yes, RA 1405 allows the disclosure ofbank deposits in cases where the moneydeposited is the subject matter of litigation. Inan action filed by the bank to recover themoney transmitted by mistake, necessarily, aninquiry into the whereabouts of the amountextends to whatever is concealed by beingheld or recorded in the name of the personsother than the one responsible for the illegalacquisition. (Mellon Bank, N.A. v. Magsino,G.R. No. 71479, Oct. 18, 1990)

Q: The Law on Secrecy of Bank Depositsprovides that all deposits of whatevernature with banks or banking institutionsare. absolutely confidential in nature andmay not be examined, inquired or lookedinto by any person, governmental official,bureau or office. However, the law providesexceptions in certain instances. Which ofthe following may not be among theexceptions?

1. in cases of impeachment2. in cases involving bribery3. in cases involving BIR inquiry4. in cases of anti-graft and corrupt

practices5. in cases where the money involved

is the subject of litigation

A: Under Section 6(F) of the National InternalRevenue Code, the Commissioner of InternalRevenue can inquire into the deposits of adecedent for the purpose of determining thegross estate of such decedent. Apart from thiscase, a BIR inquiry into bank deposits cannotbe made.

Thus, exception 3 may not always beapplicable. Turning to exception 4, an inquiryinto bank deposits is possible only inprosecutions for unexplained wealth under theAnti-graft and Corrupt Practices Act. However,all other cases of anti-graft and corruptpractices will not warrant an inquiry into bankdeposits. Thus, exception 4 may not always beapplicable. Like any other exception, it must beinterpreted strictly.

Exceptions 1, 2, and 5 on the other hand, areprovided expressly in the Law on Secrecy of

Bank Deposits. They are available todepositors at all times. (2004 Bar Question)

•.. ~ .il<.~ . ..-- .•

Academics Comm irreeC:h£lirper.lOlI: Abraham D. Gcruun o 11

f/iff:-Chllir./iu- /-Jau/elJlio: Jeannie ;\. Laurcnrinok';a:-Chair!or .Admin i......j-iillll)h'C: .-\iSS;l Coline [.1. Luna

!Fia;,C}lllirjor L.L!YfJtll~""" Dc.rign: Loi::;e R"1C C;. Naval

Mercantile Law CommitteeSub/cd Head: H nly T. i\ mpagutl'

/lJJ/. Sub led /-Ie,,(/: Manily» Rose S. Sotelo

Members:Edwin !I,lare T. Baldia

Airccn M, Cach«Socrates Benjie I. Tl.larbilRun Chcrrie S. l'V(cnd/)z;l

Edison .1 ames F. P,lgalibuanMaybcllinc M. SantiaglJ

UNIVERSITY OF SANTO TOMAS f~7c,.

Pacu{taa de Verecho Civil .•. 171

;SPECIAL COI\1MERCIAL LAWS: ANTI-MONEY LAUNDERING ACT

Q: What is the meaning of moneylaundering?

A: A crime whereby the proceeds of unlawfulactivity are transacted, making them appear tohave come from lawful transaction. (Sec. 4,AMLA)

Q: How is money laundering committed?

A: It is committed by the following persons:1. Any person knowing that the

monetary instrument or propertyrepresents, involves, or relates to, theproceeds of any unlawful activity,transacts or attempts to transact saidmonetary instrument or property;

2. Any person knowing that anymonetary instrument or propertyinvolves the proceeds of any unlawfulactivity performs or fails to performany act as a result of which hefacilitates the offense referred to inNo.1 above;

3. Any person knowing that anymonetary instrument or property isrequired under this Act to bedisclosed and filed with the Anti-Money Laundering Council (AMLC),fails to do so.

Q: When may the Anti-Money LaunderingCouncil (AMLC) inquire into bank depositswithout need of court order?

A: Only in cases of Kidnapping, Hijacking,Drugs, Arson, Murder. (Sec. 11)

Q: What are the covered entities?

A:1. Banks;2. Non-banks;3. Quasi-banks;4. Trust entities;5." All other institutions; their subsidiaries

and affiliates supervised or regulatedI by BSP (Sec. 1[1]);

6'1 Insurance companies and all otherinstitutions supervised and regulatedby the Insurance Commission;

7. Foreign exchange, corporations,money changers, money payments,remittance and transfer companiesand other similar entities; and

172

8. Other entities administering orotherwise dealing in currency,commodities or financial derivativesbased thereon, valuable objects, cashsubstitutes, and other similarmonetary instruments or propertysupervised or regulated by Sec. 9.

Q: What are the kinds of transactionscontemplated by the law?

A:1. Covered transactions - Amount more

than P500,OOO.OO in one bankingday; and

Note: These transactions are requiredto be reported to the Anti-MoneyLaundering Council

2. Suspicious transactions - Regardlessof amount, if any of the following ispresent:a. No underlying economic, trade

or legal justification;b. Client not properly identified;

numbered accounts are allowedprovided client is identified;

c. Transaction is notcommensurate with financialcapability of the client;

d. Transaction is so structured thatit cannot be reported to theAMLC; .

e. Transaction which deviates fromusual profile of the client;

f. Relates to unlawful activity asdefined by law; and

g. Analogous transactions.

Note: No administrative, criminal' or civilproceedings shall lie against any person forhaving made a covered transaction report in theregular performance of his duties and in goodfaith, whether or not such reporting results in anycriminal prosecution under the AMLA or any otherPhilippine law (Safe Harbor Provision).

Q: Who has jurisdiction for violations ofAM LA?

A:1. RTC - all cases on money laundering

(Sec. 5)2. Sandiganbayan - Those committed

by public officers and private personsin conspiracy with them.


Q: Which court has the jurisdiction to issuea freeze order?

A: The amendment by R.A. 9194 of R.A. 9160erased any doubt on the jurisdiction of theCourt of Appeals (CA) over the extension offreeze orders. As the law now stands, it issolely the CA which has the authority to issuea freeze order as well as to extend itseffectivity. It also has the exclusive jurisdictionto extend existing freeze orders previouslyissued by the AMLC vis-a-vis accounts anddeposits related to money-launderingactivities. (Republic of the Philippines v,Cabrini Green & Ramos, GR No. 154522,May 5,2006)

Q: Rudy is jobless but is reputed to be ajueteng operator. He has never beencharged or convicted of any crime. Hemaintains several bank accounts and haspurchased 5 houses and lots for hischildren from the Luansing Realty, Inc.Since he does not have any visible job, thecompany reported his purchases to theAnti-Money Laundering Council (AMLC).Thereafter, AMLC charged him withviolation of the Anti-Money LaunderingLaw. Upon request of the AMLC, the bankdisclosed to it Rudy's bank depositsamounting to P100 Million. Subsequently,he was charged in court for violation of theAnti-Money Laundering Law. Can Rudymove to dismiss the case on the groundthat he has no criminal record?

A: No. Under the Anti-Money Laundering Law,Rudy would be guilty of a "money launderingcrime" committed when the proceeds of an"unlawful activity," like jueteng operations, aremade to appear as having originated fromlegitimate sources. The money launderingcrime is separate from the unlawful activity ofbeing a jueteng operator, and requires noprevious conviction for the unlawful activity.·(Sec. 3, AMLA)

Q: To raise funds for his defense, Rudysold the houses and lots to a friend. CanLuansing Realty, Inc. be compelled totransfer to the buyer ownership of thehouses and lots?

A: Luansing Realty, Inc. is a real estatecompany, hence, it is not a covered institutionunder ·Section 3 of the Anti-Money LaunderingAct. Only banking institutions, insurancecompanies, securities dealers and brokers,pre-need companies and other entitiesadministering or otherwise dealing in currency,commodities or financial derivatives arecovered institutions. Hence, Luansing Realty,

Inc. may not use the Anti-Money LaunderingAct to refuse to transfer to the buyer ownershipof the houses and lots.

Q: In disclosing Rudy's bank accounts tothe AMLC, did the bank violate any law?

A: No, the bank did not violate any law. Thebank being specified as a "covered institution"under the Anti-Money Laundering Law, isobliged to report to the AMLC covered andSUSpICIOUS transactions, without therebyviolating any law. This is one of the exceptionsto the Secrecy of Bank Deposit Act.

-,4·~~'~··

Academ ics ComnlitteeChairper.)()JI: Abraham D. Genuine II

l/iaJ-Chairjin" /I~udellli(f: {carmjc ;\. l...aurcnnno~Fit't:-CllUirj;)r Atlmin 0"""Fillufld:: .Yissa Coline I r .., Luna

Vile-Chair/or J "')'"111 Ii- LJe.II~~II:Loise Rue c;. !'<,\\-al

Mercantile Law CommitteeSi/b)''"' J-Iead: Holy T. i\mpaguey

A.HI. Sub/ed I-{,,,": Manilyn Rose S. Sotelo


Airccn 111.Cacho .Socrates 13e111iel. lI·tubilEon Chen-ic S. Mendoza

Edison James F. PagalilauanMaybelline M. Sanli:lgll


Pacu{taa de (])erecfio Ci'rlif ~.173

SPECIAL COI\1MERCIALLAWS: PHIL. DEPOSIT INSURANCE CORP.

Q: What is the function of POIC?

A: It insures all bank deposits.

Q: What is the coverage of the insurance?

A: The deposit liabilities of any bank orbanking institution, which is engaged in thebusiness of receiving deposits, shall beinsured with PDIC. The coverage iscompulsory.

Q: What is the extent of the POIC's liabilityto a bank depositor?

A: The amount due to any depositor fordeposits in an insured bank net of anyobligation of the depositor to the insured bankas of the date of closure, but not to exceedP500,OO.OOper depositor. In determining suchamount due to any depositor, there shall beadded together all deposits in the bankmaintained in the same right and capacity forhis benefit either in his own name and thename of the others.

Q: How is the amount due determined incase of joint account?

A: A joint account regardless of whether theconjunction "and," "or," "and/or" is used, shallbe insured separately from any individually-owned deposit account: Provided, that:

i1.1 If the account is held jointly by two or

more natural persons, or by two ormore juridical persons or entities, themaximum insured deposit shall bedivided into as many equal shares asthere are individuals, juridical personsor entities, unless a different sharingis stipulated in the document ofdeposit; and

2. If the account is held by a juridicalperson or entity with one or morenatural persons, the maximuminsured shall be presumed to belongentirely to such juridical person orentity.

Note: The aggregate of the interests of each co-owner. over several joint accounts, whetherowned by the same or different combinations ofindividuals, juridical persons or entities, shalllikewise be subject to the maximum insureddeposit of P500,000.00.The provisions of any law to the contrarynotwithstanding, no owner/holder of any

174

negotiable certificate of deposit shall berecognized as a depositor entitled to the rightsprovided in this Act unless his name is registeredas owner/holder thereof in the books of theissuing bank [Sec. 4 (g)].

Illustration:1. A has P400,000 deposit - can recover

P400,0002. A has P200,000 deposit in 3 branches _

only P500,000 .3. A has P200,OOOdeposit in 3 branches

of XYZ and another P200,000 depositin 3 branches of ABC - P500,000 oneach bank

4. A and/or B P600,000 deposit - half(P300,OOO)each

Note: Individually-owned accounts are insuredseparately from joint accounts. If depositor mademore than 1 joint account, the maximum amounthe can recover is only up to 250,000.

Q: What are the types of deposits covered?

A: Demand, savings and time deposits. If thedepositor has all three types of accounts withthe same bank, he can only recover up toP500,OOO.OO. He is considered as onedepositor.

Q: Are deposits in foreign currencycovered?

A: Deposit obligations in foreign currency ofany insured bank are likewise insured.

Note: Foreign currency deposits are coveredunder the provisions of RA 3591, as amended,and insurance payment shall be ill the samecurrency in which the insured deposits aredenominated (Sec. 9, RA 6426; Circular No. 1389,1993).

Q: What are the deposits Which areexcluded from POIC coverage?

A:1. Trust funds deposited with an insured

bank; and

2. Bearer time deposit certificate with noregistered payee.

Q: What are trust funds?

A: Funds held by an insured bank in afiduciary capacity and include, without beinglimited to, funds as trustee, executor,administrator, guardian or agent.


Q: When is POIC discharged from itsobligation to a depositor?

A:1. Upon payment of an insured deposit

by itself; or

2. Upon payment of a transferreddeposit to any person by the newbank or by an insured bank in which atransferred deposit has been madeavailable.

Note: A transferred deposit is a deposit in aninsured bank made available to a depositor bythe POIC as payment of the insured deposit ofsuch depositor in a closed bank and assumed byanother insured bank.

Q: What are the effects of payment to thedepositor of his insured deposit?

A:1. pOle is discharged from any further

liability to the depositor; and

2. pOle is subrogated to all the rights ofthe depositor against the closed bankto the extent of such payment.

Q: Within what period must claims againstPOIC be filed?

A: Within 24 months. After such time,depositors have recourse against distressedbank subject to concurrence and preference ofcredit.

Note: In order that a claim for deposit insurancewith the POIC may prosper, the law requires thata corresponding deposit be placed in the insuredbank. A deposit may be constituted only if moneyor the equivalent of money is received by a bank.(PolC v. CA G.R. No. 118917, Dec. 22,1997)

Q: What is the rule with regard to therecognition of owner?

A: pOle or any insured bank is not required torecognize as the owner of any portion of adeposit under a name other than that of theclaimant, where such person whose name orinterest as such owner is not disclosed on therecords of such closed bank as part owner ofsaid deposit, if such recognition wouldincrease the aggregate amount of the insureddeposits in such closed bank (Sec. 16[c)).

Acad cm ics Comm itteeChairperson: "braham D. Genuine 11

f/jrc-Chairj;)F Acm/cllIl(f." J<..:cu1nie .-\, Laurenrinoki~·e-Cbair.F)f· r1dmill \::::.'""Fi"U/w:: .-\i!)Sil Cclinc (-I. Luna

r '~i"c-LIJairlor L.i!You/ G- nC.f~~II: Loise Rae (i. Naval

Mercantile Law Committee.r""I'd I-lead: Holy T !ll1lpagllc)'

A,J/. Jul)ed /-lead· Manily» I~DSC S. Sotcl"

Members:Edwin Marc T. Raldi.l

Airccn M. CachoSocrates Bcnjic I. J\·farbilRon Cherrie S. Mendoza

Edison J :t111l:SF. PagalibudllMaybcllinc M. Santiago

UN I V E R 5 I T Y a F 5 ANT a TOM A 5 f-"'.Pacu(taa de Wereclio CiviC -9-175

SPECIAL COMMERCIAL LAWS: INSOLVENCY LAW

Q: What is the coverage of the insolvencylaw?

A: Its coverage is not limited to insolvency butalso suspension of payment.

Q: What is insolvency?

A: The state of a person whose liabilities aremore than his assets. The term is frequentlyused in the more restricted sense to expressinability of a person to pay his debts as theybecome due in the ordinary course of hisbusiness.

Q: What are the tests to detennineinsolvency?

I

A: !1.. Equity test - A state of inability of a

person to pay his debts at maturity.2.' Balance sheet test - The assets, if all

made immediately available, wouldnot be sufficient to discharge thebalance.

Q: What are the remedies of an insolvent. debtor?

A:1. Petition the court to suspend

payments of his debts; or2. To be discharged from his debts and

liabilities by voluntary or involuntaryinsolvency proceedings. (Sec. 1)

Q: What is the effect of insolvencyproceedings filed by individual debtors?

A:1. Suits' pending in court-

a. secured obligations suspendeduntil assignee appointed

b. unsecured obligations terminatedexcept to fix amount of obligation

c. foreclosure suits pendingcontinue

2. Suits not yet filed - cannot be filedanymore but claims may bepresented to assignee

Note: The result is different if the petitioner is acorporation because under the Revised Rules onCorporate Recovery, all claims whether securedor unsecured are stayed.

176 Iteam:.W

Q: If A is declared an insolvent by thecourt, what would be the effect, if any, ofsuch declaration on his creditors? Explain.

A:1. The sheriff shall take possession of

all assets of the debtor until theappointment of a receiver orassignee;

2. Payment to the debtor of any debtsdue to him and the delivery to thedebtor of any property belonging tohim, and the transfer of any propertyby him are forbidden;

3. All civil proceedings pending againstthe insolvent shall be stayed; and

4. Mortgages and pledges are notaffected by the order declaring aperson insolvent. (Sec. 59,Insolvency Law)

Q: Assuming that A has guarantors for hisdebts, are the guarantors released fromtheir obligations once A is discharged fromhis debts?

A: The guarantors are not discharged,because the discharge is limited to A only(Sec. 68). Precisely under the principle ofexcussion, the liability of the guarantors arisesonly after the exhaustion of the assets of theprincipal obligor. The effect of dischargemerely confirms exhaustion of the assets ofthe obligor available to his creditors.

Q. What remedies are available to theguarantors in case they are made to paythe creditors? Explain.

A: Their remedy is to prove in the insolvencyproceeding that they paid the debt and thatthey substituted for the creditors, if thecreditors have not proven their claims (Sec.56).

Under Article 2081 of the Civil Code, theguarantor may set up against the creditor allthe defenses that pertain to the principaldebtor. The discharge obtained by the debtoron the principal obligation can now be used asa defense by the guarantors against thecreditors. The guarantors are also entitled toindemnity under Article 2066 of the Civil Code.(2005 Bar Question)


Q: A and B were employees of ATLASwhich hypothecated its certain assets toDBP. After ATLAS .defaulted in itsobligations, DBP foreclosed and acquiredthe mortgaged assets by virtue of theforeclosure sale. Respondents filed theirclaim their wages against both ATLAS andDBP. The Labor Arbiter (LA) ruled in favourof A and B. Is the LA correct in consideringworker's preference under Article 110 ofthe Labor Code over that of DBP'smortgage lien?

A: Declaration of bankruptcy or a judicialliquidation must be present before the worker'spreference may be enforced. A distinctionshould be made between a preference ofcredit and a lien. A preference applies only toclaims which do not attach to specificproperties. A lien creates a charge on aparticular property. The right of first preferenceas regards unpaid wages recognized by Article110 does not constitute a lien on the propertyof the insolvent debtor in favor of workers. It isbut a preference of credit in their favor, apreference in application. It is a methodadopted to determine and specify the order inwhich credits should be paid in the finaldistribution of the proceeds of the insolvent'sassets. It is a right to a first preference in thedischarge of the funds of the judgment debtor.A recorded mortgage is a special preferredcredit while the preference given to workersunder Article 110 of the Labor Code is anordinary preferred credit. (DBP v. NLRC, G.R.No. 86227, Jan. 19, 1994)

Q: On July 2, 1980, three creditors filed apetition for the involuntary insolvency ofthe spouses Gatmaytan. Prior thereto, HTAfiled a case for collection of sum of moneycovering the proceeds of some personalproperties belonging to the spouses. TheRTC issued a writ of preliminaryattachment and on March 4, 1980, a levy onattachment was done on the real propertiesregistered in the names of the spouses.However, on May 30, 1984, the saidproperties levied on attachment were madepart of the assets belonging to theinsolvents available for distribution. HTAopposed contending that the insolventcourt is without jurisdiction. Is the levy onattachment in favor of the HTA dissolvedby the filing of insolvency proceedings fourmonths after said attachment?

A: Under the Insolvency Law, attachmentsdissolved are those levied within one monthnext preceeding the commencement of theinsolvency proceedings and judgmentsvacated and set aside are judgments entered

in any action filed within thirty daysimmediately prior to the commencement of theinsolvency proceedings. Thus, a levy onattachment made more than 4 months beforethe filing of the insolvency proceedings is notdissolved and consequently any executionsale made during the pendency of theinsolvency proceeding is valid. (Radiola-Toshiba Phi/so v. lAC, G.R. No. 75222, July 18,1991)

Q: Is the power to petition for theadjudication of bankruptcy granted tojuridical persons?

A: The law grants to a juridical person, as wellto natural persons, the power to petition for theadjudication of bankruptcy of any natural orjuridical person provided that with respect tojuridical persons, it is a resident corporationand adjoins at least two other residents inpresenting the petition to the BankruptcyCourt. When a foreign bank alleged in itspetition that it is licensed to do business in thePhilippines and actually doinq business in thecountry, it is in effect stating that it is a residentforeign corporation in the Philippines. (StateInvestment House v. Citibank, N.A., G.R. Nos.79926-27, Oct. 17, 1991)

.0: What is suspension of payments?

A: It is the postponement, by court order, ofthe payment of debts of one who, whilepossessing sufficient property to cover hisdebts, foresees the impossibility of meetingthem when they respectively fall due.

Q: When is the remedy of suspension ofpayments available?

A: The debtor who, .possessing sufficientproperty to cover all his debts, foresees theimpossibility of meeting them when theyrespectively fall due, may petition that he bedeclared in the state of suspension ofpayments by the court of the province or city inwhich he has resided for six months nextpreceding the filing of his petition (Sec. 2 [1]).

Q: When does suspe;nsion take effect?

A: Upon the filing of the petition.


Pacu{taa de Verecfio Civil

SPECIAL COl\ttMERCLALLAWS: INSOLVENCY LAW

Q: What are the steps in suspension ofpaym'ents?

IiA:

1. Filing of the petition by the debtor(Sec. 2);

2. Issuance by the court of an ordercalling a meeting of creditors (Sec. 3);

3. Publication of the order and service ofsummons (Sec. 4);

4. Meetings of creditors for. theconsideration of the debtor'sproposition (Sec. B):

Note: To hold a valid meeting, thecreditors representing at least 3/5 of theliabilities of the debtor must be present.

5. Approval by the creditors of thedebtor's proposition (Sec. B, [20]);

6. The Double Majority Rule applies. Toobtain a majority vote, it is necessarythat:a. At least 213 of the creditors must

vote on the same proposition,and

b. Said 2/3 represent at least 3/5 ofthe total liabilities of the debtor.

7. Objections, if any, to the decisionmust be made within 10 daysfollowing the meeting. (Sec. 11);

8. Issuance of order by the courtdirecting that the agreement. becarried out in case the decision isdeclared valid, or when no objectionto said decision has been presented.

Q: What are the documents that shouldaccompany the petition?

A:1. A verified schedule containing a full

and true statement of the debts andliabilities of the petitioner togetherwith a list of creditors; (Sees. 15, 2)

2. A verified inventory containing a list ofcreditors, an accurate description ofall the property of the petitionerincluding property exempt fromexecution and a statement as to .thevalue of each item of property, itslocation, and encumbrances thereon,if any; (Secs. 16, 2)

3. A statement of his assets andliabilities; (Sec. 2) and

41 The 'proposed agreements hei requests of his creditors. (Ibid.)

178

Q: What are the effects of filing of thepetition?

A:1. No disposition in any manner of his

property may be made by thepetitioner except insofar as concernsthe ordinary operations of commerceor of industry in which he is engaged;(Sec. 3 [2])

2. No payments may be made by thepetitioner except in the ordinarycourse of his business or industry(Ibid.); and;

3. Upon the request to the court, allpending executions against thedebtor shall be suspended exceptexecution against property especiallymortgaged. (Sec. 6)

Q: Who are the creditors affected by thefiling of the petition?

A: Only creditors included in the schedulesfiled by the debtor shall be cited to appear andto take part in the meeting. (Sec. 5) Hence,those who did not appear because they werenot informed of the proceedings are unaffectedby the same.

Q: Who are the creditors not affected byorder of suspension of payments?

A:1. Those having claims for personal .

labor, maintenance, expenses of thelast illness and funeral of wife or childof debtor, incurred during the 60 daysimmediately preceding the filing of thepetition; and

2. Those having legal or contractualmortgages. (Sec. 9)

Q: When is a petition for suspension ofpayments deemed rejected?

A:1. When the number of creditors

representing at least 3/5 of theliabilities not attend; (Sees. B, 10) or

2. When the two majorities required arenot in favor of the proposedagreement (Sec. 10).


Q: What is the effect of disapproval ofpetition?

A: If the decision of the meeting be negativeas regards the proposed agreement or if nodecision is had in default of such number or ofsuch majorities, the proceeding shall beterminated without recourse. In such case, theparties concerned shall be at liberty to enforcethe rights which correspond to them. (Sec. 11)

Q: What are the modes or forms ofsuspension of payment?

A:1. Petition for ordinary suspension of

payments under Act 19562. Verified petition for rehabilitation

under the Interim Rules of Procedurefor Corporate Rehabilitation whichincludes suspension of payments.

Q: Distinguish Petition for ordinary suspension of payments from Petition for corporaterehabilitation.

1. Corporation, partnership or association, or i

2. The creditors holding at least 20% of the debtor's totalliabilities.

The court, still, has to issue a stay order not later than 5 days fromthe filing of the petition.

All claims against the debtor are stayed upon the jssuance of stay'order.All actions or claims against the

corporation pending before thecourt, tribunal, board, or body

shall be suspended.The creditors may proceed to enforce their claim against the

surety even if during the pendency of the rehabilitationproceedings involving the corporate debtor. (Phil. Blooming Mills,

Inc. and Alfredo Ching v. CA, G.R. No. 142381, Oct. 5, 2003)

UN I V E R 5 I T vt: F SAN ToT 0 MAS

Pacu[taa de Dere cho Civif ~i~179


Q: What are kinds of insolvency?

A:1. Voluntary insolvency2. Involuntary insolvency

Note: When suspension of payments has beenjudicially declared, a declaration of insolvency isnot legally possible unless proceedings forsuspension have been terminated. The conditionof suspension of payments is in law incompatiblewith that of simultaneous bankruptcy. Insolvencyis, of course, an essential element of insolvencyproceedings.

Q: Distingujsh suspension of paymentsfrom insolvency proceedings.

debtor hasenough assets tomeet his liabilities,but cannot meetthem as they fall

due.

of all debts, whetherdue or not, and tosecure a complete

discharge from suchdebts.

The debtor has moreliabilities than assets.

Always initiated bythe debtor

May be i bycreditors or other

persons in case ofinvoluntary insolvencyproceedings or by thedebtor himself in caseof voluntary insolvency

roceedin s.payment

of debts in order toprovide the debtor a

period to convertsome of hiserties to cash.

The amount of debtsis not affected, onlythe time for payingthem is postponed.

I

The tors usuallyreceive less than whatthey are entitled to, or

some creditors maynot even receive

an case of invol

insolvency, 3 orcreditors are

180

Q:What is a voluntary insolvency?

A: This is availed of a debtor who, havingdebts exceeding Pi ,000.00, cannot dischargeall of them with all of his existing assets andwho, as a consequence, voluntarily goes tocourt to have himself declared as an insolventso that his assets may be equitably distributedamong his creditors. (Sec 14)

Q: What is the procedure for voluntaryinsolvency?

A:1. Filing of the petition by the debtor

praying for the declaration ofinsolvency (Sec.Z),

2. Issuance of an order of adjudicationdeclaring the petitioner insolvent"(Sec. 18); .

3. Publication and service of the order(Sec. 19);

4. Meeting of the creditors to elect theassignee in insolvency (Sec. 30);

5. Conveyance of the debtor's propertyby the clerk of court to the assignee(Sec. 32);

6. Liquidation of the debtor's assets andpayment of his debts (Sec. 33);

7. Composition, if agreed upon (Sec.63);

8. Discharge of the debtor on hisapplication (Sec. 64), except acorporation;

9, Objection, if any, to the discharge(Sec. 66);

10. Appeal to the SC in certiorari.

Q: A, a well-known architect, is sufferingfrom financial reverses. He has. fourcreditors with a total claim of P26 Million.Despite his intention to pay theseobligations, his current assets areinsufficient to cover all of them. Hiscreditors are about to sue him.Consequently, he was constrained to file apetition for insolvency

Since A was merely forced bycircumstances to petition the court todeclare him insolvent, can the judgeproperly treat the petition as one forinvoluntary insolvency? Explain.

A: The petition cannot be treated as one ofinvoluntary insolvency, because it was filed byA himself, the debtor, and not by his creditors(Sec. 20). To treat it as one of involuntaryinsolvency would unduly benefit A as a debtor,because he would not be subject to the


limitation of time within which he is subject inthe case of voluntary insolvency for purposesof discharge (Sec 65).

Q: What are the requisites of petition forvoluntary insolvency?

A: The petition which must be verified (Sec.17) is to be filed:

I. By an insolvent debtor2. Owing debts exceeding in amount the

sum of P1,OOO.OO,3. In the RTC of the province or city in

which he has resided for 6 monthsnext preceding the filing of suchpetition, and

4. Setting forth in his petition thefollowing:a. His place of residence;b. The period of residence therein

immediately prior to filing saidpetition;

c. His inability to pay all his debts infull;

d. His willingness to surrender allhis property, estate, and effectsnot exempt from execution forthe benefit of his creditors; and

e. An application to be adjudged aninsolvent. (Sec. 14)

Q: What are the documents to accompanythe petition?

A:1. A verified schedule must contain:

a. A full and true statement of alldebts and liabilities of theinsolvent debtor; and

b. An outline of the facts giving riseor which might give rise to acause of action against suchinsolvent debtor; (Sec. 15)

2. A verltieo inventory, which mustcontain:a. An accurate description of all the

personal and real property of theinsolvent exempt or not fromexecution including a statementas to its value, location andencumbrances thereon; and

b. An outline of the facts giving riseor which might give rise to a rightof action in favour of theinsolvent debtor. (Sec. 16)

Q: Who may petition for voluntaryinsolvency?

A: The petition may be filed by any officer dulyauthorized by the vote of the board of directorsor trustees at a meeting especially called forthat purpose, or by assent in writing of themajority of the directors or trustees, as thecase may be. (Sec. 52)

Q: What is the effect of filing petition?

A: Once the petition is filed, it ipso facto takesaway and deprives the debtor petitioner of theright to do or commit any act of preference asto creditors, pending the final adjudication.(Philippine Trust Co. v. National Bank, 42 Phil413)

Q: What are the effects of court orderdeclaring debtor insolvent?

A:1. All the assets of the debtor not

exempt from execution are takenpossession of by the sheriff until theappointment of a receiver orassignee;

2. The payment to the debtor of anydebts due to him and the delivery tothe debtor or to any person for him ofany property belonging to him, andthe transfer of any property by himare forbidden;

3. All civil proceedings pending againstthe insolvent debtor shall be stayed;and

4. Mortgages or pledges, attachments,or executions on property of thedebtor duly recorded and notdissolved are not affected by theorder. (Sec. 59) I


'Facu(taa de CDerecno Civil ~i~181


Q: What is an involuntary insolvency?

A: This is availed of by the petition of 3 ormore creditors, none of whom became acreditor by assignment within 30 days prior tofiling of petition and whose aggregate credit isnot less than Pi ,000.00, because ofcommission of one or more acts of insolvency.(Sec. 20)

Q: What are the acts of insolvency?

A:1. Such person is about to depart or has

departed from the Philippines, withintent to defraud his creditors;

2. Being absent from the Philippines,with intent to defraud his creditors, heremains absent;

3. He conceals himself to avoid theservice of legal process for purposeof hindering or delaying or defraudinghis creditors;

4. He conceals, or is removing, any ofhis property to avoid its beingattached or taken on legal process;

5. He has suffered his property toremain under attachment or legalprocess for 3 days for the purpose ofhindering or delaying or defraudinghis creditors;

6. He has confessed or offered to allowjudgment in favor of any creditor orclaimant for the purpose of hinderingor delaying or defrauding any creditoror claimant;

7. He has willfully suffered judgment tobe taken against him by default for

i the purpose of hindering or delaying, or defrauding his creditors;

8.1 He has suffered or procured hisproperty to be taken on legal processwith intent to give a preference to oneor more of his creditors and therebyhinder, delay, or defraud anyone ofhis creditors;

9. He has made any assignment, gift,sale, conveyance, or transfer of hisestate, property, rights, or credits withintent to delay, defraud, or hinder hiscreditors;

10. He has, in contemplation ofinsolvency, made any payment, gift,grant, sale, conveyance, or transfer ofhis estate, property, rights, or credits;

11. Being a merchant or tradesman hehas generally defaulted in thepayment of his current obligations fora period of 30 days;

182

12. For a period of 30 days he has failedafter demand, to pay any moneysdeposited with him or received by himin a fiduciary capacity; and

13. An execution having been issuedagainst him on final judgment formoney, he shall have been found tobe without sufficient property subjectto execution to satisfy the judgment.(Sec. 20)

Q: What is the procedure in involuntaryinsolvency?

A:1. Filing of the petition by three or more

creditors (Sec. 20);2. Issuance of order requiring the debtor

to show cause why he should not beadjudged insolvent (Sec. 21);

3. Service of order to show cause (Sec.22);

4. Filing of answer or motion to dismiss(Sec. 23);

5. Hearing of the case (Sec. 24);6. Issuance of order or decision

adjudging debtor insolvent (Ibid.)

7. Publication and service of order (Sec.25);

8. Meetings of creditors for election ofan assignee in insolvency (Sec. 30);

9. Conveyance of debtor's property byclerk of court to the assignee (Sec.32);

10. Liquidation of the debtor's assets andpayment of debts (Sec. 33);

Note: Assets of the insolvent whichare not exempt from execution willthen be distributed among hiscreditors in accordance with the rulesof concurrence and preference ofcredits in the Civil Code.

11. Composition, if agreed upon (Sec.63);

12. Discharge of the debtor on hisapplication, except a corporation(Sec. 52);

13. Objection, if any, to the discharge(Sec. 66); and

14. Appeal to the Supreme Court incertain cases (Sec. 62)


Q: What are the requisites for filing apetition for Involuntary Insolvency?

A: The petition is filed by:

1. Three or more creditors;2. None of whom has become such a

creditor by assignment, within 30days prior to the filing of said petition;

3. Whose credits accrued in thePhilippines;

4. The total amount of which credits isnot less than P1,OOO.OO;and

5. In tile RTC of the province or city inwhich the debtor resides 01- has hisprincipal place 0 business.

6. The petition must:a. be verified by at least 3 of the

petitioning creditors;b. set forth one or more acts of

insolvency mentioned in the law;and

c. be accompanied by a bond,approved by the court with atleast 2 sureties, in' such penalsum as the court shall direct.

Q: Can a surety institute involuntaryproceedings?

A: No, a surety for the debtor is not a creditor.Hence, he cannot institute involuntaryproceedings. All he can do is to prove hisclaim.

Q: Distinguish voluntary insolvency frominvoluntary insolvency.

A:,.': 'VOLUNTARY ',INV,OLUNTARY, -INSOLVENCY INSOLVENCY ~Filed by the debtor. Filed by 3 or more

creditors.Only 1 creditor is 3 or more creditors arerequired. required.No requirement for Requirements forcreditors. creditors:

1. Residents of thePhilippines;2. Their credits ordemands must haveaccrued in thePhilippines; and3. Must not have beena creditor byassignment within 30days prior to the filingof the petition.

Venue: where he has Where the debtor hasresided 6 months . residence or has his

J2!ior to the filing of principal place of

petition. business.No need for the Debtor must ' havecommission of any of committed any of thethe acts of acts of insolvency.insolven9f,Amount of debts Amount of debts mustmust exceed not be less thanPi ,000.00. Pi ,00000.Debtor deemed Debtor is consideredinsolvent through an insolvent upon theorder of adjudication issuance by the courtafter filing of the of an order after duepetition; adjudication hearing declaring himmay be granted ex insolvent; adjudicationparte. granted only after

heariQf!,Bond is not required. Bond is required.

Q: Who is an assignee in insolvency?

A: A person elected ~y the creditors orappointed by the court to whom an insolventdebtor makes an assiqnment of all his propertyfor the benefit of his creditors.

Note: The assignee must be a person electedby the majority of the creditors who haveproven their claims, such majority being innumber and amount.

Q: Who are the creditors not entitled tovote in the election of assignee?

A:1. Those who did not file their claims at

least 2 days prior to the timeappointed for such election; (Sec. 29)

2. Those whose claims are barred bythe statute of limitations; (Ibid.)

3. Secured creditors unless theysurrender their security or lien to thesheriff or receiver or unless they shallfirst have the value of such securityfixed as provided in Sec. 59; and

4. Holders of claims for unliquidateddamages arising out of pure tort.

Q: Is the assignee required to give a bond?

A: After his election, the assignee is requiredto give a bond for the faithful performance ofhis duties. (Sees. 3D, 31)

Note: Courts have the power to appoint receiversto hold the property of individuals or corporationsalthough no insolvency proceedings are involved.A receiver appointed by a court before theinstitution of the insolvency proceedings may beappointed the permanent assignee in suchproceedings.


Pacu(taa de Der ecIio Civil

SPECIAL COMMERCIAL LA WS: INSOLVENCY LAW

Q: What is the date of cleavage?

A: The date when the petition is filed, fromwhich is counted backward or forward, indetermining the effects provided for under theInsolvency Law.

Illustrations:1. A creditor by assignment of credit

made within 30 days from date ofcleavage shall be disqualified aspetitioning creditor (Sec. 20);

2. Attachment levied upon within aperiod of 30 days before the date of .cleavage may be set aside by theassignee (Sec. 32);

3. Judgment on cases filed and decidedwithin 30 days prior to the date ofcleavage may be set aside by theassignee (Sec. 32);

4. Judgments on cases filed before 30days from the date of cleavage butdecided within 30 days because ofconfession of judgment or declarationof default by debtor may be set asideby action of assignee;

5. Properties acquired after date of

Icleavage, after discharge of debtor ingood faith shall not be liable for debtsincurred prior to the date of cleavage;

6. Fraudulent preferences made within30 days prior to the date of cleavagemay be set aside in action brought byassignee.

Q: What is a dividend in insolvency?

A: A parcel of the fund arising from the assetsof the estate, rightfully allotted to a creditorentitled to share in the fund whether in thesame proportion with other creditors or in adifferent proportion. It is paid by the assigneeonly upon order of the court (Sees. 43, 44).

Q: When may a partnership be declaredinsolvent?

A: A partnership may be declared insolvent bya petition of the partners and may be doneduring the continuation of the partnershipbusiness or after its dissolution and before thefinal settlement thereof.

A partnership may be declared insolventnotwithstanding the solvency. of the partnersconstituting the same. (Campos Rueda & Co.v. Pacific Commercial Co., G.R. No. L-18703Aug. 28, 1922)

184

Q: Who may petition for declaration ofinsolvency of a partnership?

A:1. Voluntary insolvency - By all the

partners or any of them;2. Involuntary insolvency - By one or

more of the partners or three or morecreditors of the partnership.

Q: What are the properties included in the.insolvency proceedings?

A:1. All the property of the partnership;

and ~2. All the. separate of each of the

partners except:a. Separate properties of limited

partners (Art. 1843, NCC)b. Properties which are exempt by

law (Sec. 51)

Q: What are the effects of filing of petition?

A:1. The proceedings are deemed to

commence against the partners at thesame time;

2. Upon order of the court, all theproperties of the partnership and alsoall the separate property of eachpartner, if they are liable, shall betaken; (Sec. 51)

3. All creditors of the partnership andthe separate creditors of each partner .shall be allowed to. prove theirrespective claims; (Ibid.)

4. The assignee shall be chosen by thecreditors of the partnership; and(Ibid.)

5. Pending insolvency proceedings byor against any partnership, person orcorporation no statute of limitationsshall run upon a claim of or againstthe estate of the debtor. (Sec. 73)


Q: What is the effect of insolvency ofpartnership or any partner?

A:1. A partnership may be declared

insolvent notwithstanding thesolvency of the partners constitutingtile same.

2. A partnership is not necessarilyinsolvent because one of its membersis insolvent. The solvent membersare bound to wind up the partnershipaffairs.

3. Under the law, a partnership isautomatically dissolved by theinsolvency of any partner or of thepartnership

Q: What is the effect when corporationdeclared insolvent?

A: Its property and assets shall be distributedto the creditors but no discharge shall begranted to any corporation. (Sec. 52)

Q: Is insolvency law applicable tocorporations?

A: The Insolvency Law expressly provides thatit is not applicable to corporations:

1. Engaged principally in the bankingbusiness; or

2. Any other corporation as to whichthere is a special provision of law forits liquidation in case of insolvency.(Ibid)

A:Q: In the filing of claims in an insolvency proceeding, what debts may and may not be proved?

1. All debts due and payable from the debtor atthe time of adjudication of insolvency; (Sec.53)

2. All debts existing at the time of theadjudication of insolvency but not payableuntil a future time, a discount being made ifno interest is payable by the terms of thecontract;

3. Any debt of the insolvent arisin'g from hisliability as indorser, surety, bailor guarantor,where such liability became absolute after theadjudication of insolvency but before the finaldividend shall have been declare; (Sec, 54)

4, Other contingent debts and contingentliabilities contracted by the insolvent if thecontingency shall happen before the order offinal dividend; (Sec. 55); and

5. Any debt of the insolvent arising from hisliability to any person liable as bail, surety, orguarantor or otherwise, for the insolvent, hoshall have paid the debt in full, or in part.(Sec. 56)~--------------------------~----------------------------------~

The debts which may be proved against the estateof the debtor in insolvency proceedinqs are thefollowing: The following debts are not provable or aI/owed in

insolvency proceedings:

1. Claims barred by the statute of limitations;(Sec. 29, 73)

2, .Claims of secured creditors with a mortgageor pledge in their favour unless theysurrender the security; (Sec, 59)

3. Claims of creditors who hold an attachmentor execution on the property of the debtorduly recorded and not dissolved; (Sec. 32)

4. Claims on account of which a fraudulentpreference was made or given; (Sec. 61)

5. Support, as it does not arise from anybusiness transaction but from the relation ofmarriage; and

6. A claim for unliquidated damages arising outof a pure tort, which neither constitutes abreach of an express contract nor results inany unjust enrichment of the tortfeasor thatmay form the basis of an implied contract.

UNlilERSITY OF SANTO TOMAS

Pacu(tad de De r ech o Civ i] ~v~185


Q: What is a contingent claim? Q: Distinguish composition from accord.

A: A claim in which liability depends on somefuture event that mayor may not happen andwhich makes it uncertain whether there will beany liability.

Note: After the close of the insolvencyproceedings and the happening of thecontingency, the creditor may pursue anyavailable remedy for the collection of his claim.

Q: How are claims arising or acquired afterinsolvency treated?

A:1. Claim arose after commencement of

proceedings - An obligation comingin force after the initiation of theproceedings is not generally a properclaim to be proved.

2. Claim owned by insolvent purchasedafter insolvency - One indebted to aninsolvent will not be permitted tointerpose as an offset, a claim ownedby the insolvent which he haspurchased after the insolvency.

Q: .What are the alternative rights of asecured creditor?

A:1. To maintain his rights under his

security or' lien and ignore theinsolvency proceedings, in whichcase, it is the duty of the assignee tosurrender to him the propertyencumbered;

2. To waive his right under the securityor lien and thereby share in thedistribution of the assets of thedebtor; or

3. To have the value of the encumberedproperty appraised and then share inthe distribution of the assets of thedebtor with respect to the balance ofhis credit. .

Q: What is composition?

A: It is an agreement, made upon a sufficientconsideration, between an insolvent orembarrassed debtor and his creditors,whereby the latter for the sake of immediate orsooner payment, agree to accept a dividendless than the whole amount of their claims, tobe distributed pro rata, in discharge andsatisfaction of the whole debt.

186

A: Accord properly denotes an agreementbetween a debtor and a single creditor for adischarge of the obligation by a part paymentor on different terms.

Composition, on the other hand, designates anarrangement between a debtor and the wholebody of his creditors (or at least a considerableportion of them) for the liquidation of theirclaims by the dividend offered.

Q: What are the requirements for a validoffer of composition?

A:1. The offer of the terms of composition

must be made after the filing of theschedule of the debtor's property andthe submission of the list of hiscreditors;

2. The offer must be accepted in writingby a majority of the creditorsrepresenting a majority of the claimswhich have been allowed;

3. It must be made after the depositingin such place designated by the court,the consideration to be paid and thecosts of the proceedings; and

4. The terms of the composition must beapproved or confirmed by the court.(Sec. 63)

Q: When may the court confirm acomposition?

A: When:1. It is for the best interest of the

creditors;2. The debtor has not been quilty of any

of the acts, or of a failure to performany of the duties which would createa bar to his discharge; and

3. The offer and its acceptance are ingood faith and have not been madeor procured in a manner forbidden bythe Act.


Q: What are the effects of confirmation ofcomposition?

A:1. The consideration shall be distributed

as the judge shall direct;2. The insolvency proceedings shall be

dismissed;3. The title to the insolvent's estate shall

revert in him;4. The insolvent shall be released from

his debts

Q: When may confirmation be set aside?

A: The court may, upon application of a partyin interest within 6 months after thecomposition has been confirmed, set the sameaside and reinstate the case if it shall be madeto appear upon a trial:

1. That fraud was practiced in theprocuring of such composition; and

2. The knowledge thereof has come tothe petitioner since the confirmationof such composition. (Sec. 63)

Q: What is discharge?

A: Discharge, under the Insolvency Law, is theformal and judicial release of an insolventdebtor from his debts with the exception ofthose expressly reserved by law.

Note: Only natural persons may ask fordischarge; corporations cannot ask for discharge.(Sec. 52) When granted, takes effect not from itsdate, but from the commencement of theproceedings in insolvency.

Q: When insolvent debtor may apply fordischarge?

A: A debtor' may apply to the RTC for adischarge at anytime after the expiration of 3months from the adjudication of insolvency,but not later than 1 year from suchadjudication of insolvency, unless the propertyof the insolvent has not been converted intomoney" (Sec. 64) without his fault, therebydelaying the distribution of dividends amongthe creditors in which case the court mayextend the period

Any creditor may oppose the discharge byfiling his objections thereto, specifying thegrounds of his opposition. After the debtor hasfiled and served his verified answer, the courtshall try the issue or issues raised. (Sec. 66)

Q: What are the requisites for discharge?

A:1. Compliance with statutory

requirements regarding surrender ofhis assets for the benefit of thecreditors and regarding the renditionof an account of his assets andliabilities;

Note: A discharge in insolvency is amatter of legislative grace or favour tothe debtor, to be obtained only by astrict compliance with the conditionsprescribed by the statute.

2. Application for discharge should befiled after the expiration of 3 monthsfrom the adjudication of insolvency,but not later than 1 year; (Sec. 64);and

3. Insolvent debtor must not havecommitted any of the acts ofinsolvency preventing discharge.

Q: What are the acts of debtor or groundswhich will prevent discharge?

A: No discharge shall be granted, or if gr\3nted,shall be valid, to the following cases:

1. False swearing;2. Concealment of any part of his estate

or effects;3. Fraud or willful neglect in the care of

his property or in the delivery thereofto the assignee;

4. Procuring his properties to beattached or seized on executionwithin 1 month before thecommencement of insolvencyproceedings;

5. Destruction, mutilation, alteration orfalsification of his books, documents,and papers;

6. Giving fraudulent preference to acreditor;

7. Non-disclosure of the assignee of aproven false or fictitious debt within 1month after acquiring knowledge;

8. Being a merchant, failure to keepproper books or accounts;

9. Influencing the action of any creditor,at any state of the proceedings, bypecuniary consideration;

10. Effecting any transfer, conveyance ormortgage in contemplation ofinsolvency;

11. Conviction of any misdemeanorunder the Insolvency Law:

12. In case of voluntary insolvency, hehas received the benefit of insolvency

UNIVERSITY OF SANTO TOMAS ~~~", 187'Facu{taa de <Derecfio Civil 'W'


within 6 years next preceding hisapplication for discharge; and

13. If irisolvency proceeding in which hecould have applied are pending by oragainst him in the RTC of any otherprovince or city. (Sec. 65)

Q: What are the effects of discharge?

A:1. It releases the debtor from all claims,

debts, liabilities and demand set forthin the schedule or which were ormight have been proved against hisestate in insolvency. (Sec. 69).Hence, non-provable debts are notaffected whether or not they wereproperly scheduled;

2. It operates as a discharge of theinsolvent and future acquisitions, butpemits mortgagees and other liencreditors to have their satisfaction outof the mortgage or subject of the lien;

3. It is a special defense which may bepledged and be a complete bar to allsuits brought on any such debts,claims, liabilities or dernands. (Ibid.)

4. It does not operate to release anyperson liable for the same debt, for orwith the debtor, either as partner, jointcontractor, indorser," surety orotherwise; (Sec. 68)

5. The certificate of discharge is primafacie evidence of the fact of release,and the regularity of such discharge.

Note: Where a debtor is judicially declaredinsolvent, the remedy of the guarantor orsurety would be to file a contingent claim inthe insolvency proceeding, if his rights assuch guarantor or sureties are not to bebarred by the subsequent discharge of theinsolvent debtor from all his liabilities.

Q: What are the debts and obligations notaffected by discharge of insolvent?

A:1. Taxes or assessments due the

Government, whether national orlocal;Any debt created by the fraud orembezzlement of the debtor;Any debt created by ihe defalcation ofthe debtor as a public officer or whileacting in a fiduciary capacity;Debt of any person liable for thesame debt, for or with the insolventdebtor, either as partner, jointcontractor, inorser, surety orotherwise; (Sec; 68)Debts of a corporation (Sec. 52);Claim for support;

2.

3.

i4.

5.6.

188

7. Discharged debt but revived by asubsequent new promise to pay;

8. Debts which have not been dulyscheduled in time for proof andallowance, unless the creditors hadnotice or actual knowledge of theinsolvency proceedings, are notdischarged as tosuch creditors;

9. Claims for unliquidated damagesarising out of a pure tort;

10. Claims of secured creditors; (Sec. 59)11. Claims not in existence or not mature

at the time of the discharge;12. Claims that are contingent at the time

of discharge.

Q: When discharge may be revoked?

A: A discharge may be revoked by the courtwhich granted it on petition of any creditor:

1. Whose debt was proved or provableagainst the estate in insolvency onthe ground that the discharge wasfraudulently obtained;

2. Who has discovered facts constitutingthe fraud subsequent to tile dlscharqeand fraudulent transfer; and provided,

3. The petition is filed within 1 year afterthe date of the discharge. (Sec. 69)

Q: What is transfer?

A: It includes the'sale and every other anddifferent modes of disposing of or parting withproperty, or the possession of property,absolutely or conditionally, as a payment,pledge, mortgage, gift, or security.

Note: A deposit of money is not a transfer.

Q: When is there preferential transfer?

A: There must be a parting with the insolvent'sproperty for the benefit of the creditor and aconsequent diminution of the insolvent's estatewith the result that such creditor receives agreater proportion of his claim than othercreditors of the same class.Note: Except incases mentioned in theInsolvency Law, a debtor is not prohibited frompaying one creditor in preference to another.


Q: Howcommitted?

fraudulent preferenceis

A: A fraudulent preference is committed whenthe debtor procures any part of his property tobe attached, sequestered, or seized onexecution or makes any payment, pledge,mortgage, assignment, transfer, sale orconveyance of any part of his property,whether directly or indirectly, absolutely orconditionally, to anyone under the followingcircumstances:

1. The debtor is insolvent or incontemplation of insolvency;

2. The transaction in question is madewithin 30 days before the filing of apetition by or against the debtor;

3. It is made with a view to givingpreference to any creditor or personhaving a claim against him; and

4. The person receiving a benefitthereby has reasonable cause tobelieve that the transfer is made witha view to prevent his property fromcoming to his assignee in insolvencyor to prevent the same from beingdistributed ratably among hiscreditors or to defeat the object of orany way hinder the operation of orevade the provisions of theInsolvency Law. (Sec. 70)

Q: What are the effects of fraudulenttransfer?

A: As against the creditors of the insolvent,any conveyance or assignment fraudulentlymade is void.

In all actions to set aside or nullify fraudulenttransfer or transactions as void, the assigneeappears for and represents the generalcreditors. The creditors of the Insolvent are notauthorized to institute an independent action toannul such fraudulent preferences.

Q: When are the provisions of the Act notapplicable?

A: The provisions of the Act shall not apply tocorporations principally in the bankingbusiness or any other corporation as to whichthere is a special provision of law for itsliquidation in case of insolvency.

A petition for liquidation of an insolvent. partnership or corporation is a special

proceeding not an ordinary action.

Q: As of June 1, 2002,Edzo Systems Corporation(Edzo) was indebted to the following creditors:

a. Ace Equipment Supplies - forvarious personal computers andaccessories sold to Edzo on creditamounting to P300,000.

b. Handyman Garage - for mechanicalrepairs (parts and service)performed on Edzo's company caramounting to P10,000.

c. Joselyn Reyes - former employeeof Edzo who sued Edzo for unlawfultermination of employment and wasable to obtain a final judgmentagainst Edzo for P100,000.

d. Bureau of Internal Revenue - forunpaid value-added taxesamounting to P30,000.

e. Integrity Bank - which grantedEdzo a loan in 2001 in the amountof P500,000.

The loan was not secured by any asset ofEdzo, but it was guaranteedunconditionally and solidarily by Edzo'sPresident and controlling stockholder,Eduardo Z. Ong, as accommodation surety.The loan owed to Integrity Bank fell due onJune 15, 2002. Despite pleas for extensionof payment by Edzo, bank demandedimmediate payment. Because IntegrityBank threatened to proceed against thesurety, Eduardo, Edzo decided to pay up allof its obligations to Integrity Bank. On June20, 2002, Edzo paid to Integrity Bank thefull principal amount of P500,000.00, plusaccrued interests amounting to P55.000.00.As a result, Edzo had hardly any cash leftfor operations and decided to close itsbusiness. After paying the unpaid salariesof its employees, Edzo filed a petition forinsolvency on July 1, 2002. In theinsolvency proceedings in court, theassignee in insolvency sought to invalidatethe payment made by Edzo to IntegrityBank for being a fraudulent transferbecause it was made within 30 days beforethe filing of the insolvency petition. Indefense, Integrity Bank asserted that thepayment to it was for a legitimate debt thatwas not covered by the prohibitionbecause it was "a valuable pecuniaryconsideration made in good faith," thusfalling within the exception specified in theInsolvency Law.

As judge in the pending insolvency case,how would you decide the respectivecontentions of the assignee in insolvencyand of Integrity Bank? Explain.

UNIVERSITY OF SANTO TOMAS ~"-1,'~189'Facu(tad de De r eclio Civii •

SPECIAL COIvIJ:v[ERCIAL LAWS: INSOLVENCY LAW

A: The contention of the assignee ininsolvency is correct. The payment made byEdzo to Integrity Bank was a fraudulentpreference or payment, being made withinthirty (30) days before the filing of theinsolvency petition.

Q: Based on the same facts as stated in thepreceding question, how would you, asjudge in the insolvency proceedings, rankthe respective credits or claims of the five(5) creditors mentioned above in terms ofpreference or priority against each other?

A: The claim of Handyman Garage forP10,000.00 has a specific lien on the carrepaired. The remaining four (4) claims havepreference or priority against each other in thefollowing order:

1. Letter (d) - claim of the BIR for unpaidvalue-added taxes;

2. Letter (c) - claim of Joselyn Reyes forunlawful termination;

3. Letter (a) - claim of Ace EquipmentSupplies as an unpaid seller; and

4. Letter (e) - claim of Integrity Bank.(2002 Bar Question)

190

Academics CommitteeC.!wirpmrl/l: Abraham D. Cl'lluill() II

l/ia-Chuir./rJr /[aH/e/J/;t:r: -' cnnni« ;\. LaurcntinoVial-C/wirjfw/ldlllill e::...·/·'i·II(J'hr: ;\issa Cclinc [-I. Luna

1/1~:e-(.ll{/irJiJf' Lq}'fJ/(1 C'""'f)l'J(~": Loise Rae (;. Naval

Mercantile Law Comm ittccJllbjed llead: 11,,1)' T {\mpaguey

Aul . .l'1If,jcd I lead: Manilvn I(ose S. Sotel"

Members:I':dwin Marc T. lIaldia

Airccn M. CachoS()crates llenjil' I. MarbilRon Chcrric S. f"Iendel%<1

[':dison .Iallles I,'. I'agalilauanMnybcllinc M. Santiago

•. ---. 'IO('~ ~ ..•


Q: What are the applicable laws?

A:1. .Sections 48-50, Act 19562. Articles 2241-2245, New Civil Code

Q: What is concurrence of credit?

A: It implies possession by two or morecreditors of equal rights or privileges over thesame property or all of the property of adebtor.

Q: What is preference of credit?

A: It is the right held by a creditor to bepreferred in the payment of his claim aboveother out of the debtor's assets. By preferenceof credit, one person is given a superior rightor claim over another.

Q: What is the order of distribution?

A:1. Exclude properties exempt from

execution;2. Exclude equitable claims under

Section 48;3. Preferred claims with respect to the

specific movable property andspecific immovable property underArticle 2241 and Article 2242,respectively, of the Civil Code;

Note: The preferred claims enumeratedin Article 2241 and Article 2242 of theCivil Code are considered as mortgagesor ledges of real or personal property orliens within the purview of theInsolvency Law. (Article 2243, Nee)

With reference to specific movable andimmovable property of the debtor, thetaxes due the State shall first besatisfied. If there are two or morecredits with respect to the samemovable or immovable property, theyshall be satisfied pro rata, after paymentof taxes due the State.

4. Preferred claims as to unencumberedproperty of the debtor which shall bepaid in the order named in Article2244 of the Civil Code; and

5. Common or ordinary credits, whichshall be paid pro rata regardless ofdates under Article 2245 of the CivilCode.

Q: What are the exempt properties?

A:1. Present Property:

a. Family homeb. Right to receive support as well

as money or property obtainedby such support shall not belevied upon an attachment orexecution.

c. Sec. 13, Rule 39, Rules ofCourt.

d. Sec. 118, the Public Land Act.

2. Future Property

Note: A debtor who obtains a dischargefrom his debts on account of insolvency,is not liable for the unsatisfied claims ofhis creditors with said property.

3. Property in custodia legis and ofpublic dominion.

Q: What are the equitable claims under theInsolvency Law?

A: Under Sec. 48, any property found amongthe property of the insolvent, the ownership orwhich has not been conveyed to him by legaland irrevocable title, shall not be consideredas property of the insolvent and shall beplaced at the disposal of its lawful owners onorder of the court on petition of the assignee orany creditor whose right to the estate of theinsolvent has been established.

Equitable claims shall include the following:

1. Paraphernal property belonging towife of the insolvent;

2. Property held by the insolvent indeposit, administration, lease orusufruct;

3. Merchandise held by the debtor oncommission;

4. Negotiable instruments for collectionor remittance;

5. Money held by the debtor forremittance;

6. Amounts due the insolvent for salesor merchandise on commission;

7. Merchandise bought by the insolventon credit where no delivery is madeor where the right of ownership or


Pacu{taa de CJ)erecho Civil ~i~191

SPECIAL COMMERCIAL LAWS: CONCURRENCE AND PREFERENCE OF CREDIT

possession has been retained by theseller; and

8. Goods or chattels wrongfully taken bythe insolvent on the amount of thevalue thereof. (Sec. 48)

Q: A special examination of Rural Bank ofBoklod Inc. (RBBI) was conducted by theBSP wherein various loan irregularitieswere uncovered. The Monetary Boardordered the liquidation of the bank. TheMonetary Board transferred to POIC thereceivershiplliquidation of RBBI. PDIC thenfiled a Motion for Approval of Project ofDistribution of the Assets of RBBI. Duringthe hearing, BIR manifested that PDICshould secure a tax clearance certificatepursuant to Section 52(C) of Republic ActNo. 8424 before it could proceed with thedissolution. The RTC directed the PDIC tocomply. Is there a need to secure a taxclearance before the project of distributionmay be approved?

A: The Government, in this case, cannotgenerally claim preference of credit, andreceive payment ahead of the other creditorsof RBBI. Duties, taxes and fees due to theGovernment may enjoy priority only when theyare with reference to a specific movableproperty under Art. 2241 (1) of the Civil Codeor im'movable property under Art. 2242(1) ofthe same Code. With reference to the otherreal bnd personal property of the debtor,sometimes referred to as "free property", thetaxes' and assessments due to the NationalGovernment, other than those in Art.2241(1)and Art. 2242(2) of the Civil Code will comeonly in the ninth place in the order ofpreference. (In Re: Petition for Assistance inthe Uquidation of the Rural Bank of Bokod(Benguet), PolC v. BIR, G.R. No. 158261,Dec. 18, 2006)

192

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-' .'. . i: INSURANCEtLAW ."

Q: What laws govern insurance?

A:1. Insurance Code of 1978 (P.D. 1460)2. New Civil Code3. Special Laws

Q: What is a contract of insurance?

A: It is an agreement whereby one undertakesfor a consideration to 'indemnify anotheragainst the loss, damage or liability arisingfrom an unknown or contingent event. (Sec.2[1], Insurance Code)

Q: What are the elements of a contract ofinsurance?

A: SPEAR1. Existence of insurable interest - The

insured possesses an interest ofsome kind susceptible of pecuniaryestimation, known as "insurableinterest. "

In general (except in life insurancepolicies), a person is deemed to havean insurable interest in the subjectmatter insured where he has arelation or connection with or concernin it that he will derive pecuniarybenefit or advantage from' itspreservation and will suffer pecuniaryloss from its destruction or injury bythe happening of the event insuredagainst.

2. Risk of loss - The insured is subjectto a risk of loss through thedestruction or impairment of thatinterest by the happening ofdesignated peril.

3. (jssumption of Risk - The insurerassumes that risk of loss for aconsideration.

4. Scheme to distribute losses - Suchassumption of risk is part of a generalscheme to distribute actual lossesamong a large group or substantialnumber of persons bearing a similar

. risk.

5. Eayment of premium Asconsideration for the insurer'spromise, the insured makes a ratablecontribution called "premium," to ageneral insurance fund.

Note: Because of the fourth element,an insurance contract therefore is arisk-distributing device.

Q: What is moral hazard?

A: An undesirable side effect in the transfer ofrisk. It is a phenomenon on which theexistence of insurance could have theperverse effect of the probability of loss.

Q: What are the nature and characteristicsof an insurance contract?

A:1. Consensual - It is perfected by the

meeting of the minds of the parties.So, if an application for insurance hasnot been either accepted or rejected,there is no contract as yet.

Note: Insurance contracts throughcorrespondence follow the "cognitiontheory" wherein an acceptance madeby letter shall not bind the personmaking the offer except from the timeit came to his knowledge (Enriquez v.Sun Life Assurance Co. of Canada,GR No. L-15774, Nov. 29, 1920).

2. Voluntary . The parties mayincorporate such terms andconditions as they may deemconvenient which will be bindingprovided they do not contravene anyprovision of law and are not opposedto public policy.

GR: The taking out of an insurancecontract is not compulsory.

XPN: Liability insurance may berequired by law in certain instancessuch as for motor vehicles,oremployees under Labor Code, or as acondition to granting a license toconduct a business or callingaffecting the public 'safety or welfare.

3. Aleatory - It depends upon somecontingent event.

Note:· An aleatory contract is acontract where one or both of theparties reciprocally bind themselvesto give or do upon the happening ofan event which is uncertain, or whichis to occur at an indeterminate time(Art. 2010, NCC).

4. Unilateral - It imposes legal dutiesonly on insurer who promises to


Pacu{tad de DerecIio Civif~i~193

INSURANCE LAW

indemnify in case of loss. It isexecuted as to the insured after thepayment of the premium, andexecutory on the part of the insurer inthe sense that it is not executed untilpayment for a loss.

5. Conditional - It is subject toconditions the principal one of whichis the happening of the event insuredagainst.

6. Contract of indemnity-GR: The insurer promises to makegood only the loss of the insured.

XPN: A life insurance is not acontract of indemnity. It is notapplicable to life insurance policiesbecause life is not capable ofpecuniary estimation. The onlysituation where the principle ofindemnity is applicable to lifeinsurance is if the amount in thepolicy is fixed. An example would bein a case where a creditor insuresthe life of his debtor to the extentof the latter's debt to the former.

7. Personal - Each party having in viewthe character,credit and conduct ofthe other.

8. Property - Since insurance is acontract, it is property in legalcontemplation.

9. Risk distributing device - Insuranceserves to distribute the risk ofeconomic loss among as many aspossible of those who are subject tothe same kind of loss.

10. Onerous - there is a valuableconsideration called the premium

Q: What are the five cardinal principles ininsurance?

1. Insurable interest - Relation betweenthe insured and the event insuredagainst such that occurrence of theevent will cause substantial loss orharm of some kind to the insured.

2.

iI

Principle of utmost good faith(uberrimae fides) - Each party takesinto consideration the character,conduct and/or credit of the other andin making the contract, each isenjoined by law to deal with the otherin utmost good faith. A violation of

194'

this duty gives the aggrieved partythe right to rescind the contract.

3. Contract of indemnity - The insuredwho has insurable interest over aproperty is only entitled to recover theamount of actual loss sustained andthe burden is upon him to establishthe amount of such loss.

4. Contract of Adhesion (Fine PrintRule) - the policy is presented to theinsured already in its printed form, sothat he either takes it or leaves it.Most of the terms of the contract donot result from mutual negotiationsbetween the parties as they areprescribed by the insurer in thatprinted form to which the insured mayadhere if he chooses but which hecannot change (Rizal Surety andInsurance, Co. v, CA, GR. No.112360, July 18, 2000). In effect, theambiguous terms are to be construedstrictly against the insurer andliberally in favor of the insured.However, if the terms are clear, thereis no room for interpretation.

5. Principle of subrogation - if theplaintiff's property has been insured,and he has received indemnity fromthe insurance company for the injuryor loss arising out of wrong or breachof contract complained of, theinsurance company shall besubrogated to the rights of theinsured against the wrongdoer or theperson who has violated the contract.(Aft 2207, NCC).

Q: Should there be a contract before theinsurer be subrogated?

A: The principle of subrogation inures to .theinsurer without any formal assignment or anyexpress stipulation to that effect in the policy.Said right is not dependent upon nor does itgrow out of any private contract. Payment tothe insured makes the insurer a subrogee inequity. (Malayan Insurance Co., Inc. v. CA,G.R. No. L-36413, Sept. 26, 1988)

Note: Incapacity of the insured will not affectthe capacity of the subrogee because capacityis personal to the holder (Lorenzo Shipping v.Chub and Sons, tnc., G.R. No. 147724, June8, 2004).


Q: What are the rules on indemnity?

A:1. Applies only to property insurance

except when the creditor insures the·Iife of his debtor

2. Insurance contracts are not wageringcontracts or gambling contracts.

Note: Wagering contracts are thosewhere the parties contemplate gainthrough mere chance.

Q: What are the purposes of subrogation?

A:c. To make the person who caused the

loss legally responsible for it;d. To prevent the insured from receiving

double recovery from the wrongdoerand the insurer; and

e. To prevent the tortfeasors from beingfree from liability and is thus foundedon consideration of public policy.

Q: What are the rules on subrogation?

A:1. Applicable only to property insurance

- the value of human life is regardedas unlimited and therefore, norecovery from a third party can bedeemed adequate to compensate theinsured's beneficiary.

2. The right of insurer against a thirdparty is limited to the amountrecoverable from latter by theinsured.

Q: What if the amount paid by theinsurance company does not fully coverthe injury or loss?

A: The aggrieved party shall be entitled torecover the deficiency from the person causinq 'the loss or injury. (Art 2207, NCC)

Q: What are the instances where the rightof subrogation does not apply?

A:1. Where the insured by his own act

releases the wrongdoer or third partyliable for loss or damage from liability;

2. The insurer loses his rights againstthe wrongdoer since the insurer canonly be subrogated to only suchrights as the insured may have;

3. Where the insurer pays the insuredthe value of the loss without notifyingthe carrier who has in good faithsettled the insured claim for loss;

4. Where the insurer pays the insuredfor a loss or risk not covered by thepolicy;

5. Life insurance;6. For recovery of loss in excess of

insurance coverage.

Q: What are the 3 classes of insurance?

A:2. Life insurance - dependent upon

human life.a. Individual lifeb. Group lifec. Industrial life

3. Non-Life Insurancea. Marineb. Firec. Casualty

4. Contracts of suretyship or bonding.(Hector S. de Leon, The InsuranceCode Annotated, 2006.)

Q: What may be insured against?

A:1. Any contingent or unknown event,

whether past or future, which maydamnify a person having an insurableinterest or creates a liability againsthim. (Sec. 3 [1])

2. A past event may be insured providedthe loss is unknown to both partiesand they expressly stipulated thatprior loss is insured by the policy.

3. Contingent liability, that is to say, theinsured is protected against his losswith regards to claims for damages.Thus, we have reinsurance,workmen's compensation insurance,and motor vehicle liability (Hector S.de Leon, The Insurance CodeAnnotated, 2006.)

Q: What event is covered by an insurancecontract?

A:GR: Only a future event can be covered byan insurance contract.

XPN: In marine insurance, even a pastevent can be covered, provided that theloss of the vessel in the past could nothave been known by ordinary means ofcommunication (Sec. 109).


Pacu{taa de (j)erecfio Civif

INSURANCE LA WI

Q: What are void insurance contractstipulations?

Q: Distinguish contract of insurance fromgam bl inglwageri ng contract.

A: A:1. Stipulations for the payment of loss

whether the person insured do nothave any interest in the subjectmatter of the insurance.

2. Stipulation that the policy shall bereceived as proof of insurableinterest.

3. Policy executed by way of gaming orwagering.

4. Stipulations within the proscription ofArticle 739 of the New Civil Code.

5. Stipulations against public policy,public morals and public order.

Q: What is a wager policy?

A:GR: It is a pretended insurance where theinsured has no interest in the thing insuredand can sustain no loss by the happeningof the misfortunes insured against.

XPN: A policy of insurance upon life orhealth may pass by transfer, will orsuccession to any person, whether he hasan insurable interest or not, and suchperson may recover upon it whatever theinsured might have recovered (Sec. 181).

Q: What are the requisites of wageringpolicy?

A:1;.

I2.3.

The original proposal to take outinsurance was that of the beneficiary.Premiums are paid by the beneficiary.Beneficiary has no interest (economicor emotional), in the continued life ofthe insured.

Q: Mayan insurance be taken up on alottery ticket?

A: No. The Insurance Code provides that "Noinsurance for or against the drawing of anylottery, or for or against any chance or ticket ina lottery drawing a prize may be allowed" It isnot allowed because it may result in profitwhich is not true in insurance which only seeksto indemnify the insured against losses. (Sec.4)

196

·GAMBLING/WAGERING· CONTRACT OF. CONTRACT. ' INSURANCE

Distributes theGains through mere possible loss by

chance reason ofmischance.

Gambler courts fortune Insured seeks toavoid misfortune

Increases the inequality Equalizes fortune.of fortune.

Whatever one wins from The gain of theone insured is nota wager is lost by the at the expense ofother wagering party. another insured.

The only

As soon as the party intelligent reasonfor purchasingmakes a wager, he insurance is thatcreates a risk of loss to the purchaserhimself where such risk faces an alreadydid not exist previously. existing risk ofeconomic loss.

Q: What are the requisites for recoveryupon insurance contract?

A:1. The insured must have insurable

interest in the subject matter;2. The interest is covered by the policy;3. There must be a loss; and4. The peril insured against must be the

proximate cause of the lossldamage

Q: What may be the subject matter of aninsurance contract?

A:1. In general: Anything with. pecuniary

value.2. Property insurance: Property covered

by the policy.3. Life, health and accident: Person

insured.4. Casualty: Risks involved in its use or

the insured's risk of loss or·liability.


"".':" PARTIES TO,THE CONTRACT ,

Q: Who are the parties to an insurancecontract?

A:1. The insurer - the party who assumes

or accepts the risk of loss andundertakes for a consideration toindemnify the insured or to pay him acertain sum on the happening of aspecified contingency or event.

2. Insured - the party in whose favor thecontract is operative and who isindemnified against, or is to receive acertain sum upon the happening of aspecified contingency or event

3, Beneficiary (cestui que trust) -person designated to receive theproceed of the policy when the riskattaches

Q: Who may be an insurer?

A: Every person, partnership, association, orcorporation duly authorized to transactinsurance business. (Sec, 6)

Q: What are the requisites for one to beaninsured?

A:

Q: May a member of the Moro IslamicLiberation Front (MILF) or its breakawaygroup, the Abu Sayyaf, be insured with acompany licensed to do business underthe Insurance Code of the Philippines (P.O.1460)? Explain.

A: Yes, What is prohibited to be insured is apublic enemy. A public enemy is a citizen ornational of a country with which the Philippinesis at war, Such member of the MILF or the AbuSayyaf is not a citizen or national of anothercountry, but of the Philippines. (2000 BarQuestion)

Q: What is the effect of war?

A: It abrogates the contract of insurance; evenif war terminates. It does not revive thecontract.

Q: Are mobs, robbers or thievesconsidered public enemies?

A: No, a mob, however numerous they maybe, or robbers or thieves whoever they maybe, are never considered public enemies forpurposes of the provision.

Q: What determines the nationality of thecorporation during wartime?

1, He must have the capacity to A:contract; GR: The place of incorporation or where it

2. He must have insurable interest and ts registered (incorporation test),3. He must not be a public enemy.

Q: Who is a public enemy?

A: A nation with whom the Philippines is at warand it includes every citizen or subject of suchnation,

Q: What is the reason behind theprohibition that a public enemy may not beinsured?

A: The purpose of war is to cripple the powerand exhaust the resources of the enemy, andit is inconsistent that one country shoulddestroy its enemy's property and repay ininsurance the value of what has been sodestroyed, or that it should in such mannerincrease the resources of the enemy, or renderit aid, However,' elementary rules of justicerequire that the premium paid by the insuredpublic enemy from first payment up to the timeof its becoming public enemy, should bereturned.

XPN: During wartime where the Philippinesis involved, what is decisive is not itsregistration but is the nationality of themajority of its stockholders (control test).

Q: Who may be a beneficiary?

A:1. Insured himself;2. Third person who paid a

consideration; or3, Third person through mere bounty of

insured, (Hector S, de Leon, TheInsurance Code Annotated, 2006.)

Note: In the Z'd and 3rd cases, the beneficiaryis not a party to the contract. The New CivilCode allows the contracting parties to includea stipulation in favor of a third person not aparty to the contract.


tf'acu{taa d» iJ)ereclio ctou ~i~197

INSURANCE LA \\I: PARTIES TO TI-IE CONTRACT

Q: Who are the persons who cannot benamed as beneficiary?

A: Any person who is forbidden from receivingany donation under Article 739 of the New CivilCode cannot be named beneficiary of lifeinsurance policy by the person who cannotmake any donation to him, as follows:

1 . Those who are guilty of adultery orconcubinage with the insured at thetime of designation;

2. Those who were found guilty with theinsured of the same criminal offense,committed in consideration of thedesignation;

3. A public officer or his wife,descendants and ascendantsdesignated by reason of his office.

Note: The prohibition will apply only to lifeinsurance policy.

Q: Is a beneficlary required to have aninsurable interest?

A:1. On a life insurance - A person who

insures his own life can designateany person as his beneficiary,whether or not the beneficiary has aninsurable interest in the life of theinsured subject to limitations underArticle 739 and 2012 of the NCC.

A person who insures the life ofanother (as allowed under Section10) and name himself as thebeneficiary must have an insurableinterest in such life.

2. On a non-life or property insurance -Beneficiary must have an insurableinterest on the property of the insuredat the time the policy was taken, andat the time the loss took place,although it may not exist in themeantime. (Sec. 19)

Q: May the insured change his beneficiary?

A:GR: The insured shall have the right tochange the beneficiary he designated inthe policy.

1. The beneficiary acquires no vestedright but only expectancy of receivingthe proceeds under the insurance.

2. The right may be exercised in themanner provided in the policy.

198

3. The right ceases upon the insured'sdeath. It may not be exercised by hisrepresentatives.

XPN:1. If the right to change the beneficiary

is expressly waived in the policy thenthe insured has no power to makesuch change without the consent ofthe beneficiary;

2. When the designation of beneficiaryis irrevocable;

Note: If the insured refuses to paythe premiums, the designatedirrevocable beneficiary may continuethe policy by paying the premiumsthat are due.

XPN to XPN: Under Articles 43(4), 50 and64 of the Family Code, the innocent spousemay revoke the designation of the otherspouse who acted in bad faith asbeneficiary in any insurance policy, even ifsuch designation be stipulated asirrevocable.

Q: What are the effects of an irrevocabledesignation?

A: The insured cannot, without the expresswritten consent of the irrevocable beneficiary:

1. Assign the policy;2. Take the cash surrender value of the

policy;3. .Allow his creditors to attach or

execute on the policy;4. Add a new beneficiary or5. Change the irrevocable designation

to revocable.

When. the designation of beneficiary isrevocable but the insured died withoutexercising his right to revoke, the right must beexercised specifically in the manner providedin the policy or contract. But the insured'spower to extinguish the beneficiary's interestceases at his death, and cannot be exercisedby his personal representatives or assignees.The beneficiary's right then becomescompletely fixed.

Note: The beneficiary acquires a vested rightin the policy. Such beneficiary, to whom apolicy of insurance upon life or health haspassed by transfer, will or succession, mayrecover upon it whatever the insured mighthave recovered.


Q: What if the beneficiary dies before the-insured?

5. Death caused by the beneficiary-

A:1. If irrevocable - Such beneficiary has

a vested interest in the policy. Thelegal representatives of suchbeneficiary are entitled to theproceeds of the insurance as assetsof his or her estate, unless theproceeds were made payable to thebeneficiary only "if living"

2. If revocable - Such beneficiary doesnot have vested interest ii} the policyat the time of his death, his estate orlegal representatives derive nointerest from or through him, but theproceeds passes to the estate of theinsured.

In case of an insurance policy takenout by an original owner on the life orhealth of a minor, all rights, title andinterest in the policy shallautomatically vest in the minor uponthe death of the original owner,unless otherwise provided for in the

policy.

Q: What are the rules on the liability ofinsurer on death of insured?

A:1. Death at the hands of the law - The

insurer is liable. This is one of therisks assumed by the insurer in theabsence of a valid policy exception.

2. Death by suicide - The insurer is notliable if suicide is intentional, withwhatever motive because death isstill caused by the voluntary act of theinsured, he knowing and intendingthat his death shall be the result of hisact. (Sec. fBO-A)

3. Death by accident - Death which arepurely accidental, even though due tothe insured's own carelessness ornegligence is not excluded from thecoverage by the words "self-destruction," death by his own hand,"and the like which are generallyconsidered synonymous with suicide.

4. Death by suicide while insane - Theinsurer is still liable since theunwitting act of self-destruction is asmuch the consequence of thatdisease.

GR: The beneficiary cannot receivebenefits.

XPN:a.- The beneficiary acted in self-defense;

b. The insured's death was notintentionally caused.

Note: Sec. 12 says in "willfully"bringing about the death.

6. Death caused by violation of law -The insurer is still liable. To avoidliability, the insurer must 'furtherestablish that the commission of thefelony or the violation of law was thecause or had a causal connectionwith the accident resulting in thedeath of the insured.

Q: When is the "interest" of a beneficiary ina life insurance forfeited?

A: When the beneficiary is the principal,accomplice, or accessory in willfully bringingabout the death of the insured. (Sec. 12)

Note: The word "interest" means the right ofthe beneficiary to receive the proceeds of thelife insurance policy. It does not meaninsurable interest since the beneficiary neednot have an insurable interest in the life of theinsured

Q: In such case, who shall receive theproceeds of insurance?

A: The nearest relative, not otherwisedisqualified, of the insured shall receive theproceeds of the insurance in accordance withthe rules on intestate succession provided inthe Civil Code.

The nearest relatives of the insured in theorder of enumeration are the following:

1. The legitimate children;2. The father or mother, if living;3. The grandfather and grandmother; or

ascendants nearest in degree, ifliving;

4. The Illegitimate children;5. The surviving spouse; and6. The collateral relatives, to wit:

a. Brothers and sisters of the fullblood;

b. Brothers and sisters of the half-blood;

c. Nephews and nieces ..

UNIVERSITY OF SANTOToMAS ("""; 199'Facu(tati tie Verecfio Civif·. "

INSURANCE LAW: PARTIES TO TI-IE CONTRACT

7. In default of the above, the State shallbe entitled to receive the insuranceproceeds.

Q: On January 1, 2000, A secured a lifeinsurance from X Insurance Corp. for P1Million with B, his adopted daughter, as thebeneficiary. A died on March 4, 2005 and inthe pollee investigation, it was ascertainedthat B participated as an accessory in thekilling of A. Can X Insurance Corp. avoidliability by setting up as a defense theparticipation of B in the killing of A?

A: No. Although S, as the killer - beneficiary isnot qualified to claim the insurance proceedsbecause of the prohibition in both civil law(donation) and insurance law, the insurer maynot escape liability and is liable to pay theestate of the insured when the designatedbeneficiary does not qualify to claim theinsurance proceeds. (2008 Bar Question)

200

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, ". .INSURABLE INTEREST' . , :" ~

Q: What is an insurable interest?

A:·GR: A person is deemed to have aninsurable interest in the subject matterinsured where he has a relation orconnection with or concern in it that he willderive pecuniary benefit or advantage fromits preservation and will suffer pecuniaryloss from its destruction or injury by thehappening of the event insured against.

XPN: The term has a somewhat broadermeaning in connection with life insurance.To have an insurable interest in the life of aperson, the expectation of benefit from thecontinued life of that person need notnecessarily be of pecuniary nature.

Q: Differentiate insurable interest in lifeinsurance and insurable interest inproperty insurance.

A: Insurable interest in life exists when there isreasonable ground founded on the relation ofthe parties, either pecuniary or contractual orby blood or affinity, to expect some benefit oradvantage from the continuance of the life ofthe insured.

On the other hand, every interest in property,whether real or personal, or any relationthereto, or liability in respect thereof, of suchnature that a contemplated peril might directlydamnify the insured. (Sec. 13)

Q: What are the reasons for therequirement of an insurable interest?

A:1. As deterrence to the insured - The

requirement of an insurable interestto support a contract of insurance is'based upon considerations of publicpolicy which render wager policiesinvalid. A wager policy is obviouslycontrary to public interest.

2. As a measure of limit of recovery - Ifand to the extent that any particularinsurance contract is a contract topay indemnity, the insurable interestof the insured will be the measure ofthe upper limit of his provable lossunder the contract.

Q: What are the two general classes of lifepolicies?

A:1. Insurance upon one's life - are those

taken out by the insured upon hisown life (Section 10[a)) for the benefitof himself, or of his estate, in case itmatures only at his death, for thebenefit of third person who may bedesignated as beneficiary.

The question of insurable interest isimmaterial where the policy isprocured by the person whose life isinsured. A person who insures hisown life can designate any person ashis beneficiary, whether or not thebeneficiary has an insurable interestin the life of the insured subject to thelimits under Article 739 and 2012 ofthe NCC.

Note: An application for insurance onone's own life does not usuallypresent an insurable interestquestion.

2. Insurance upon life of another .: arethose taken out by the insured uponthe life of another. (Sec. 10 raj, [b), [cJand [d))

Where a person names himselfbeneficiary in a policy he takes on thelife of another, he must haveinsurable interest in the life of thelatter.

Q: For whose life and health does a personhave an insurable interest?

A: Of himself, of his spouse and of hischildren (Sec. 10 [a])

Q: Is the insured beneficiary required toprove insurable interest?

A: No, because he is presumed to have aninsurable interest on the life of his spouse orhis children.

The husband and wife as well as parent andchild do have some pecuniary interest in eachother's life since they are legally obliged tosupport each other.

c. Of any person on whom he dependswholly or in part for education orsupport, or in whom he has apecuniary interest; (Section 10, [b))


Pacu{taa de De rech o Civii,'-0". 201

INSURANCE LA \\I: INSURABLE INTEREST

Mere blood relationship or mererelationship by affinity does notconstitute an insurable interest; theremust be a risk of monetary loss fromthe insured's death.

d. Of any person under a legalobligation to him for the payment ofmoney, or respecting property orservices, of which death or illnessmight delay or prevent performance;(Sec. 10, (c])

e. Of any person upon whose life anyestate or interest vested in himdepends. (Sec. 1~ (d])

Q: Who are the persons under Sec. 10, (c)who have an insurable interest on the lifeand health of a person?

A: A creditor may name himself as beneficiaryin a policy he takes on the life of his debtor.The d~ath of the debtor may either preventpayment if his estate is not sufficient to pay hisdebts or delay such payment if anadministrator has to be appointed to settle hisestate. Except Section 10, (a) of the InsuranceCode, an insurance contract partakes thenature of a contract of indemnity.

Q: What is the extent of the creditor'sreco,very upon the death of the debtor?

A:GR: Limited to the amount of his interest(the amount owing to him).

XPN: If the debtor is the insured and thecreditor is named beneficiary, the creditorwill be entitled to the whole proceeds of thepolicy upon the debtor's death, though hiscredit may be much less.

Note: The debtor was the one who appliedfor the insurance, to insure his own life.

XPN to XPN:1. If debtor applied for insurance and

designated creditor in compliancewith creditor's requirement that debtorwill take insurance to insure creditor'sinterest.

2. A person may take a policy on the lifeof his business partner because thelatter's death may result in aninterruption of business operationswhich can be in turn cause financialloss.

3. A business firm can take out a policyon the life of its officers or employees

whose services proved valuable tothe business. The proceeds are nottaxable income but constituteindemnity to the employer for the losswhich the business suffers becauseof the death of a valued officer oremployee.

Q: Is the consent of the person insuredessential to the validity of the policy?

A: No. So long as it could be proved that theinsured has an insurable interest at theinception of the policy, the insurance is valideven without such consent.

Q: When must insurable interest exists?

A:1. Life or health insurance

GR: Insurable interest in life or healthmust exist when the insurance takeseffect, bur need not exist thereafter orwhen the loss occurs. (Sec. 19)

XPN:a. When the insurance is taken by

the creditor on the life of thedebtor, the creditor is required tohave an insurable interest notonly at the time of the contractbut also at the time of thedebtor's death because in thiscase, it is considered as acontract of indemnity.

b. When the insurance is taken bythe employer on the life of theemployee.

2. Property Insurance - When theinsurance takes effect and when theloss occurs, but need not exist in themeantime. (Sec. 19)


Q: In a civil suit, the court ordered Benjie topay Nat P500, 000.00. To execute thejudgment, the sheriff levied upon Benjie'sregistered property (a parcel of land andthe building thereon), and sold the same atpublic auction to Nat, the highest bidder.The latter, on March 18, 1992, registeredwith the Register of Deeds the certificate ofsale issued to him by the sheriff.Meanwhile, on January 27, 1993, Benjieinsured with Garapal Insurance forP1,000,000.00 the same building that wassold at public auction to Nat. Benjie failedto redeem the property by March 18, 1993.On March 19, 1993, a fire razed the buildingto the ground. Garapal Insurance refusedto make good its obligation to Benjie underthe insurance contract.

1. Is Garapal Insurance legallyjustified in refusing payment toBenjie?

iii. Is Nat entitled to collect on theinsurance policy?

A:1. Yes. At the time of the loss, Benjie

was no longer the owner of theproperty insured as he failed toredeem the property. The lawrequires in property insurance that aperson can recover the proceeds ofthe policy if he has insurable interestat the time of the issuance of thepolicy and also at the time when theloss occurs. At the time of fire, Benjieno longer had insurable interest in theproperty insured.

2. No. While at the time of the loss Nathad insurable interest in the building,as he was the owner thereof, Nat didnot have any interest in the propertyat the inception of the policy. Therewas no automatic transfer clause inthe policy that would give him suchinterest in the policy. ('1994 BarQuestion)

Q: JQ, owner of a condominium unit,insured the same against fire with the XYZInsurance Co., and made the loss payableto his brother, MLQ. In case of loss by fireof the said condominium unit, who mayrecover on the fire insurance policy? Statethe reason(s) for your answer.

A: JQ can recover on the fire insurance policyfor the loss of said condominium unit. He hasthe insurable interest as owner-insured. Asbeneficiary in the fire insurance policy, MLQcannot recover on the fire insurance policy.For the beneficiary to recover on the fire or

property insurance policy, it is required that hemust have insurable interest in the propertyinsured. In this case, MLQ does not haveinsurable interest in the condominium unit.(2001 Bar Question)

Q: What may consist an insurable interestin property?

A:1. An existing interest - The existing

interest in the property may be legalor equitable title.

Examples of insurable interest arisinqfrom legal title:a. Trustee, as in the case of the

seller of property not yetdelivered;

b. Mortgagor of the propertymortgaged;

c. Lessor of the property leased

Examples of insurable interest arisingfrom equitable title:a. Purchaser of property before

delivery or before he hasperformed the conditions of thesale

b. Mortgagee of propertymortgaged;

c. Mortgagor, after foreclosure butbefore the expiration of theperiod within which redemption isallowed

2. An inchoate interest founded on anexisting interest

Example: A stockholder has aninchoate interest in the property of thecorporation of which he is astockholder, which is founded on anexisting interest arising from hisownership of shares in thecorporation

3. An expectancy coupled with anexisting interest in that out of whichthe expectancy arises.

Note: Expectancy to be insurablemust be coupled with an existinginterest or founded on an actual rightto the thing or upon any valid contractfor it. (Sec. 16)


PacuCtaa de ([)erecho CiviC ~i'203

INSURANCE LAW: INSURABLE INTEREST

Q: A piece of machinery was shipped to Mr.Pablo on the basis of C&F Manila. Pabloinsured said machinery with the TalagaMerchants Ins. Co. (Tamic) for loss ordamage during the voyage. The vesselsank en route to Manila. Pablo then filed aclaim with Tamic which was denied for thereason that prior to the delivery, Pablo hadno insurable interest. Decide the case.

A: Pablo had an existing insurable interest onthe piece of machinery he bought. Thepurchase of goods under a perfected contractof sale already vests equitable interest on theproperty in favor of the buyer eve~ while it ispending delivery. (1991 Bar Question)

Q: What is the measure of insurableinterest in property?

A: The extent to which the insured might bedamnified by loss or injury thereof. (Sec. 17).Insurable interest in property does notnecessarily imply a property interest in, or lienupon, or possession of, the subject matter ofthe insurance, and neither title nor a beneficialinterest is requisite to the existence thereof. Itis sufficient that the insured is so situated withreference to the property that would be liableto loss should it be injured or destroyed by theperil against which it is insured. Anyone has aninsurable interest in property who derives abenefit from its existence or would suffer lossfrom its destruction. (Gaisano Cagayan, Inc. v.Insurance Company of North America, G.R.No. 147839, June 8, 2006)

Q: BD has a bank deposit of one millionpesos. Since the limit of the insuranc~coverage of the Philippine DepositInsurance Corp (PDIC) is only P500,000.00,he would like some protection for theexcess by taking out an insurance aqainstall risks or contingencies of loss ansmgfrom, any unsound or unsafe bankingpractices including unforeseen adverseeffects of the continuing crisis involvingthe banking and financial sector in theAsian region. Does BD have an insurableinterest within the meaning of theInsurance Code of the Philippines (P.O.1460)?

A: Yes. In case of loss of said deposit, SD willsuffer pecuniary loss of P500,OOO.OO,that is,his bank deposit of one million pesos minusP500,OOO.OOwhich is the maximum amountrecoverable from the PDIC. (2000 BarQuestion)

204

Q: What are the distinctions betweeninsurable interest in life and propertyinsurance?

If the securedthe policy, the

beneficiary need nothave insurable interest

over the life of the .insured; if secured bythe beneficiary, the

latter must haveinsurable interest ill

the life of the insured.

The beneficiary musthave all insurableinterest ill the thinq

insured.

Q: What is the extent of insurable interestof a common carrier or depository in athing held by him?

A: To the extent of his liability but not toexceed the value thereof (Sec. 15). This is sobecause the loss of the thing by the carrier ordepository may cause liability aqainst him tothe extent of its value.

Q: Is the insurable interest of mortgagorand mortgagee in case of a mortgagedproperty the same?

A: Each has an insurable interest ill theproperty mortgaged and this interest isseparate and distinct from the other.Therefore, insurance taken by aile ill his nameonly and ill his favor alone does not inure tothe benefit of the other. The same IS not opento objection that there is double insurance.(Sec. 8)


Q: . A, a businessman in the grocerybusiness, obtained from X Insurance aninsurance policy for five million pesos tofully cover his stocks-in-trade from the riskof fire.

Three months thereafter, a fire ofaccidental origin broke out and completelydestroyed the grocery including his stocks-in-trade. This prompted the A to file with Xinsurance a claim for five million pesosrepresenting the full value of his goods. XInsurance denied .the claim because itdiscovered that at the time of the loss, thestocks-in-trade were mortgaged to B(creditor) who likewise obtained from Y,Second Insurance Company fire insurancecoverage for the stocks at their full value offive million pesos. May the businessmanand the creditor obtain separate insurancecoverage over the same stocks-in-trade?Explain.

A: Yes. A, the businessman, as owner, and Bthe creditor, as mortgagee, have separateinsurable interests in the same stocks-in-trade.Each may insure such interest to protect hisown separate interest. (1999 Bar Question)

Q: X Insurance refused to pay claiming thatdouble insurance is contrary to law. Is thiscontention tenable?

A: No. There is no law providing that doubleinsurance is illegal per se. Moreover, in theproblem at hand, there is no double insurancebecause the insured with the First Insurance isdifferent from the insured with the SecondInsurance Company. The same is true withrespect to the interests insured in the twopolicies, e.g., there is no identity of person andinterests insured. (Geagonia v. CA, G.R. No.114427, Feb. 6, 1995)

Q: What is the extent of insurable interestof mortgagor and mortgagee?

A:1. Mortgagor - To the extent of its value

as owner of the property. The loss ordestruction of the property insuredwill not extinguish the mortgage debt.The exception is in marine insurance.

2. Mortgagee - To the extent of thedebt. Such interest continues until themortgage debt is extinguished.

The property relied on as mortgagedis only a security. In insuring theproperty, he is not insuring theproperty itself but his interest or lienthereon.

Note: In case of an insurance taken by themortgagee alone and for his benefit, themortgagee, after recovery from the insurer, isnot allowed to retain his claim against themortgagor but it passes by subrogation to tileinsurer to the extent of the insurance moneypaid. .

Q: Maya lessor be a beneficiary of a fireinsurance policy taken by a lessee over hismerchandise?

A: No, the provision for such automaticassignment is void for being contrary to lawand public policy. If at all, the lessor is deemedto have an insurable interest only over theleased premises, and not over themerchandise owned only by the lessee. (Chav. CA, G.R. No. 124520, Aug. 18, 1997)

Q: What are the distinctions between astandard or union mortgage clause andopen or loss payable mortgage clause?

A:. STANDARD OR . -'I . 'OPEN OR LOS,S": 'I. UNION MORTGAGE . " PAYABLE .7MORTGAGE ..•..

,CLAUSE 'p. . CLAUSE .\Acts of the mortgagoraffect the mortgagee.Subsequent acts of

the mortgagor cannotaffect the rights of the

assignee.

Reason: Mortgagordoes not cease to be

a party to thecontract.

Q: What are the effects of insurance takenby the mortgagor providing that the loss ispayable to the mortgagee?

A:1. The contract is deemed to be upon

the interest of the mortgagor; hencehe does not cease to be a party to thecontract;

2. Any act of the mortgagor prior to theloss, which would otherwise avoidthe insurance affects the mortgageeeven if the property is in the hands ofthe mortgagee;

3. Any act, which under the contract ofinsurance is to be performed by themortgagor, may be performed by themortgagee with the same effect;

4. In case of loss, the mortgagee isentitled to the proceeds to the extentof the debt;

5, Upon recovery by the mortgagee tothe extent of the debt, the d1ebtisextinguished.


'Fa cu.It a d' de Der ech a CiviC ~i~205

INSURANCE LA WI: INSURABLE INTEREST

Q: Is the rule on subrogation by the insurerapplicable to the right of the mortgagee?

A: No, because the premium payment hasbeen paid by the mortgagor and not by themortgagee.

Q: What are the rights of mortgagee undermortgagor's policy?

A:1. Before loss - entitled to receive so

much of any sum that may becomedue under the policy as does notexceed his interest as mortgagee.Such right becomes absolute uponthe occurrence of the loss.

2. After loss and credit is not due -entitled to receive the money to applyto the extinguishment of the debt asfast as it becomes due. On the otherhand, if the loss happensafier thecredit has matured; the mortgageemay apply the proceeds to the extentof his credit.

IQ: What is the rule on transfer of policyfrom mortgagor to mortgagee?

A: It is the rule which assents and imposesfurther obligations on the assignee(mortgagee), making a new contract with him,the acts of the mortgagor cannot affect therights of said assignee. Unless assigneemakes a new contract with insurer, he has nogreater right under the insurance. (Sec. 9)

Q: What is the rule in case of mortgageredemption insurance (MRI)?

A: A life insurance taken pursuant to a groupmortgage redemption scheme by the lender ofmoney on the life of a mortgagor, whomortgages the house constructed to the extentof the mortgage indebtedness, such that if themortgagor dies, the proceeds of his lifeinsurance will be used to pay for hisindebtedness and the deceased's heirs willthereby be relieved from paying the unpaidbalance of the loan. (Great Pacific LifeAssurance Corp. v. CA, GR. No. 113899, Oct.13, 1999)

206

Q: May a general or unsecured creditorinsure the property of his debtor?

A:GR: No, a general or unsecured creditorcannot insure specific property of hisdebtor who is alive, even thoughdestruction of such property would renderworthless any judgment he might obtain.

XPN:1. When the debtor has died (all

personal liability ceases with thedeath of the debtor);

2. When the unsecured creditor obtainsa judgment in his favor (becomes ajudgment creditor;

3. An unsecured creditor may insure thelife of his debtor to the extent of theamount of the debt.

Q: What may be trahsferred or assigned?

A:1. The thing insured; (See Sec. 20)2. The policy itself; (See Sec. 58)3. The claim itself. (See Sec. 83)

UST GOLDEN NOTES 20.10

-Q: What is the effect of change of interestunaccompanied by a correspondingchange in interest in the insurance? .

A:GR: A change in interest in any part of thething insured, unaccompanied by acorresponding change of interest in theinsurance, suspends the insurance to anequivalent extent, until the interest in thething and the interest in the insurance arevested in the same person. (Sec. 20)

Reason: Insurance contract is personal

XPN:1. In cases of life, accident, and health

insurance (Sec. 20).

Reeson. They are not regarded ascontracts of indemnity and therefore,insurable interest need exist only atthe time the insurance is effected.

2. Change of interest in the thinginsured after the occurrence of aninjury which results in the loss. (Sec.21)

Reason: After the loss has happened,the liability of the insurer becomesfixed. Therefore, the insured has theright to assign his claim against theinsurer as any other money claim.

3. Change of interest in one or more ofseveral distinct things, separatelyinsured by one policy. (Sec. 22)

Reason: The contract is divisible.

4. Change of interest, by will orsuccession, 011 the death of theinsured. (Sec. 23)

Reason: Art. 1311 , NCC (Relativity ofContracts ).

Whoever takes the property of thedecedent will automatically becomethe owner of the policy.

5. Transfer of interest by one of severalpartners, joint owners, or owners incommon, who are jointly insured, toothers. (Sec. 24)

Reason: No new party wasintroduced into the co-ownership. It is

the alienation to a stranger that willsuspend the policy.

6. When a policy is so framed that it will. inure to the benefit of whomsoever,during the continuance of the risk,may become the owner of the interestinsured. (Sec. 57) .

Reason: Art. 1306, NCC (Autonomyof Contracts).

7. When there is a prohibition againstthe alienation or change of interestwithout the consent of the insurer, inwhich case, the policy is not merelysuspended but avoided.

Reason: Art. 1306, NCC (Autonomyof Contracts).

Q: What is the rule regarding the transfer ofpolicy?

A:1. Life insurance -

GR: The policy may be transferredwithout the consent of the insurer.(Sec. 181)

Reason: The policy does notrepresent a personal agreementbetween the insured and the insurer.

XPN: When notice to insurer of atransfer is expressly required in thepolicy. (Sec. 182)

2. Property insurance - The policy maynot be transferred without the consentof the insurer.

Reason: The insurer approved thepolicy based on the personalqualification and the insurable interestof the insured.

3. Casualty Insurance - The policy maynot be transferred without the consentof the insurer.

Reason: The moral hazards are asgreat as those of property insurance.


PacuCtaa de (j)ereclio CiviC ~.~207

INSURANCE LAW: INSURABLE INTEREST

Q: What is the effect of transfer theinsurance policy without consent of theinsurer?

A: The insurance policy will be suspendeduntil the interest in the thing and the interest inthe insurance are vested in the same person.

Q: What is the rule regarding the transfer ofclaim?

A: Claim of insured after loss is transferable,and any stipulation to the contrary is void.(Sec. 83)

Q: The policy of insurance upon his life,with a face value of P100,OO.OO wasassigned by Jose, a married man with 2legitimate children, to his nephew Y assecurity for a loan of P50,OOO.OO.He did notgive jthe insurer any written notice of suchassignment despite the explicit provisionto that effect in the policy. Jose died. Uponthe claim on the policy by the assignee, theinsurer refused to pay on the ground that itwas 'not notified of the assignment. Uponthe other hand, the heirs of Jose contendedthat Y is not entitled to any amount underthe policy because the assignment withoutdue notice to the insurer was void. Resolvethe issues.

A: A life insurance is assignable. A provision,however, in the policy stating that writtennotice of such an assignment should be givento the insurer is valid (Sec. 181-182). Thefailure of the notice of assignment would thuspreclude the assignee from claiming rightsunder the policy. The failure of notice did not,however, avoid the policy; hence, upon thedeath of Jose, the proceeds would, in theabsence of a designated beneficiary, go to theestate of the insured. The estate, in turn,would be liable for the loan of P50,OOO.OOowing in favor of Y. (1991 Bar Question)

Q: What are the rights of insured after theloss?

A:1. To assign his right of claim against

the insurer (absolute and cannot bedelimited by agreement);

2. Insured has a right to transfer thething insured after the occurrence ofthe loss.

Reasons:a. Agreernent hinders

transrnission of property;

208

free

b. Transfer does not involve apersonal contract, but merely amoney clairn or right of action;

c. Transfer involves no moralhazard.

Q: What are the 4 primary concerns of theinsurer?

A:1. Correct estimation of risk which

enables insurer to determine if he willapprove the policy application and ifso at what premium rate;

2. Determination of the risk;3. Control of risk to guard against

increase of risk;4. Determine if loss occurs and if so the

amount thereof.

Q: What are the devices used forascertaining and controlling risks andloss?

A:1. Concealrnent2. Representation3. Warranties4. Condition5. Exception

Academ ics CommitteeCf,airjJc!JolI: Abraham 1), C;l'lluin(J II

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"" - . CONCEALNI T ~".. ,ti!', c '

Q: What is concealment?

A: Concealment is a neglect to communicatethat which a party knows and ought tocommunicate. (Sec. 26)

Q: What are the requisites in concealment?

A:1. A party knows a fact which he

neglects to communicate or discloseto the other party;

2. Such party concealing is duty boundto disclose such fact to the other;

3. Such party concealing makes nowarranty as to the fact concealed;

4. The other party has no means ofascertaining the fact concealed; and

5. The fact must be material.

Q: What is the test of materiality?

A: It is determined not by the event, but solelyby the probable and reasonable influence ofthe facts upon the party to whom thecommunication is due, in forming his estimateof the advantages of the proposed contract, orin making his inquiries. (Sec. 31)Q: What is the presumption when theinsured failed to convey the nature of thefacts to the insurer?

A:GR: The failure of the insured tocommunicate is intentional rather thaninadvertent.

XPN: In the absence of evidence of theuninsurability of a person afflicted withchronic cough, concealment thereof is noground for annulment of the policy.

Note: As long as the facts concealed arematerial. Sec. 27 states concealment, whetherintentional or not.

Q: How does it differ from materiality inmarine insurance?

A: Rules on concealment are stricter since theinsurer would have to depend almost entirelyon the matters communicated by the insured.Thus, in addition to material facts, each partymust disclose all the information he possesseswhich are material to the information of thebelief or expectation of a third person, inreference to a material fact. But a concealmentin a marine insurance in any of the followingmatters enumerated under Section 110,Insurance Code does not vitiate the entire

contract, but merely exonerates the insurerfrom a loss resulting from the risk concealed.

Q: What is the test in ascertaining theexistence of concealment?

A: If the applicant is aware of the existence ofsome circumstances which he knows wouldinfluence the insurer in acting upon hisapplication, good faith requires him to disclosethat circumstance, though unasked.

Q: What are the matters that need not bedisclosed?

A:GR: The parties are not bound tocommunicate information of the followingmatters:

1. Those which the other knows;2. Those which, in the exercise of

ordinary care, the other ought toknow and of which, the former has noreason to suppose him ignorant;

3.. Those of which the other waivescommunication;

4. Those which prove or tend to provethe existence of a risk excluded by awarranty, and which are nototherwise material;

5. Those whicn relate to a risk exceptedfrom the policy and which are nototherwise material; ,

6. The nature or amount of the interestof one insured (except if he is not theowner of the property insured, Sec.34)

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

Note: Neither party is bound tocommunicate, even upon inquiry,information of his own judgment.

The parties are bound to know all thegeneral causes which are open to hisinquiry, equally with the other, and allgeneral usages of trade.

Q: What are the matters that must bedisclosed even in the absence of inquiry?

A:1. Those material to the contract;2. Those which the other has no means

of ascertaining;3. Those as to which the party with the

duty to communicate makes nowarranty.

UNIVERSITY OF SANTO TOMAS ~"""'~J 209PacuCtaa de /Irere ch o CiviC

INSURANCE LA \'\I: CONCEALMENT

Note: Matters relating to the health of theinsured are material and relevant to theapproval of the issuance of the life insurancepolicy as these definitely affect the insurer'saction to the application. It is well-settled thatthe insured need not die of the disease he hadfailed to disclose to the insurer, as it issufficient that his non-disclosure misled theinsurer in forming his estimates of the risks of.the proposed insurance policy or in makinginquiries (Sunlife Assurance Company ofCanada v. CA, G.R. No. 105135, June 22,1995).

Q: May the right to information of materialfacts be waived?

A: Yes.1.2.

By the terms of the contract;By the failure to make an inquiry as tosuch facts, where they are distinctlyimplied in other facts from whichinformation is communicated (Sec.33)

Q: What are the effects of concealment?

A:1. If there is concealment under Section

27, the remedy of the insurer isrescission since concealment vitiatesthe contract of insurance.

2. The party claiming the existence ofconcealment must prove that therewas knowledge of the fact concealedon the part of the party charged withconcealment.

3. Good faith is not a defense inconcealment. Concealment, whetherintentional or unintentional entitles theinjured party to rescind the contract ofinsurance. (Sec. 27)

4. The matter concealed need not bethe cause of loss.

5. To be guilty of concealment, a partymust have knowledge of the factconcealed at the time of the effectivityof the policy.

Q: When should concealment take place inorder that the policy may be avoided?

!A: At the time the contract is entered into andnot afterwards. The duty of disclosure endswith the completion of the contract. Waiver ofmedical examination in a non-medicalinsurance contract renders even more materialthe information required of the applicantconcerning previous condition of health anddiseases suffered, for such' informationnecessarily constitutes an important factorwhich the insurer takes into consideration in

210

deciding .whether to issue the policy or not.Failure to communicate information acquiredafter the effectivity of the policy will not be aground to rescind the contract.

Reason: Information is no longer material as itwill no longer influence the other party to enterinto such contract.

Q: A applied for a non-medical lifeinsurance. The insured did not inform theinsurer that one week prior to hisapplication for insurance, he was examinedand confined at St. Luke's Hospital wherehe was diagnosed for lung cancer. Theinsured soon thereafter died in a planecrash. Is the insurer liable considering thatthe fact concealed had no bearing with thecause of death of the insured? Why?

A: No. The concealed fact is material to theapproval and issuance of the insurance policy.It is well settled that the insured need not dieof the disease he failed to disclose to theinsurer. It is sufficient that his nondisclosuremisled the insurer in forming his estimate ofthe risks of the proposed insurance policy or inmaking inquiries. (2001 Bar Question)

Acad em ics Corum irtccC/!"irpc/:wII: I\braham I), (;CIIUill(1 [I

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/1.1'.1'1. .\'II/'Ied lIe,1d- Mall;l),n Rosl' S. Sotelo

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. 'REPRESENTATION '

Q: What is representation?

A: An oral or written statement of a fact orcondition affecting the risk made by theinsured to the insurance company, tending toinduce the insurer to assume the risk.

Q: What are the kinds of representation?

A:1. Oral or written; (Sec. 36)2. Affirmative; (Sec. 39) or3. Promissory. (Sec. 42)

Q: What is an affirmative representation?

A: Any allegation as to the existence or non-existence of a fact when the contract begins.(e.g the statement of the insured that thehouse to be insured is used only for residentialpurposes is an affirmative representation).

Q: What is a promissory representation?

A: Any promise to be fulfilled after thecontract has come into existence or anystatement concerning what is to happen duringthe existence of the insurance.

Q: When should representation be made?

A: At the time of, or before, issuance of thepolicy. (Sec. 37)

Q: What are the requisites of a falserepresentation (misrepresentation)?

A:1. The insured stated a fact which is

untrue;2. Such fact was stated with knowledge

that it is untrue and with intent todeceive or which he states positively'as true without knowing it to be trueand which has a tendency to mislead;

3. Such fact in either case is material tothe risk.

Q: What is misrepresentation?

A: It is an affirmative defense. To avoidliability, the insurer has the duty to establishsuch a defense by satisfactory and convincingevidence. (Ng Gan Zee v. Asian Crusader LifeAssn. Corp., G.R. No. L- 30685, May 30,1983)

Note: In the absence of evidence that theinsured has sufficient medical knowledge toenable him to do distinguish between "peptic

ulcer" and "tumor", the statement of deceasedthat said tumor was "associated with ulcer. ofthe stomach" should be considered anexpression in good faith. Fraudulent intent ofinsured must be established to entitle insurerto rescind the insurance cqntract.Misrepresentation, as a defense of insurer, isan affirmative defense which must be proved.(Ng Gan Zee v. Asian Crusader Life: Assn.Corp., G.R. No. L- 30685, May 30, 1983

1Q: What is the test of materiality?

A: It is to be determined not by the event, butsolely by the probable and reasonableinfluence of the facts upon the party to whomthe representation is made, in forming hisestimates of the disadvantages of theproposed contract or in making his inquiries(similar with concealment). (Sec. 46)

Q: What aremisrepresentation?

the effects of

A:1. It renders the insurance contract

voidable at the option of the insurer,although the policy is not therebyrendered void ab initio. The injuredparty entitled to rescind from the timewhen the representation becomesfalse;

2. When the insurer accepted thepayment of premium with theknowledge of the ground forrescission, there is waiver of suchright;

3. There is no waiver of the right ofrescission if the insurer had noknowledge of the ground therefore atthe time of acceptance of premiumpayment.

Q: What is the effect of collusion betweenthe insurer's agent and the insured?

A: It vitiates the policy even though the agentis acting within the apparent scope of hisauthority. The agent ceases to represent hispnncioal. He, thus, represents himself; so theinsurer is not estopped from avoiding thepolicy.

IUNIVERSITY OF SANTO TOMAS f·';J-'. ')11

Pacu{taa de (])ereclio Ci-ui] '9' ~

INSURANCE LAW: REPRESENTATION

Q: What are the characteristics ofrepresentation?

A:1. Not a part of the contract but merely a

collateral inducement to it;2. Oral or written;3. Made at the time of, or before issuing

the policy and not after;4. Altered or withdrawn before the

insurance is effected but notafterwards;

5. Must be presumed to refer to the datethe contract goes into effect. (Sec.42)

Q: What are the similarities of concealmentand representation?

A:1. Refer to the same subject matter and

both take place before the contract isentered.

2. Concealment or representation priorto loss or death gives rise to thesame remedy; that is rescission orcancellation.

3. The test of materiality is the same.(Secs. 31, 46)

4. The rules of concealment andrepresentation are the same with lifeand non-life insurance.

5. Whether intentional or not, the injuredparty is entitled to rescind a contractof insurance on ground ofconcealment or false representation.

6. Since the contract of insurance issaid to be one of utmost good faith onthe part of both parties to theagreement, the rules on concealmentand representation apply likewise tothe insurer.

Q: How does concealment differ frommisrepresentation?

A: In concealment, the insured withholds theinformation of material facts from the insurer,whereas in misrepresentation, the insuredmakes erroneous statements of facts with theintent of inducing the insurer to enter into theinsurance contract.

212

Q: How is concealment andmisrepresentation applied in case of lossor death?

A:GR: If the concealment ormisrepresentation is discovered before lossor death, the insurer can cancel the policy.If the discovery is after loss or death, theinsurer can refuse to pay.

XPN: The incontestability clause underparagraph 2 of Section 48.

XPN to XPN:1. Non-payment of premiums (Sees. 77,

22 rbi, 228 rbi, 203 [bJ) ;2. Violation of condition (Secs 227 [o],

228 [b});3. No insurable interest;4. Cause of death was excepted or not

covered;5. Fraud of a vicious type;6. Proof of death was not given (Sec.

242).7. That the conditions of the policy

relating to military or naval service(Secs. 227 rbi, 228 [bJ)

8. That the action was not bought withinthe time specified (Sec. 62)

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Q: What is an incontestability clause?

A: The Code provides that:

fter a policy of life insurance made payableon the death of the insured shall have been in'orce during the lifetime of the insured for aperiod of-two years from the date of its issue orits last reinstatement, the insurer cannot prove. at the policy is void ab initio or is rescindable

'Jy reason of the fraudulent concealment orflisrepresentation of the insured or his agentSecA8).

:.'henever a right to rescind a contract of~ rance is given to the insurer by any

'lOv;sion of this chapter, suet: right must be= ·.E{cised previous to the commencement of=..- a 'on on the contract"

--- aragraph - Incontestability Clause. It==- es to life insurance only.

-::I: aragraph - Refers to the insurer's right to-- ,d that may only be validly exercised:-=. LIS to the commencement of an action on-'O contract. It applies to non-life insurance~ -.-

What are thentestability clause?

requisites

The policy must be a life insurancepolicy

2. The policy must be payable on thedeath of the insured; and

3. The policy must be in force during thelifetime of the insured for at least 2years from the date of its issue or ofits last reinstatement

a. te: The period of 2 years may be shortened--: : cannot be extended by stipulation.

: Renato was issued a life insurancelicy on January 2, 1990. He concealed

re fact that three years prior to thessuanca of his life insurance policy, head been seeing a doctor about his heartilment On March 1, 1992, Renato died of"art failure. May the heirs file a claim onIe proceeds of the life insurance policy ofenato?

es, the life insurance policy in question",5 issued on January 2, 1990. More than two, years had elapsed when Renato, theJred, died on March 1, 1992. The

of

incontestability clause applies. (1998 BarQuestion)

Q: What is the meaning of "during thelifetime" under the incontestability clause?

A: The phrase "during the lifetime" means thatthe policy is no longer considered after theinsured has died. The key phrase in the 2"dparagraph is for a period of 2 years. (Tan v.CA, GR No. 48049, June 29, 1989)

Q: What is the purpose of incontestabilityclause?

A: To assure that after the specified period,the policy owner may rely upon the insurancecompany to carry out the terms of the contract,regardless of irregularities in connection withthe application which may later be discovered.

Q: What is the essence of incontestabilityclause?

A: It precludes the insurer from- raising thedefenses of false representations orconcealment of material facts insofar as healthand previous diseases are concerned if theinsurance has been in force for at least 2 yearsduring the insured's lifetime.

Q: Manpower Co., obtained a group lifeinsurance policy for its employees fromPhoenix Insurance Co. The master policyissued by Phoenix on June 1, 1986contained a provrsron that eligibleemployees for insurance coverage were allfull time employees of Manpower regularlyworking at least 30 hours per week. Thepolicy had also an incontestability clause.Beforehand, Phoenix sent enrollment cardsto Manpower for distribution to its eligibleemployees. X filled out the card whichcontained a printed clause: "I request theinsurance for which I may become eligibleunder said Group Policy." The cards werasent to Phoenix and X was among theemployees of Manpower who was issued acertificate of coverage by Phoenix. On July3, 1988, X was killed on the occasion of arobbery in their house. While processingthe claim of X's beneficiary, Phoenix foundout that X was not an eligible employee asdefined in the group policy since he hasnot been employed 30 hours a week byManpower. Phoenix refused to pay. May X'sbeneficiary invoke the incontestabilityagainst Phoenix? Reasons?

A: Yes. While it is true that the master policycontained an exclusionary clause-excludingfrom coverage employees working less than

UNIVERSITY OF SANTO TOMAS ~~.LU) )13Pacu{taa de De re ch o Civii ·9'~

INSURANCE LAW: INCONTESTABILITY CLAUSE

30 hours- X filled up an enrollment card wherehis personal circumstances and workingschedule were obviously contained. Thefailure by Phoenix to exclude X, who insteadwas issued a certificate coverage, is deemedas a' waiver by Phoenix of said exclusionaryclause. Hence, the. beneficiary of X canrecover under the policy. (1989 Bar Question)

IQ: What are the grounds for rescission ofcontract of insurance?

A:1. Concealment2. False representation3. Breach of material warranty4. Breach of a condition subsequent5. Alteration of the thing insured

Q: When may the: right to rescind beexercised?

A:1. 'Non-life policy - The insurer must

exercise the right to rescind thecontract before the insured has filedan action to collect the amount ofinsurance.

Note: A defense to an action torecover insurance that the policy wasobtained through falserepresentation, fraud and deceit is notin the nature of an action to rescindand therefore not barred by theprovision. There is no limit forinterposing this defense.

2. Life-policy - The defenses mentionedare available only during the first 2years of a life insurance policy,provided that after a policy ofinsurance made payable on the deathof the insured shall have been inforce during the lifetime of the insuredfor a period of 2 years from the dateof its issue or its last reinstatement,the insurer cannot prove that thepolicy is void ab initio or isrescindable by the reason offraudulent concealment ormisrepresentation of the insured orhis agent. (Incontestability Clause)

214

Q: What are the limitations on the right ofthe insurer to rescind?

A:1. He must not have. accepted

premiums despite knowledge ofrescission;

2. He cannot rescind if he has alreadycommenced any action on thecontract.

Note: In life insurance, defenses which maybe raised as grounds for rescission areavailable only during the first 2 years of the lifeinsurance policy.

Q: When right to rescind is lost?

A: If the beneficiary has commenced an actionon the policy.

Q: What are the defenses of the insurer thatare barred by the Insurance Code?

A:1. Policy is void ab initio;2. Policy is rescindable by reason of the

fraudulent concealment, no matterhow patent or well founded;

3. Policy is rescindable by reason ofmisrepresentation of the insured orhis agent.

Q: What defenses are not barred byincontestability clause?

A:1. Lack of insurable interest;2. Cause of death is an excepted risk;3. Non-payment of premium (subject to

certain exceptions);4. Violations of conditions relating to

military or naval service;5. Fraud is particularly vicious;6. Failure to furnish proof of death;7. Failure to comply with any condition

imposed by the policy after the losshappened;

8. Prescription.


.' . . . WARRANTIES . "~'.

Q: What are warranties?

A: Statements or promises by the insured setforth in the policy itself or incorporated in it byproper reference. the untruth or non-fulfillmentof which in any respect, and without referenceto whether the insurer was in fact prejudicedby such untruth or non-fulfillment render thepolicy voidable by the insurer.

Q: What is the purpose of warranties?

A: To eliminate potentially increasing moral orphysical hazards which may either be due tothe acts of the insured or to the change of thecondition of the property.

Q: What is the basis of warranties?

A: The insurer took into consideration thecondition of the property at the time ofeffectivity ·of the policy.

Q: What are the kinds of warranties?

A:1. Express - an agreement contained in

the policy or clearly incorporatedtherein as part thereof whereby theinsured stipulates that certain factsrelating to the risk are or shall be true,or certain acts relating to the samesubject have been or shall be done.

2. Implied - It is deemed included in thecontract although not expresslymentioned.

Peculiar only to marine insurance,and therefore is deemed included inthe 'contract, although not expresslymentioned:

a. That the ship will not deviatefrom the agreed voyage unlessdeviation is proper;

b. That the ship will not engage inillegal venture;

c. Warranty of neutrality, that theship will carry the requisitedocuments of nationality orneutrality where such nationalityor neutrality is warranted;

d. Presence of insurable interest;e. That the ship is seaworthy at the

time of the commencement ofthe insurance contract.

Q:' What are the distinctions betweenwarranty and representation?

A:WARRANTY REPRESENTATION' I

Considered parts Collateral inducement toof the contract. the contract.

Always written on ,May be written in athe face of the totally disconnectedpolicy, actually or paper or may be oral.by reference.

Must be strictly Only substantial proof iscomplied with. required.

Its falsity or non-fulfillment Its falsity render's the

operates as a policy void on the groundbreach of of fraud.contract.

Presumed Insurer must show itsmateriality in order tomaterial.

defeat an action on thepolicy.

Q: What are the effects of breach ofwarranty?

A:1. Material

GR: Violation of material warranty orOfmaterial provision of a policy willentitle the other party to rescind thecontract.

XPN:a, Loss occurs before the time of

performance of the warranty;The performance becomesunlawful at the place of thecontract; andPerformance becomesimpossible.

b.

c.

2. Immaterial

GR: It will not avoid the policy.

XPN: When the policy expresslyprovides or declares that a violationthereof will avoid it.

For instance, an "Other InsuranceClause" which is a condition in thepolicy requiring the insured to informthe insurer of any other insurancecoverage of the property. A violationof the clause by tile insured will notconstitute a breach unless there is anadditional provision stating that theviolation thereof will avoid the policy.(Sec. 75)


'Fa cu It.a d de Der ec Iio Civ i] ~i·215

INSURANCE LAW: WARRANTIES AND CONDITIOONS

Q: What is the effect of a breach ofwarranty without fraud?

A: The policy is avoided only from the time ofbreach (Sec. 76) and the insured is entitled:

1. To the return of the premium paid at apro rata from the time of breach if itoccurs after the inception of thecontract; or

2. To al/ premiums if it is broken duringthe inception of the contract.

. _<.', CONDITIONS .' " .•. '

Q: What is a condition in insurance policy?

A: It is an event signifying in its broadestsense, either an occurrence or a non-occurrence that alters the previously existing,legal relations of the parties to the contract.

IQ: What are the kinds of conditions?

A:1. Condition precedent - It calls for the

happening .of some event or theperformance of some act after theterms of the contract have beenagreed upon, before the contractshall be binding on the parties.

Eg. the policy shall not take effectuntil delivery and payment of the firstpremium during the good health ofthe applicant.

2. Condition subsequent - It is thatwhich pertains not to the attachmentof the risk and the inception of thepolicy, but to the contract ofinsurance after the risk has attachedand during the existence thereof.

Eg. the condition requiring notice andproof of loss in case of loss upon aninsurance against fire.

216

Q: What distinguishes a condition fromwarranty as to effects?

A:CONDITION WARRANTY I

Limitation to the Does not haveattachment of the risk. that effect.Condition precedent is

one if not performed, will Does notrender the contract as suspend or

not constituted although defeat theit is sufficient in form, operation of the

executed by the parties, contract.and validly delivered.

The occurrence of breach temporarilyrenders the entire contract voidable.

Q: What are "exceptions"?

A: Those which are inserted in a contract ofinsurance for the purpose of withdrawing fromthe coverage of the policy, as delimited by thegeneral language describing the risk assumed,some specific risks which the insurer declareshimself unwilling to undertake.

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'. "'~ , ,'POLICY, <~ " " Q: What are kinds of policies?

Q: What is a policy of insurance?

A: It is the written instrument in which thecontract of insurance is set forth (Sec. 49) It isthe written document embodying the termsand stipulations of the contract of insurancebetween the insured and insurer. It is notnecessary for the perfection of the contract.

Q: What is the form of an insurancecontract?

A: May be verbal or in writing, or partly inwriting and partly verbal. However, the lawprovides that no policy of insurance shall beissued or delivered unless in the formpreviously approved by the InsuranceCommission.

Q: May the approval of the InsuranceCommissioner be dispensed with?

A: Yes, upon the certification of the president,vice-president, or general manager of theinsurance company concerned that the riskinvolved, the values of such risks and/or thepremiums therefore has not yet beendetermined or established, or such extensionor renewal is not contrary to and is not for thepurpose of violating any provisions of theInsurance Code, or of any rulings, instructions,or circulars of the Insurance Commissioner.

Q: Is the insurance policy the same withthe contract itself?

A: No, the policy is the formal writteninstrument evidencing the contract ofinsurance entered into between the insuredand the insurer. It is the law between them.

Q: What is the characteristic of the policy?

A: It is a contract of adhesion wherein oneparty having superior bargaining powerimposes its choice of terms on the other party.The insured sees the contract in its final formand has no voice in the selection or agreementof the words employed therein.

A:5. Open - One in which the value of the

thing insured is not agreed upon, butis left to be ascertained in case ofloss. (Sec. 60)

6. Valued policy - One which expresseson its face an agreement that thething insured shall be valued at aspecified sum (Sec. 61).

What is defined in this section is thevalue of the thing insured, not theface value of the policy. The liabilityof the insurer under a life policy ismeasured by the face value of thepolicy. However, the insurer may stillcome up with the investigation to theactual loss suffered. Thus, valuedpolicies are sometimes construed asthe maximum amount of liability(whichever is lower).

7. Running' policy One whichcontemplates successive insurances,and which provides that the object ofthe policy may be from time to timedefined, especially as to the subjectsof insurance, by additional statementsor endorsements. (Sec. 62)

It is intended to provide indemnity forproperty which cannot well becovered by a valued policy becauseof its frequent change in location andquantity, or for property of such anature as not to admit of a grossvaluation. Contemplates that the riskis shifting, fluctuating or varying, andwhich covers a class of propertyrather than any particular thing.

Q: What is the prescriptive period incomrnenclnq an action?

A: Within one year from time cause of actionaccrues.

Q: When is the insurance contractperfected?

A: When the assent or consent is manifestedby the meeting of the offer and the acceptanceupon the thing and the cause which are toconstitute the contract. Mere offer or proposalis not contemplated. (De Lim v. Sun LifeAssurance Co., G.R. No. L-15774, Nov. 29,1920)


Pacu(taa de i])ereclio Ci oi] ~i'217

INSURANCE LAW: POLICY

Q: What are the contents of policy? Q: What are the kinds of insurable risks?

A:1. Parties - It is of no importance that

the name of the insured wasincorrectly spelled, provided theidentity of the party can be clearlyestablished. The .insured may bedescribed in other ways than byname. (e.g. "for the owner", to whomit may concern") (Sec. 57).

2. Amount of insurancea. It is the basis for calculating the

premium.b. Need not be specified in open or

running policies.c. Not necessarily the value of the

property insured nor the extent ofliability of the insurer in the eventof loss.

3. Rate of premium - It is theconsideration of the contract. Its basisis on the nature and character of therisk assumed (rate increases as therisk of loss increases). Thus, thebasis in:a. Life insurance - Average life

span predicted from statisticalfigures (mortality tables)

b. Fire insurance Structure,occupancy or use, location andloss-prevention or protectionfacilities

4. Property or the life insured - It is thesubject matter of the insurance.

5. Interest of the insured in the propertyif he is not the absolute owner -Important in fire insurance todetermine the actual damagesuffered by the insured in case of lossof the property covered by the policyif he is not the absolute owner.

But if he is the absolute owner,information of the nature or amount ofhis interest need not becommunicated unless in answer to aninquiry. (Sec. 34)

6. Risk insured against - Generallyi speaking, all foreseeable losses or

risks may be insured against exceptthose the insurance of which wouldbe repugnant to public policy orpositively prohibited, or those whichare occasioned by the insured's ownfraud/misconduct.(Sec. 51)

218

A:1. Personal risks (death or' disability

involving the person, life and healthrisks).

2. Property risks (loss or damage toproperty)

3. Liability risks (those involving liabilityfor the injury/damage caused to thirdpersons.

p: What is the duration of the insurance?

A: It is the period during which the insurance isto continue (life of the policy). Insurer wouldnot be liable unless it occurred during suchduration of the insurance. For:

1. Annual policies: 12 months2. Short period policies: less than 12

months

Q: Who are the signatories to the insurancepolicy?

A:GR: It is only the insurer or his dulyauthorized agent who signs the policy. Itneed not be signed by the insured

XPN: Where express warranties arecontained in a separate instrument formingpart of the policy; the law requires that itmust be signed by the insured.

Note: The signature of the insured is neededonly when· there is a rider or endorsement forcountersigning purposes.

Q: What is a rider?

A: An attachment in· an insurance policy thatmodifies the condition of the policy expandingor restricting its benefits or excluding certainconditions from the coverage.

.Q: When is a counter-signature of theinsured on a rider, endorsement, clause, orwarranty not necessary?

A: If the rider, endorsement, clause orwarranty was issued simultaneously with thepolicy. However, the descriptive title or nameof the rider must be written on the blankspaces provided in the policy.

Where the rider, endorsement, clause, orwarranty was issued after the issuance of thepolicy, the following rules apply:


1. If the insured applied for the rider,endorsement, clause, or warranty, hiscounter-signature is not necessary.

2. If the same is not applied for by theinsured, riders and the like shall becountersigned by the insured orowner.

Note: When the requirements for a rider arecomplied with, it is considered as part of thepolicy.

Q: Are riders necessary in a policy?

A: Yes, because it often becomes necessaryto add a new term to a policy, or to modify orwaive an existing form.

Q: In case of conflict between a rider (orwarranties, clauses, or endorsements) andthe printed stipulations of a policy, whichshall prevail?

A: The rider prevails it being more deliberateexpression of tile agreement of the contractingparties.

Q: What is an endorsement?

A: It is any provision added to an insurancecontract altering its scope or application (maybe in the nature of a permit). Thus, if it isalready attached to the policy at the time of itsissue, it is not an endorsement, strictlyspeaking.

Q: What is a clause?

A: It is an agreement between the insurer andthe insured on certain matter relating to theliability of the insurer in case of loss.

Q: What are warranties?

A: They are attached or inserted to a policy toeliminate specific potential increases of hazardduring the policy term owing to actions of theinsured or condition of the property.

Q: What are the requirements in order thata rider, clause, warranty, or endorsementmay be binding on the insured?

A:1. The descriptive name or title of the

rider, clause, warranty, orendorsement must be mentioned andwritten on the blank spaces providedin the policy; (Sec. 50 [2])

2. If the policy was not applied for by theinsured, the latter must agree to the

contents of the rider, clause,warranty, or endorsement by'countersigning the policy; (Sec. 50[3]) and

3. The rider, clause, warranty, orendorsement must be approved bythe Insurance Commissioner.

Q: What are. the distinctions between abinding receipt and a binding slip?

A:,,' CONDITIONAL or ',' ,COYER NOTE or

, BINDING RECEIPT ~,BINDING 5'(IP,' .Acknowledgement onbehalf of the companythat their branch office

had received fromapplicant the insurance

premiumand hadaccepted the applicationsubject to processing by

the head office,

A concise andtemporary writtencontract issued bythe insurer throughits duly authorizedagent embodying

the principal termsof an expected

policy insurance, Itis intended to give

the insuredtemporary

protection (goodonly for 60 days)

pending theinvestigation of therisk by the insurer

or until theissuance of aregular policy.

It is that which insuranceagents issue (since theydo not have the authorityto bind immediately theinsurers they represent)that makes the coverageeffective on (1) the dateof the application, or on(2) the date of medical

examination, if theinsurer determines laterthat the applicant was

insurable on that date. Itis a conditional

acceptance by theinsurer.

Apply this term to lifeInsurance

Apply this termspecifically, "cover

notes" treatedunder Sec, 52 to

non-life insurance(such as in marine

insurance)pending

investigation of thevessel.


Pacuftaa de ([)ereclio Cio i] ~.·219

Q: What are the rules on cover notes?


A:1. Insurance companies doing business

in the Philippines may issue covernotes to bind insurance temporarily,pending issuance of the policy. (Sec.52 [1])

2. A cover note shall be deemed to be acontract of insurance Within themeaning of (Sec. 1 [1]).

3. No cover note shall be issued orrenewed unless in the form previouslyapproved by the InsuranceCommission.

4. The cover note is valid for 60 daysfrom the date of issuance, whetherthe premium therefor has been paid,but such cover note may be cancelledby either party upon at least 7 daysnotice to the other party.

5. If a cover note is cancelled, a policyof insurance shall, within 60 daysafter the issuance of such cover note,be issued in lieu thereof. Such policyshall include within its terms theidentical insurance and under thecover note and the premium.

6. The period may be extended orrenewed beyond 60 days with thewrilten approval of the Commissionerif he determines that such extensionis not contrary to and is not for thepurpose of violating any provision ofthe Code. (Sec. 52 [2])

7. Insurance companies may impose oncover notes a deposit premiumequivalent to at least 25% of theestimated premium of the intendedinsurance coverage but in no caseless than P500.

Q: Is the cover note null and void for lackof valuable consideration?

A: No. It is binding. A "cover note" issued inadvance of the issuance of a marine policy isbinding as an insurance contract although noseparate premium paid therefor. The non-payment of premium on the Cover Note is nocause for the insured. to lose what is due it, fornon-payment by it was not chargeable againstits fault. To add, such Cover Note must not betreated separately but instead as integrated aspart of the insurance policy (Pacific TimberExport Corporation v. C.A., G.R. No. L-38613,Feb. 25, 1982).

Q: Is the binding slip issued only by theagent binding between the insured and theinsurer in a life insurance policy?

A: No. When an agreement is made betweenthe applicant and agent only, no liability shallattach until the principal approves the risk anda receipt is given by the agent. Theacceptance is merely conditional, and issubordinated to the act of the company inapproving or rejecting the application. Thus, inlife insurance, a "binding slip" or "bindingreceipt" does not insure by itself, and usemerely as an acknowledgment on behalf of thecompany, that the latter's branch office hasreceived from the applicant the insurancepremium and had accepted the applicationsubject for processing by the insurancecompany (Great Pacific Life AssuranceCompany v. CA, G.R. No. L-31845, Apr. 30,1979).

Q: What are the 2 types of conditional orbinding receipt?

A:1. One that affords inlmediate protection

- Insured is covered so long as hefiles his application and pays thepremium.

2. One that does not afford immediateprotection - There is no coverage ifanything happens to the insured priorto favorable action on his applicationat the home office.

Q: When does the policy become binding?

A:1. When all the conditions precedent

stated in the offer have beensatisfied; and

2. When delivered

Q: What are the requisites for a validdelivery?

A:1. Intention of the insurer to give legal

effect as a completed instrument;2. Word or act by insurer putting the

instrument beyond his legal, thoughnot necessarily physical control;

3. Insured must acquiesce in thisintention.

Note: Possession of the policy by the insuredraises the presumption of delivery, while thepossession by the insurer is prima facieevidence of no delivery.


Q: What are the 2 types of delivery?

A:1. Actual- delivery to the person of the

insured.2. Constructive

a. By mail - If policy was mailedalready and premium was paidand nothing is left to be done bythe insured, the policy is

. considered constructivelydelivered if insured died beforereceiving the policy.

b. By agent - If delivered to theagent of the insurer, whose dutyis ministerial, or delivered to theagent of the insured, the policy isconsidered constructivelydelivered.

Q: What is the importance of delivery?

A:1. It becomes the evidence of the

making of a contract and of itsterms;

2. It is considered as communicationof the insurer's acceptance of theinsured's offer;

3. It becomes the determination ofpolicy period;

4. It marks the end of. insurer'sopportunity to decline coverage.

Q: What are the 2 views when there is afailure of the insured to read the policy?

A:1. Majority rule The insured's

acceptance and retention of thepolicy unread is not such laches aswill defeat his right to reformation.This is so because insurancecontracts are contracts of adhesion.

2. Minority rule-

GR: The insured has the duty to readhis policy and is bound by hiscontract as written whether he readsit or not. He may not thereafter beheard to say that he did not read thepolicy or knows not its terms.

XPN:a. When the insured could not

have discovered the erroneousstatement by such reading (e.g.the copy attached was illegible);

b. He is induced by the fraud ofthe agent not to read the policy;

c. He is illiterate; and

d. When the contracts are long,complicated and difficult tounderstand.

Q: When does the insurer have the duty toexplain the policy?

A: When the policy is ambiguous and unclear.This, however, is subject to some importantcaveats:

1. Reasonable expectations doctrine -Insurer must explain to the insuredwhat is contained in the policy for thelatter may have something in minddifferent from what is contained in thepolicy.

2. Insurer must explain the optionsavailable to the insured.

3. Agents owe their customers a duty toexercise the skill and care that areasonable agent would exercise inthe circumstances.

4. Insurer must take affirmative steps tomake sure that the insured isinformed of his remedial rights.

Q: May a third person sue the insurerdirectly?A:

GR: The insurance proceeds shall beapplied exclusively to the proper interest ofthe person in whose name or for whosebenefit it is made. A third person may notsue the insurer directly.

XPN: If the insurance contract wasintended to benefit third persons, the lattermay directly claim for the insurer. Thus:

1. If the insurance contract containsome stipulation in favor of a thirdperson (stipulation pour autrui), thelatter although not a party to thecontract may enforce the stipulationin his favor before it is revoked by thecontracting parties.

2. A third person has no right in law orequity to the proceeds of insuranceunless there is a contract or trust,express or implied, between theinsured and third person.

3. Where the contract of insuranceprovides for indemnity against liabilityto third persons, then third persons,to whom the insured is liable, can suethe insurer.


. Pacu{taa de Derec Iio CiviC ~i~221


Q: What is the test to detennine whether athird person may directly sue the insurer ofthe wrongdoer?

A: Where the contract provides for indemnityagainst liability to third person, then the latterto whom the insured is liable, can sue theinsurer. On the other hand, where theinsurance is for indemnity against actual lossor payment, then third persons cannot proceedagainst the insurer, the contract being solely toreimburse the insured for liability actuallydischarged by him through payment to thirdpersons, said third person's recourse being,thus limited to the insured alone.

Q: What is the effect of an insuranceprocured by an agent?

A: The insurance inures to the benefit of theprincipal.


A:1. Agent must be authorized;2. Must act within the scope of his

authority;3. Must disclose his principal;4. Indicate by appropriate words that he

is acting in a representative capacity.

Q: Maya policy be unilaterally cancelled?

A: The insurer may, upon notice to theinsured, stating grounds for cancellation, andstating further that it can prove the groundshould the insured require it, unilaterallycancel the policy.

Q: What are grounds for cancellation ofnon-life insurance policy?

A: After prior notice by the insurer to theinsured and upon the occurrence of one ormore of the ff:

1. Non-payment of premium;2. Conviction of a crime arising out of

acts increasing the hazard insuredagainst;

3. Discovery of fraud or materialmisrepresentation;

4. Discovery of willful or reckless acts oromissions increasing the hazardsinsured against;

5. Physical changes in the propertyinsured which result in the propertybecoming uninsurable;

6. A determination by the commissionerthat the continuation of the policywould violate or would place the

222

insurer in violation of the InsuranceCode. (Sec. 64).

Q: When is notice of cancellationsufficient?

A:1. Made prior to the cancellation;2. Based on the occurrence, after the

.effectivity date of the policy;3. In writing, mailed or delivered to the

named insured at the address shownin the policy;

4. Must state the grounds relied upon.(Malayan Insurance Co. Inc. v. CruzArnalda, G.R. No., G.R. No. L-67835Oct. 12, 1987)

Academics Com m ittccChair/,l'J:wll ...Abraham I). tielll1illO 11

!/'icc-Chairjf", //fiJdl'llli,:f: Jl'ann,ic A. Lnurcnrin»l/il~'-ChtJir/;Jr /Idmill e:....,Fi'lltlJ1a': i\issa Cclinc II. J .unn

l/i((!-Ch~i"j;1r i.L!:)'{~!l1 e:~~./)i~.\t~lI:J .nisc Rae ( ;. Naval

Mercantile Law Committee·.rllhjcd I/(!()r/.- Iloly 'J'. J\mpagLicy

./Iul. Jllh/cd '-leaJ Manilyn Rose S. Sotelo

Members:'i':dwin Mate 'I' Baldia

Airccn M. CachoSocrates llenjic I. 1\JarbilR()i1 Chcrric S. i\'(clld()z;\

1':disoll .Ial11es I", Pag:11ibu;1I1Maybcllin« 1\,1.~anliag"

....i


'," GROUP INSUR, NeE '7,,' .:

Q: What is flrouP insurance?

A: Tile coverage of a number of individuals bymeans of a single or blanket policy, therebyeffecting economies which frequently enablethe insurer to sell its services at lower premiumrates than are ordinarily obtainable for thesame type of insurance protection on lifepolicies sold to individuals.

Q: What is the form and nature of groupinsurance?

A: It is essentially a single insurance contractthat provides coverage for many individuals. Inits original and most common form, groupinsurance provides life or health insurancecoverage for the employees of one employer.(Pineda v. CA, G.R. No. 105562, Sept. 27,1993) Even though the employer is the namedpolicy-holder in the "master" policy, it is notindemnity insurance for the benefit of theemployer but insurance upon the life of theemployee for his personal benefit and theprotection of those depending upon him and isin addition to and distinct from workmen'scompensation insurance. It affects 4 parties:the insurer, the insured, the employer, and thebeneficiary.

Q: X company procured a group accidentinsurance policy for its constructionemployees variously assigned to itsprovincial infrastructure projects. YInsurance Company underwrote thecoverage, the premiums of which were paidfor entirely by X Company without anyemployee contributions. While the policywas in effect, five of the coveredemployees perished at sea on their way totheir provincial assignments. Their wivessued Y Insurance Company for payment ofdeath benefits under the policy. While thesuit was pending, the wives signed a powerof attorney designating X Companyexecutive, PJ, as their authorizedrepresentative to enter into a settlementwith the insurance company. When asettlement was reached, PJ instructed theinsurance company to issue the settlementcheck to the order of X Company, whichwill undertake the payment to the individualclaimants of their respective shares. PJmisappropriated the settlement amountand the wives pursued their case against YInsurance Co. Will the suit prosper?Explain.

A: Yes. The suit will prosper. Y Ins Co is liable.X Co, through its executive, PJ, acted as agent

of Y Ins Co. The latter is thus bound by themisconduct of its agent. It is the usual practicein the group insurance business that theemployer-policy holder is the agent of the

:'.insurer.(2000 Bar Question)

Q: What is a mutual insurance company or:\':association?,tfA: A mutual life insurance corporation is acooperative that promotes the welfare of itsown members, with the money collected fromamong themselves and solely for their ownprotection and not for profit. Members are boththe insurer and insured. A mutual lifeinsurance company has no capital stock andrelies solely upon its contributions or premiums

- to meet unexpected losses, contingencies andexpenses. (Republic v. Sunlite, G.R. No.158085, Oct. 14, 2005). (2006 Bar Question)

Academics CommitteeCJJuirpl!l:wlI.' r\ braham D. Genuine 11

Via:-Chdir./or .·~Jt{ldt!lJlit:';: Jeannie A, Laurcu rinoVia:-Chtlir'/oJ" .--Idmin cc....•},'illtlfla.:: I\iss~ Cclinc r I. LUlU

r ~it"l:-('Jltlir./;Jr 14..lyoJlI ~'" ne.\~·~Jl: Loise Rae (;. Naval

Mercantile Law Committee.\'lIbl'eI Hcad: Hnly T /\ll1pagul')'

/'I.e.fI. .5'111'1'(/ Head' Manilyn Rose S. Sotelo

Members:Edwin Marc T. Baldiu

Airucn M, CachoS{)crate' Belljie I. i\farbil]{()Il Chcrric S. t\(clldcJZ:l

Edison JanH':s I,'. Pagali!auanMaybcllincM. Salltiago

UNIVERSITY OF SANTO TOMAS ~ •...•.••)

Pacu(tad de (j)erecfto CiviC. 223

INSURANCE LAW: PREMIUM

PREMIUM

Q: What is premium?

A: It is an agreed price for assuming andcarrying the risk - that is, the considerationpaid an insurer for undertaking to indemnifythe insured against a specified peril.

Q: What is the difference between premiumand assessment?

A: Premium is levied and paid to meetanticipated losses, while. assessment arecollected to meet actual losses. Also, whilepremium is not a debt, assessment properlylevied, unless otherwise expressly agreed, is adebt.

Q: When does payment of premiumbecome a debt or obligation?

A:1. In fire, casualty and marine

insurance, the premium payablebecomes a debt as soon as the riskattaches.

2. In life insurance, the premiumbecomes a debt only when, in thecase of the first premium, the contracthas become binding, and in the caseof subsequent premiums, when theinsurer has continued the insuranceafter maturity of the premium, inconsideration of the insured's expressor implied promise to pay.

Q: Does non-payment of balance ofpremiums cancel the policy?

A: No', a contrary rule would place exclusivelyin the 'hands of the insured the right to decidewhether the contract should stand or not.(Philippine Phoenix Surety & Insurance, Co.,tnc., v. Woodworks, Inc., G.R. No. L-22684,Aug. 31, 1967)

Q: What are the effects of non-payment ofpremiums?

A: Non-payment of the first premium unlesswaived, prevents the contract from becomingbinding notwithstanding the acceptance of theapplication or the issuance of the policy.

Non-payment of the subsequent premiumsdoes not affect the validity of the contractsunless, by express stipulation, it is providedthat the policy shall in that event be suspendedor shall lapse.

Q: Js the fire insurance )Jo)jcy a bh7djng 0178

ererr IT r/le prem/um srafed In r/le po/icy ISnot paid?

A: No, insurance is a contract whereby oneundertakes for a consideration to indemnifyanother against loss, damage or liability arisingfrom an unknown contingent event.

The consideration is the premium. Thepremium must be paid at the time and in theway and manner specified in the policy, and ifnot, the policy will lapse and be forfeited by itsown terms.

·The non-payment of consideration constitutesinability of the agreement (Philippine Suretyand Insurance Company v. Woodwork, Inc.,

·G.R. No. L-25317, Aug. 6, 1979)

Q: C Insurance Co. delivered· to therespondent P Manufacturing Co, an openFire Policy. When the policy was delivered,P Manufacturing failed to pay thecorresponding insurance premium.However, it executed an acknowledgmentreceipt with a promise to pay the premiumwithin 30 days. Two days after theinsurance premium had become due, thethings insured was damaged by fire. Is theinsurer liable for the loss? Was there aperfected insurance contract between theinsurer and the insured?

A: Yes, the insurer is liable because there hasbeen a perfected insurance contract. CInsurance accepted the promise of PManufacturing to pay the insurance premiumwithin thirty (30) days from the effective date ofpolicy. By so doing, it has implicitly agreed tomodify the tenor of the insurance policy and in

·effect, waived any provision therein that itwould only pay for the loss or damage in casethe same occurs after the payment of thepremium. Considering that the insurancepolicy is silent as to the mode of payment, CInsurance is deemed to have accepted thepromissory note in payment of the premium.This rendered the policy immediately operativeon the date it was delivered. (CapitalInsurance & Surety Co. Inc. v. Plestic Era Co.,Inc. G.R. No. L-22375, July 18, 1975)


Q: Various tax surety bonds posted by PSurety Co., in. behalf of respondent ACorporation, as principal in favor of theRepublic of the Philippines through theBureau of Customs and the Board ofIndustries. In consideration of theobligation assumed by the P Surety Co., ACorporation agreed to pay the premiumsand cost of documentary stamps duethereon as per stipulations contained in theseparate agreement. A Corporation wasgranted tax exemption by the Board ofIndustries Thereafter, the respondentstopped pa¥ing premiums and costs ofdocumentary stamps to the P. Surety Co.As such, P Surety Co. filed a case for sumof money for the value of the premiums.Can A Corporation be held liable for theunpaid premiums?

A: No, it could not possibly be liable for anyviolation under the original surety bonds whichwere already void and of no force and effect.Suretyship cannot exist without a validobligation. The insurance company incurred norisk from the time A Corporation's taxexemption application was approved. Anyrenewals were void from the beginningbecause the cause or object of said renewalsdid not exist at the time of the purportedtransaction. (Plaridel Surety & InsuranceCompany v. AI1ex Development Company,Inc. G.R. No. L-30554, Feb. 28, 1983)

Q: Can fortuitous event excuse the insuredfrom not paying the premiums?

A:GR: NO, non-payment of premiums doesnot merely suspend but put an end to aninsurance contract since the time of thepayment is peculiarly of the essence of thecontract.

XPN:1. The insurer has become insolvent

and has suspended business, or hasrefused without justification a validtender of premiums. (Gonzales v.Asia Life Ins. Co., G.R. No. L-5188,Oct. 29, 1952)

2. Failure to pay was due to thewrongful conduct of the insurer.

3. The insurer has waived his right todemand payment.

Q: What is the effect of acceptance ofpremium?

A: Acceptance of premium within thestipulated period for payment thereof, includingthe agreed grace period, merely assurescontinued effectivity of the insurance policy inaccordance with its terms. (Stoke v. MalayanInsurance Co., Inc., G.R. No. L-347§.8, Feb.28, 1984) .

Where an insurer authorizes an insuranceagent or broker to deliver a policy to theinsured, it is deemed to have authorized saidagent to receive the premium in its behalf. Theinsurer is bound by its agent'sacknowledgment of the receipt of payment ofpremium.

Q: What is the effect of payment ofpremium by post-dated check?

A: Delivery of a promissory note or a checkwill not be sufficient to make the policy bindinguntil the said note or check has beenconverted into cash. This is consistent withArticle 1249 of the Civil Code.

Note: Payment by means of a check or note,accepted by the insurer, bearing a date prior tothe loss, assuming availability of the. fundsthereof, would be sufficient even if it remainsunencashed at the time of the loss. Thesubsequent effects of encashment 'wouldretroact to the date of the instrument and itsacceptance by the creditor.

Q: What if there was no premium paid, maythe insurer recover the unpaid premiumfrom the insured?

A: No, the continuance of the insurer'sobligation is conditioned upon the payment ofthe premium, so that no recovery can be hadupon a lapsed policy, the contractual relationbetween the parties having ceased. If the perilinsured against had occurred, the insurerwould have had a valid defense againstrecovery under the policy.

UNIVERSI-TY OF SANTO TOMAS C""'.'Facu{tad de (])erecfio CiviC '9" 225


Q: What is the "cash and carry" rule?I

A:GR: No policy or contract of insuranceissued by an insurance company is validand binding unless and until the premiumthereof has been paid. Any agreement tothe contrary is void. (2003 Bar Question)

XPN: A policy is valid and binding evenwhen there is non-payment of premium:

1. In case of life or industrial life policywhenever the grace period provisionapplies.

2. When there is acknowledgment in apolicy of a receipt of premium, whichthe law declares to be conclusiveevidence of payment, even if there isstipulation therein that it shall not bebinding until the premium is actuallypaid. This is without prejudicehowever to right of insurer to collectcorresponding premium. (Sec. 77)

3. When there is an agreement allowingthe insured to pay the premium ininstallments and partial payment hasbeen made at the time of loss (MakatiTuscany Condominium Corp. v. CA,G.R. No. 95546, Nov. 6, 1992).

4. When there is an agreement to grantthe insured credit extension for thepayment of the premium. (Art. 1306,NCC), and loss occurs before theexpiration of the credit term. (UCPBGeneral Insurance v. MasaganaTeiemart, G.R. No. 137172, Apr. 4,2001).

5. When estoppel bars the insurer toinvoke non-recovery on the policy

6. When the public interest so requires,as determined .by the InsuranceCommissioner

E.g.: In compulsory motor vehicleinsurance, if the policy was issuedwithout payment of premium by thevehicle owner, the insurer will still be

'-Jleld liable. To rule otherwise wouldprejudice the 3rd party victim.

226

Q: What is the effect of acknowledgment ofreceipt of premium in policy?

A: Conclusive evidence of its paymeni, in sofar as to make the policy binding,notwithstanding any stipulation therein that itshall not be binding until the premium isactually paid (Sec. 78).

When the policy contains such writtenacknowledgment, it is presumed that theinsurer has waived the condition ofprepayment. It hereby creates a legal fiction ofpayment. The presumption is however,extended only to the question of the bindingeffect of the policy.

As far as the payment of the premium itself is'concerned, the acknowledgment is only aprima facie evidence of the fact of suchpayment. The insurer may still dispute itsacknowledgment but only for the purpose ofrecovering the premium due and unpaid.Whether payment was indeed made is aquestion of fact. .

Q: The Peninsula Insurance Companyoffered to insure Francis' brand new caragainst all risks in the sum of Pi Million for1 year. The policy was issued with thepremium fixed at 160,000.00 payable in 6months. Francis only paid the first twomonthly installments. Despite demands, hefailed to pay the subsequent installments.Five months after the issuance of thepolicy, the vehicle was catnapped.

Francis filed with the insurance company aclaim for its value. However, the companydenied his claim on the ground that hefailed to pay the premium resulting in thecancellation of the policy. Can Francisrecover from the Peninsula InsuranceCompany?

A: Yes, when insured and insurer have agreedto the payment of premium by installments andpartial payment has been made at the time ofloss, then the insurer becomes liable. Whenthe car loss happened on the 5th month, thesix months agreed period of payment had notyet elapsed. (Ibid.) Francis can recover fromPeninsula Insurance Company, but the latterhas the right to deduct the amount of unpaidpremium from the insurance proceeds. (2006Bar Question)


Q: When is the insured entitled to recoverpremiums already paid or a portionthereof?

A:1. Whole:

a. When no part of the thing insuredhas been exposed to any of theperils insured against (Sec. 79)

b. When the contract is voidablebecause of the fraud ormisrepresentations of the insurerof his agent (Sec. 81).

c. When the insurance is voidablebecause of the existence of factsof which the insured wasignorant without his fault(Sec.81).

d. When the insurer never incurredany liability under the policybecause of the default of theinsured other than actual fraud(Sec. 81).

e. When rescission is granted due toinsurer's breach of contract (Sec.74).

2. Pro rata:a. When the insurance is for a

definite period and the insuredsurrenders his policy before thetermination thereot, (Sec. 79 [b));except:i. Policy not made for a definite

period of time;ii. Short period rate is agreed

upon;iii. Life insurance policy.

b. When there is over-insurance.The premiums to be retumedshall be proportioned to theamount by which the aggregatesum insured in all the policiesexceeds the insurable value ofthe thing at risk. (Sec. 82)i. In case of over-insurance by

double insurance, the insureris not liable for the totalamount of the insurancetaken, his liability beinglimited to the propertyinsured. Hence, the insurer isnot entitled to that portion ofthe premium corresponding tothe excess of the insuranceover the insurable interest ofthe insured.

ii. In case of over-insurance byseveral insurers, the insuredis entitled to a ratable return

of the premium, proportionedto the amount by which theaggregate sum insured in allthe policies exceeds theinsurable value of the thinginsured (Sec. 82). i

iE.g. Where there i(> a totalover insuraRC.~ ofP500,00000 in an iggregateP2,000,000.00 policy(Pi ,500,000.00 is 'only theinsurable value), 25%(proportion of P500k to P2M)of the premiums paid to theseveral insurers should bereturned.

Q: When insured not entitled to return ofpremiums paid?

A:1. The risk has already attached and the

risk is entire and indivisible;2. In life policies; .3. If contract is void ab initio because of

fraud by the insured;4. If contract is illegal and the parties

are in pari delicto.

Q: What are the devices used to preventthe forfeiture of a life insurance after thepayment of the first premium?

A:1. Grace period - After the payment of

the first premium, the insured isentitled to a grace period of 30 dayswithin which to pay tile succeedingpremiums.

2. Cash surrender value - The amountthe insurer agrees to pay to theholder of the policy if he surrenders itand releases his claim upon it.

3. Extended insurance - It is where theinsured is given a right, upon default,after payment of at least three fullannual premiums (see Sec. 227 [fj) tohave the policy continued in forcefrom the date of default for a timeeither stated or equal to the amountas the net value of the policy taken asa single premium, will purchase.(Hector S. de Leon The InsuranceCode of the Philippines Annotated,2006)

4. Paid up Insurance - Tile insured isgiven a right, upon default, after thepayment of at least three annual

jUN I V E R S I TY OF SAN T a To M A.S ~~.(. 227

Pacu[ta{ de Der ech o Civtf ~


premiums to have the policycontinued in force from the date ofdefault for the whole period of theinsurance without further payment ofpremiums.{ibid.) It results to areduction of the original amount ofinsurance, but for the same periodoriginally stipulated.

5. Automatic Loan Clause Astipulation in the policy providing thatupon default in payment of premium,the same shall be paid from the loanvalue of the policy until that value isconsumed. In such a case, the policyis continued in force as fully andeffectively as though the premiumshad been paid by the insured from

I funds derived from other sources.

6.1i

Reinstatement - Provision that theholder of the policy shall be entitled toreinstatement of the contract atanytime within 3 years from the dateof default in the payment of premium,unless the cash surrender value hasbeen paid, or the extension periodexpired, upon production of evidenceof insurability satisfactory to thecompany and the payment of alloverdue premiums' and anyindebtedness to the company uponsaid policy

228

Academics COIl1111ittcc

Chairpenrm: Abraham D. (;clluill() I J

Vue-Chair]»: ...-L/,udemio: Jeannie 1\. LaurcntinoVia-Chair li)f- .Admin e:,.,Finan«: Aissa Celine II. Luna

T/ia!-Cj,~ir.JfJr l-q}'ollt & J)e.r~·gJl: Loise Rae (;. Naval

Mercantile Law Committee.\""bjedl-fear!.· 1-1011'T. i\mJ1aguc),

/I.r.rl. J"bjed '-'earl' Manilyn Rosc S. Sotelo

Members:I edwin Marc T. Baldin

Au-ccn M, (~ach()Socrates Bcnjie I. ~hrbi\Ron Cherric S. Mendoza

Edison James F. PagalilauanMaybellinc M. Santiago


, ,LOSS' -

Q: What is loss?

A: It is the injury, damage, or liability sustainedby the insured in consequence of one or moreof the perils against which the insurer, inconsideration of the premium, has undertakento indemnify the insured. It may be total, partial'or constructive.

It embraces:1. Bodily injury;2. Death;3. Property damage or destruction

(Bonifacio Bros. v. Mora, GR. No. L-20853, May, 29, 1967)

4. Loss of income or profits;5. Legal liability to a third party.

Q: Can the insured transfer his claimagainst the insurer after a loss hasoccurred?

: Yes, and there is no need to obtain theconsent of the insurer because it is not the

ersonal contract which is being assigned but2 money claim under or a right of action on theooucy (Ocean Acci. & G. Corp. v.S uthwestern Bell Telephone. Co., 122 A.L.R.- 3). Any stipulation to the contrary is void if"12de after the loss except as otherwiseorovideo in the case of life insurance. (Sec.

~

: When is a fire friendly and when is itostile?

1. A fire is friendly - when it burns in aplace where it was intended to burn,and ought to be, it is to be regardedas merely an agency for theaccomplishment of some purpose.

2. A fire is hostile - when it occursoutside of the usual confines orbegins as a friendly fire and becomeshostile by escaping from the placewhere it ought to be to some placewhere it ought not to be.

ote:1. Even though a fire remains entirely

within its proper place, it may becomehostile if it, by accident, becomesexcessive as to be beyond control. (InO'Connor v. Queens Ins. Co., 122N.W. 1038)

2. A fire caused by a lighted cigarette ona rug is a hostile fire. But recovery

would not be allowed for damage to arug accidentally dropped on a burningstove. (Swerling v. Connecticut FireIns. Co., 180 A. 343)

Q: When is the insurer liable for the lossand when is it not liable?

LOSS for which LOSS for which' .: 'I' Insurer is NOTInsurer is LIABLE LIABLE'

When the proximatecause of the loss is Loss due to insured's

the peril insured willful act. (Sec. 87)~gainst (Sec. 84)

Loss the immediatecause of which is theperil insured against, Loss due to the

except where the connivance of theproximate cause is an insured. (Sec. 87)excepted peril (Sec.

86)

Loss through simple Loss where theexcepted peril is thenegligence of the

proximate cause.insured. (Sec. 86)

Loss caused byefforts to rescue thething insured from aperil insured against.

(Sec. 85) IWhen the thing I

I

insured is rescuedfrom a peril insuredagainst that would

have otherwisecaused a loss, if, inthe course of suchrescue, the thing is

exposed to a peril notinsured against,

which permanentlydeprives the insuredof its possession, in

whole or in part. (Sec.85)

U N.I V E R 5 I T Y 0 F 5 ANT 0 TOM A 5

fJ'acu(tad de De re clio ciou ~i;229

INSURANCE LAW: Loss

NOTICEAND PROOFOF LOSS

Q: What is notice of loss?

A: It is tHe more or less formal notice giventhe insurer by the insured or claimant under apolicy of the occurrence of the loss insuredagainst.

Q: What are the conditions before theinsured may recover on the policy after theloss?

A:1. The insured or some person entitled

to the benefit of the insurance,without unnecessary delay; must givenotice to the insurer; (Sec. 88)

2. When required by the policy, insuredmust present a preliminary proof losswhich is the best evidence he has inhis power at the time. (Sec. 89)

Q: What are the purposes of notice of loss?

A:1. To give insurer information by which

he may determine the extent of hisliability;

2. To afford the insurer a means ofdetecting any fraud that may havebeen practiced upon him; and

3. To operate as a check uponextravagant claims.

Q: What is the effect of failure to givenotice of loss?

A:I FIRE OTHERTYPESOFI' INSURANCE INSURANCE

Failure to givenotice defeatsthe right of the

insured torecover.

Failure to give notice willnot exonerate the insurer,

unless there is astipulation in the policy

requiring the insured to doso.

Q: What are the instances when the defectsin the notice or proof of loss areconsidered waived?

IA: W:hen the insurer: MaJoR-DeW

I'! - ••..•

1. Writes to the insured that heConsiders the policy null and void asthe furnishing of notice or proof ofloss would be useless;

2. Recognizes his liability to pay theclaim;

3. Denies all liability under the policy

230

2. Maturing at thedeath of the insured,occurring prior to theexpiration of the termstipulated - theproceeds are payableto the beneficiarieswithin 60 days afterpresentation of claimand filing of proof ofdeath (Sec. 242)

4. Joins in the proceedings fordetermining the amount of the loss byarbitration, making no objections onaccount of notice and preliminaryproof; or

5. Makes Objection on any ground otherthan the formal defect in thepreliminary proof.

Q: When is delay in the presentation ofnotice or proof of loss deemed waived?

A: If caused by:1. Any act of the insurer; and2. By failure to take objection promptly

and specifically upon that ground.(Sec. 91)

Q: What is proof of loss?

A: It is the more or less formal evidence giventhe company by the insured or claimant undera policy of the occurrence of the loss, theparticulars thereof and the data necessary toenable the company to determine its liabilityand the amount thereof.

Q: What is the time for payment of claims?

LIFE POLICIES NON·L1FEPOLICIES I1. Maturing upon theexpiration of the term -the proceeds areimmediately payable tothe insured, except ifproceeds are payablein installments orannuities which shallbe paid as theybecome due

The proceeds shallbe paid within 30'days after the receiptby the insurer of proofof loss andascertainment of theloss or damage byagreement of theparties or byarbitration but notlater than 90 daysfrom such receipt ofproof of loss, whetheror not ascertainmentis had or made. (Sec.243)


Q: What is the effect of refusal or failure topay the claim within the time prescribed?

A: Secs. 242, 243 and 244 provide that theinsurer shall be liable to pay interest twice theceiling prescribed by the Monetary Boardwhich means twice 12% per annum (legal rateof interest prescribed in CB No. 416) or 24%per annum interest on the proceeds of theinsurance from the date following the timeprescribed in Secs. 242 or 243 until the claimis fully satisfied (Prudential Guarantee andAssurance, Inc. v. Trans-Asia Shipping Lines,Inc. G. R. No. 151890, June 20, 2006)

Note: Refusal or failure to pay the loss ordamage will entitle the assured to collectinterest UNLESS such refusal or failure to payis based on the ground that the claim isfraudulent

PRESCRIPTIVE PERIOD ..

Q: What are the rules on the prescriptiveperiod?

A:1. The parties to a contract of insurance

may validly agree that an action onthe policy should be brought within alimited period of time, provided suchperiod is not less than 1 year from thetime the cause of action accrues. Ifthe period agreed upon is less than 1year from the time the cause of actionaccrues, such agreement is void.(Sec. 63)

a. The stipulated prescriptive periodshall begin to run from the dateof the insurer's rejection of theclaim filed by the insured orbeneficiary and not from the time.of loss.

b. In case the claim was denied bythe insurer but the insured filed apetition for reconsideration, theprescriptive period should becounted from the date the claimwas denied at the first instanceand not from the denial of thereconsideration (Sun Life Office,Ltd. VS. CA, GR. No. 89741, Mar13, 1991)

2. If there is no stipulation or thestipulation is void, the insured maybring the action within 10 years incase the contract is written.

3. In a comprehensive motor vebicleliability insurance (CMVLI), the written

notice of claim must be filed within 6months from the date of the accident;otherwise, . the claim is deemedwaived even if the same is broughtwithin 1 year from its rejection. (Vda.Oe Gabriel vs. CA, GR No. 103883,Nov 14, 1996)

4. The suit for damages, either-with theproper court or with the InsuranceCommissioner, should be filed within1 year from the date of the denial ofthe claim by the insurer, otherwise,claimant's right of action shallprescribe. (Sec. 384)

Academics Com m itteeChairperson: Abraham D. (-;<':Iluinc) 11

f/ice-C/wirjiJr /-/c(u/emitJ: Jeannie r\. ] .aurcu rinol/it:e-C'btJjr./nr .....:Jdmi" i""' Fill~/lIa:: /\iSStl Coline If. 1...una

r 'ia:-C/;lIir/or l.L..'youl 16'"'"ne.f~·~IJ:Loise Rae C;. Naval

Mercantile Law Com mitteeJIII'Ied Fic,,'/'- J J oly T i\ Illpaglley

/1 .•..•.1. SubjCd !-lead; Manilyn Rose S. Sotelo

Mem hers:Edwin Marc T. Baldia

Aireen M. CachoSocrates 13enjie J. l'vfarbilRon Cherric S. l'vfenc.\{)%;l

Edison J ames F. Pagalilauan~r'1ybcllil1c M. Sal1[iago

'.--l';""~.--.,


Fa cu.It a d' de (j)erecno Ci o il

INSURANCE LAW: DOUBLE INSURANCE

DOUBLE INSURANCE

Q: Whbn does double insurance exist?I

A: Double insurance exists where the sameperson is insured by several insurersseparately, in respect to the same subject andinterest. (Sec. 93)

Q: Give the requisitasof double insurance.

A: STRIP1. Person insured is the same;2. Iwo . or .more insurers insuring

separately;3. .§ubject matter is the same;4. Interest insured is the same; and5. Risk or peril insured against is the

same

Q: What is the purpose of the rule ondouble insurance?

A: To prevent over-insurance and thus avertthe perpetration of fraud. The public, as well asthe insurer, is interested in preventing thesituation in which a loss would be profitable tothe insured (Pioneer Insurance and SuretyCorp v. Yap, G.R. No. L-36232, Oec. 19, 1974)

Q: Is double insurance prohibited by law?

A: No. A person may therefore procure two ormore insurances to cover his property. What isprohibited by law is over insurance.

Q: Terrazas de Patio Verde, acondominium building, has a value of P50Million. The owner insured the buildingagainst fire with three (3) insurancecompanies for the following 'amounts:Northern Insurance Corp. - P20 MSouthern Insurance Corp. - P30 MEastern Insurance Corp. - P50 M

Is the owner's taking of insurance tor thebuilding with three (3) insurers valid?Discuss.

A: Yes, the owner's taking of insurance for thebuilding with three (3) insurers is valid. This isa case of double insurance whereby the samepersoni is insured by several insurersseparately in respect to the same subject andinterest. It is lawful to obtain double insurance,and the insured can make claim to severalinsurers in the event of a loss because theyare liable under their respective policies.Provided however, that the insured can onlyrecover up to the value of his insurableinterest which, at the instant case, is P50Million.

232

Q: The building was totally razed by fire. Ifthe owner decides to claim from EasterhInsurance Corp. only P50 Million, will theclaim prosper? Explain.

A: Yes, the claim will prosper if the ownerdecides to claim from Eastern InsuranceCorporation only P50 Million because theamount sought to be claimed does not exceedthe value of his insurable interest. EasternInsurance Corporation, however, can recoverfrom Northern Insurance Corporation andSouthern Insurance Corporation theirproportionate share of the amount it paid to theowner. (2008 Bar Question).

Q: Can an insurer provide that the insuredmay not procure additional insurance?

A: Yes, the insurer may insert an "otherinsurance clause" which will prohibit doubleinsurance. The rationale is to prevent thedanger that the insured will over insure hisproperty.

Q: What is additional or other insuranceclause?

A: A condition in the policy requiring theinsured to inform the insurer of any otherinsurance coverage of the property insured. Itis lawful and specifically allowed under Sec. 75which provides that "a policy may declare thata violation or a specified provision thereof shallavoid it, otbetwise the breach of an immaterial'provision does not avoid it.

Q: What are Its purposes?

A:1. To prevent an increase in the moral

hazard; and2. To prevent over-insurance and fraud

Q: julie and Alma formed a businesspartnership. Under the business name PinoShop, the partnership engaged in a sale ofconstruction materials. julie insured thestocks in trade of Pino Shop with WGCInsurance Co for P350,000.00.Subsequently, she again got an insurancecontract with RSI for P1,000,000.00 andthen from EIC for P200,OOO.OO.A fire ofunknown origin gutted the store of thepartnership. Julie filed her claims with thethree insurance companies.However, her claims were deniedseparately for breach of policy conditionwhich required the insured to give notice ofany insurance effected covering the stocksin trade. Julie.went to court and contendedthat she should not be blamed for the


omission, alleging that the insuranceagents for WGC, RSI and EIC knew of theexistence of the additional insurancecoverage and that she was not informedabout the requirement that such other oradditional insurance should be stated inthe policy.

Is the contention of Julie tenable? Explain.

May she recover on her fire insurancepolicies? Explain.

A:1. No. An insured is required to disclose

the other insurances covering thesubject matter of the insurance beingapplied for.

2. No, because she is guilty of violationof a warranty/ condition. (1993 BarQuestion)

Q: What are the distinctions betweendouble insurance and over insurance?

A:I DOUBLE -

INSURANCE 0'f:~~;INS,U~NCEThere may be no overinsurance as when the

sum total of theamounts of the policies

issued does notexceed the insurable

interest of the insured.

When the amount ofthe insurance is

beyond the value ofthe insured's

insurable interest.

Two or more insurers.

There may be onlyone insurer, with

whom the insuredtakes insurance

beyond the value ofhis insurable

interest.

Not prohibited by law,unless there is astipulation to the

contrary.

Prohibited by lawbecause it is a

wagering contractand no longer a

contract ofindemnity.

Q: What are the rules where the insured isover-insured by double insurance?

A:1. The insured, unless the policy

otherwise provides, may claimpayment from the insurers in suchorder as he may select, up to theamount which the insurers areseverally liable under their respectivecontracts.

2. Where the policy under which theinsured claims is a valued policy, theinsured must give credit as againstthe valuation for any sum received byhim under any other policy withoutregard to the actual value of, thesubject matter insured. .

3. Where the policy under whlQh! theinsured claims is an unvalued pblicyhe must give credit, as against the fullinsurable value, for any sum receivedby him under any policy.

4. Where the insured receives any sumin excess of the valuation in the caseof valued policies, or of the insurablevalue in the case of unvaluedpolicies, he must hold such sum intrust for the insurers, according totheir right of contribution amongthemselves.

5. Each insurer and the other insurers,to contribute ratably to the loss inproportion to the amount for which heis liable under his contract. (Sec. 94)

Q: What is the nature of the liability of theseveral insurers in double insurance?Explain.

A: In double insurance, the insurers areconsidered as co-insurers. Each one is boundto contribute ratably to the loss in proportion tothe amount for which he is liable under hiscontract. This is known as the "principle ofcontribution" or "contribution clause." (Sec. 94[e)) (2005 Bar Question)

UNIVERSITY OF SANTO TOMAS ~~')233Pacu.(taa de (j)ereclio Civi{

INSURANCE LAW: REINSURANCE

REINSURANCE Q: What are the two kinds of reinsurancetreaties?

Q: What is contract of reinsurance?A:

A: It is that which one party, the reinsurer,agrees to indemnify another,. the reinsured(original insurer), either in whole or in part,against loss or liability which the latter maysustain or incur under a separate and originalcontract of insurance with a third party, theoriginal insured. It is also known as"reinsurance cession".

AUTOMATIC IREINSURANCE FACULTATIVE

TREATY REINSURANCEThere IS no

obligation to cede oraccept participation

in the risk each partyhaving a free choice.But once the share

is accepted, theobligation is

absolute and theliability can be

discharged only bypayment. (EquitableIns. & Casualty Co.,Inc. v. Rural Ins. &

Surety Co. Inc., G.R.No. L- 17436, Jan.

31, 1962

The reinsured is boundto cede and the

reinsurer is obligatedto accept a fixed shareof the risk which has tobe reinsured under the

contract.

Note: In every reinsurance, the originalcontract of insurance and the contract ofreinsurance are covered by separate policies.

Q: What is the duty of the insurer inobtaining reinsurance?

A: ~e must communicate all therepresentatlons of the original insured, andalso ~II the knowledge and information hepossesses, whether previously orsubsequently acquired, which are material tothe risk, except under "automatic" reinsurancetreaties. (Sec. 96) Q: What are the distinctions between

double insurance and reinsurance?

Q: What are, the distinctions betweenreinsurance policy and reinsurance treaty?

A:DOUBLE

REINSURANCEINSURANCE(Sec. 95)(Sec, 93)

Insurer remains as Insurer becomes thethe insurer of the insured, in so far as theoriginal insured. reinsurer is concerned.Subject matter is Subject matter is the

property original insurer's riskInvolves the same Insurance is of different

interest interestThe original insured has no

The insured is the interest in the contract ofparty interest in all reinsurance which is

the contracts independent of the originalcontract of insurance

The insured has to The consent of the originalgive his consent insured is not necessary

A:I REINSURANCE REINSURANCEI POLICY TREATY

It is merely anagreement between

two insurancecompanies wherebyone agrees to cede

and the other toaccept reinsurance

business pursuant toprovisions specified

in the treaty.

It is a contract ofindemnity where

insurer makes withanother to protect the

first insurer from arisk it has already

assumed.

It is a contract forinsurance.

(American Life Ins.Co. v. Auditor

General, G.R. No. L-19255, Jan. 18,

1968)

It is a contract ofinsurance. Q: What is retrocession?

A: It is a transaction whereby the reinsurer, inturn, passes to another insurer a portion of therisk reinsured. It is really the reinsurance of thereinsurance. The ceding reinsurer is called a"retrocedent" and the second assumingreinsurer is known as a "retrocessionaire."


Q: MC\yC\reinsurer be held directly liable tothe original insured?

A:GR: The original insured has no interest ina contract of reinsurance (Sec. 98). Thereis no privity of contract between the originalinsured and the reinsurer.

XPN: The contract may contain a provisionwhereby the reinsurer binds himself to paythe policyholder any loss for wi uch theinsurer may become liable. Thus, thereinsurer who has promised to pay the lossaccruing under the original policy will beliable to a suit by the original insured underthe contract of reinsurance. In such case,the contract of reinsurance amounted tonovation of the original contract whichoperates to discharge that contract and theoriginal insurer from all obligationsthereunder. Tile original insurer will bereleased only when the insured agrees withthe insurer and the reinsurer to thenovation.

Academics CommitteeC.!JclirJJeJ~lOlJ: Abraham D. Genuine Il

Vi(r.-CJJilirjfJr /L/au/clJJin: Jeannie A. Laurcntino1,.-/jre-Cbai-rj()J' /JdtlliJ1 ~~ r'iJltJIh'l1: Aiss,"\ Ccline H. Lun.i

r 'ia-Cbairfor L-L!yolIl e.'" neJ~~I1:Loise Hat: G. Naval

Mercantile Law Comrnirrec·1'''''1'.-1 l lend: Holy T. I\mpagllc)'

..-4.ul . .f1l1?Jf:d Head: Manilyn Rose S. Sow]u

MeJnbers:Edwin Marc T lialdia

Aircco M. CachoSocrates Belliic I. l\farbilRon Chcrric S. Mendoza

Edison James F. Pagali!auanMaybcllinc M. Santi'lgo


Fac ul t a d' de CDereclio Civil ~.~235

INSURANCE LAw: MARINE INSURANCE

MARINE INSURANCE

Q: What is marine insurance?

A: Insurance against risks connected withnavigation, to which a shlp, cargo, freightage,profits or other insurable interest in movableproperty, may be exposed during a certainvoyage or fixed period of time.

Q: What vessels ar:e contemplated inmarine insurance?

A: Those used, or at least, intended fornavigation. E.g., one for shipping, chartering,voyage and the like. Vessels which are usedas museums or those that are stationary arenot entitled to be insured under this a marineinsurance.

Q: What does marine insurance include?

A: Marine insurance includes:

1. Insurance against loss or damage to:a. Vessels, goods, freight, cargo,

merchandise, profits, money,valuable papers, bottomry andrespondentia, and interest inrespect to all risks or perils ofnavigation;

b. Persons or property inconnection with marineinsurance;

c. Precious stones, jewels, jewelryand precious metals whether inthe course of transportation orotherwise; and

d. Bridges, tunnels, piers, docksand other aids to navigation andtransportation (Sec. 99)

Note: Cargo can be the subject ofmarine insurance, and once it isentered into, the implied warranty ofseaworthiness immediately attachesto whoever is insuring the cargo,whether he be the ship owner or not.(Roque v. lAC, G.R. No. L-66935,Nov. 11, 1985)

2. "Marine protection and Indemnityinsurance" which means insuranceagainst, or against legal liability of theinsured for loss, damage, or expenseincident to ownership, operation,chartering, maintenance, use, repair,or construction of any vessel, craft orinstrumentality in use of ocean orinland waterways, including liability ofthe insured for personal injury, illnessor death or for loss of or damage to

236

the property of another person. (Sec.99)

Measure of indemnity:a. Valued policy - the parties

are bound by the valuation,if the insured had someinterest at risk and there isno fraud (Sec. 156)

b. Open policy - the followingrules shall apply inestimating a loss:I. value of the ship- value

at the beginning of therisk

ii. value of the cargo-actual cost when ladenon board or marketvalue at the time andplace of lading

iii. value of freightage-gross freightE)geexclusive of primage

iv. cost of insurance - ineach case to be addedto the estimated value(Sec. 161)

Q: What are the two major divisions ofMarine insurance?

A:1. Ocean marine insurance - covers

primarily sea perils of ships andcargoes. Scope: GELSa. §.oods or cargoes;b. Earnings such as freight,

passage money;c. .biability incurred by reason of

maritime perils;d. §hips or hulls.

2. Inland marine insurance - coversprimarily the land or over the land(but sometimes water) transportationperils of property shipped byrailroads, motor trucks, airplanes, andother means of transportation. It alsocovers risks of lake, river, or the otherinland waterway transportation andother waterborne perils outside ofthose risks that fall definitely withinthe ocean marine category. Classes:Pt-BFFa. Eroperty in Ira nsit - Provides

protection to the propertyfrequently exposed to loss whileit is being transported from onelocation to another.

b. §ailee liability - Insurance forthose who have temporarycustody of the goods.


c. fixed transportation property _They are so insured becausethey are held to be an essentialpart of transportation systemsuch as bridges, tunnels, etc.

d. floater - Provides insurance tofollow the insured propertywherever it may be locatedsubject always to the territoriallimits of the contract.

Q: Does an insurer undertake to insureagainst "perils of the ship"?

A: In the absence of any stipulation to thecontrary, the insurer does not undertake toinsure against perils of the ship. The purposeof an ocean marine policy is to secure anindemnity against accidents which mayhappen not against event which must happen.

Q: A marine insurance policy on a cargostates that "the insurer shall be liable forlosses incident to perils of the sea." Duringthe voyage, seawater entered thecompartment where the cargo was storeddue to the defective drainpipe of the ship.The insured filed an action on the policy forrecovery of the damages caused to thecargo. May the insured recover damages?

A: No. The proximate cause of the damage tothe cargo insured was the defective drainpipeof the ship. This is peril of the ship, and notperil of the sea. The defect in the drainpipewas the result of the ordinary use of the ship.To recover under a marine insurance policy,the proximate cause of the loss or damagemust be peril of the sea. (1998 Bar Question)

Q: What is an "all risks" marine insurancepolicy?

A:GR: It is that which insures against allcauses of conceivable loss or damage.

XPN:1. As otherwise excluded in the policy;

or2. Due to fraud or intentional

misconduct on the part of the insured.(Choa Tiek v. CA, G.R. No. 84507,Mar. 15, 1990) This type of policygrants greater protection than thatafforded by the "perils clause."

Q: Who has the burden of proof in an "allrisks" marine insurance policy?

A: The insured Linder an "all risks insurancepolicy" has the initial burden of proving that the

cargo was in good condition when the policyattached and that the cargo was damagedwhen unloaded from the vessel; thereafter, theburden then shifts to the insurer to show theexception to the coverage.

INSURABLE INTERESTQ: What is the extent of the insurableinterest of the following?

A:1. Shipowner

a. Over the vessel to the extent ofits value, except that if chartered,the insurance is only up ;to theamount not recoverable from thecharterer (Sec. 100).

b. If hypothecated by a bottomryloan, the insurable interest isonly Lip to the excess of thevalues of the vessel over theloan (Sec. 101).

c. He also has an insurable intereston expected freightage (Sec.103).

2. Cargo owner - over the cargo andexpected profits (Sec. 105)

3. Charterer - over the amount he isliable to the ship owner, if the ship islost or damaged during the voyage(Sec. 106).

4. Creditor/lender - amount of tile loan

Q: What is the risk insured against inmarine insurance?

A:GR: Only perils of the sea is insuredagainst.

XPN: Unless perils of the ship are coveredby an all-risks policy.

UNIVERSITY OF SANTO TOMAS ~) "',...

'Facu l ta d' de (])ereclio Civj{' . _J I

INSURANCE LA \\I: MARINE INSURANCE

Q: What are the distinctions between perilsof the sea and perils of the ship?

Q: Where is freightage derived from?

A:PERILSOF THE PERILSOF THE

SEA SHIPIncludes only thoseasualties due to the:1. Unusual

A loss which in theordinary course ofevents, results fromthe:1. Natural

inevitable actionof the sea;

2. Ordinary wearand tear of theship; orNegligent failureof the ship'sowner to providethe vessel withproper equipmentto convey thecargo underordinaryconditions.

2.violence; orExtraordinaryaction of wind~nd wave; orOtherextraordlnarycausesconnected with 3.navigation.

3.

Q: What does the phrase "perils of the seaor perils of navigation" mean?

A: It includes only those casualties due to theunusual violence or extraordinary action ofwind and wave, or to other extraordinarycauses connected with navigation.

Q: What does "perils of the ship" mean?

A: It is a loss which, in the ordinary course ofevents.rresults from:

1. The natural and inevitable action ofthe sea;

2. The ordinary wear and tear of theship;

3. The negligent failure of the ship'sowner to provide the vessel withproper equipment to convey thecargo under ordinary conditions.

Q: What is a loan on bottomry?

A: It is one which is payable only if the vesselgiven as security for the loan completes insafety the contemplated voyage.

Q: Whatls freightage?

A: It is the benefit which is to accrue to theowner of the vessel from its use in the voyagecontemplated or benefit derived from theemployment of the ship.

238

and

1. The chartering of the ship;2. Its employment for the carriage of his

own goods; and3. Its employment for the carriage of

goods of others (Sec. 102).

Q: When does insurable interest inexpected freightage in a charter partyexist?

A: It exists when the insured has an inchoateright to freight, that is, he must be in suchposition with regard to freight that nothingcould prevent him from ultimately having aperfect right to it but the intervention of theperils insured against.

Q: Wheh does inchoate right to freightexists?

A:1. Where freight is the price to be paid

for the hire of the ship under a charterparty, the ship owner has an inchoateright to freight as soon as there is aninception of performance by the shipunder the charter party.

2. As soon as the goods are actually puton board and where part of the goodshas been loaded and the balance isready, there is an insurable interest inthe whole freight.

3. Where the ship owner has made abinding contract for freight and theship is in readiness to receive thegoods, he has an insurable interest.

Q: When is insurable interest in expectedfreightage in a charter party non-existent?

A:1. Where there is no contract and no

part of the goods expected to becarried are on board, there is noinsurable interest in freight althoughthere are goods ready for shipment orthe master is provided with funds forthe purpose of purchasing a cargo.

2. Where the vessel is a mere "seekingship" or a vessel looking for cargo tobe transported, the owner has noinsurable interest in freight to beearned on goods not loaded.


Q: What are special marine insurancecontracts and clauses?

A:1. All-risks policy - insurance against all

causes of conceivable loss ordamage, except:a. as otherwise included in the

policy, orb. due to fraud or intentional

misconduct on the part of theinsured (Chao Tiek Seng v. CA,GR. No. 84507, Mar. 15, 1990)

The insured has the initial burdenof proving that the cargo was ingood condition when the policyattached and that the cargo wasdamaged when unloaded fromthe vessel; thereafter, the burdenshifts to the insurer to show theexception to the coverage.

2. Barratry clause - a clause whichprovides that there can be norecovery on the policy in case of anywillful misconduct on the part of themaster or crew in pursuance of someunlawful or fraudulent purposewithout the consent of the owner andto the prejudice of owner's interest. Itrequires an intentional and willful actin its commission. No honest error orjudgment or mere negligence, unlesscriminally gross, can be barratry.(Roque v. lAC, G.R. No. L- 66935,Nov. 11, 1985)

3. Inchmaree clause - a clause whichmakes the insurer liable for loss ordamage to the hull or machineryarising from the:a. Negligence of the captain,

engineers, etc.b. Explosion, breakage of shafts;

andc. Latent defect of machinery or

hull. (Thames and MerseyMarine Insurance Co v. HamiltonFraser and Co [1887) 12 AC 484)

4. Sue and labor clause - a clauseunder which the insurer may becomeliable to pay the insured in addition tothe loss actually suffered, suchexpenses as he may have incurred inhis efforts to protect the propertyagainst a peril for which the insurerwould have been liable (Sec. 163)

Note: Such clause constitutes an exception tothe principle that an insurance contract is one

of indemnity (where the insurer promises tomake good only the loss of the insured) sincethe insurer is liable to pay additional expensesfor the protection of the property against aninsured peril.

Q: What is concealment in marineinsurance?

A: It is the failure to disclose any material factor circumstance which in fact or law is within,or which ought to be within the knowledge ofone party and of which the other has no actualor presumptive knowledge.

Q: Is information· of the belief orexpectation of a third person, in referenceto a material fact, material?

A: Yes. Thus, there is concealment where theinsured at the time of application for insurancedid not disclose the opinion of marine expertswho inspected the vessel insured that it wasunseaworthy. (Sec. 108) ,

Q: When is the insured presumed to haveknowledge of a prior loss in ~arineinsurance? !

A: The insured is presumed to haveknowledge of a prior loss at the time ofinsuring, if the information might possibly havereached him in the usual mode of transmissionand at the usual rate of communication. (Sec.109)

Q: What matters, when concealed, do notvitiate the entire insurance contract, butmerely exonerates the insurer from a lossresulting from the risk concealed?

A:1. National character of the insured;2. The liability of the thing insured to

capture and detention;3. The liability to seizure from breach of

foreign laws of trade;4. The want of necessary documents;5. The use of false and simulated

papers. (Sec. 110)


'Fa cu l t a d: de ([)ereclio Ci-o il

INSURANCE LA \\I: MARINE INSURANCEi

Q: What are the distinctions onconcealment in marine insurance and otherproperty insurance?

A:MARINE OTHER PROPERTY

INSURANCE INSURANCE

The information orthe belief or

expectation of 3'd :persons in referenceto a material fact is

material and must becommunicated.

The concealment ofany fact in relation to

any of the mattersstated in Sec. 110does not vitiate theentire contract butmerely exonerates

the insurer from a riskresulting from the fact

concealed.

The information orbelief of a 3'd party is

not material andneed not be

communicated,unless it proceeds

from an agent of theinsured whose duty

is to giveinformation.

:: -,' 'REPRESENTATION '

Concealment of anymaterial fact willvitiate the entire

contract, whether ornot the loss results

from the riskconcealed.

Q: What is the effect of false representationby the insured?

A: Any misrepresentation of a material factmade with fraudulent intent avoids the policy. Ifthe misrepresentation is not intentional orfraudulent but the fact misrepresented ismaterial to the risk, the insurer may rescind thecontract from the time representation becomesfalse. (Sec. 111)

Q: What is the effect of falsity as toexpectation?

A: Representations of expectation or intention,unless made with fraudulent intent, their failureof fulfillment is not ground for rescission. (Sec.112)

240

Q: What are the distinctions betweenpromissory representation andrepresentation of expectation?

A:PROMISSORY REPRESENTATION

REPRESENTATION OF EXPECTATIONIt is any promise tobe fulfilled after thecontract has comeinto existence or anystatementconcerning what is tohappen during theexistence of theinsurance

It is a statement offuture facts or eventswhich are in theirnature contingentand which the insureris bound to know thatthe insured could nothave intended tostate as known facts,but as intentions orex ectations merel

. . ' ", ,", WARRANTIES '

Q: What is warranty in marine insurance?

A: It is a stipulation, either express or implied,forming part of the policy as to some fact,condition or circumstance relating to the risk.

Q: What are the implied Warranties inmarine insurance?

A:1. Seaworthiness (Sec. 113)2. Non-deviation from the agreed

voyage; (Sees. 123, 124, 125)3. Non-engagement from illegal venture.4. Warranty of neutrality - the ship will

carry neutrality of the ship or cargowhere such nationality or neutrality isexpressly warranted. (Sec. 120)

5. Presence of insurable interest

Q: What is seaworthiness?

A: It is a relative term depending upon thenature of the ship, voyage, service and goodsdenoting in general, a ship's fitness to performthe service and to encounter the ordinaryperils of the voyage, contemplated by theparties to the policy. (Sec. 114)

Q: When is the warranty of seaworthinesscomplied with?

A:GR: The warranty of seaworthiness iscomplied with if the ship be seaworthy atthe time of the commencement of the risk.(Sec. 115) There is no implied warrantythat the vessel will remain in seaworthycondition throughout the life of the policy.


XPN:1. In the case of time policy, the ship

must be seaworthy at thecommencement of every voyage shemay undertake. (Sec. 115 [a))

2. In the case of cargo policy, eachvessel upon which cargo is shippedor transshipped must be seaworthy atthe commencement of each particularvoyage (Sec. 115 [b))

3. In the case of voyage policycontemplating a voyage in differentstages, the ship must be seaworthy atthe commencement of each portion.(Sec. 117)

Q: What is the effect of the admission ofseaworthiness by the insurer?

A: If the policy provides that the seaworthinessof the vessel as between insured and insureris admitted, the issue of seaworthiness cannotbe raised by tile insurer without showingconcealment or misrepresentation by theinsured. (Phil. American General InsuranceCo. v. CA, G.R. No. 116940, June 11, 1997)

Q: What does the admission ofseaworthiness by the insurer mean?

A: It may mean:1. That the warranty of seaworthiness is

to be taken as fulfilled; or2. That the risk of unseaworthiness is

assumed by the insurer. (PhilippineAmerican General Insurance Co., Inc.v CA, GR No. 116940. June 11,1997)

Q: What is the effect if unseaworthiness isunknown to the owner of the cargo?

A: It is immaterial in ordinary marine insuranceand may not be used by him as a defense inorder to recover on the marine insurancepolicy. It becomes the obligation of a cargoowner to look for a reliable common carrier,which keeps its vessels in seaworthyconditions. The shipper may have no controlover the vessel but he has control in thechoice of the common carrier that will transporthis goods. (Roque v. lAC, GR. No. L- 66935,Nov. 11, 1985)

Q: What is the scope of the seaworthinessof a vessel?

A: A warranty of seaworthiness extends notonly to the condition of the structure of the shipitself, but requires that it be properly laden,

and provided with a competent master, asufficient number of competent officers andseamen, and the requisite appurtenances andequipment, such as ballasts, cables andanchors, cordage and sails, food, water, fueland lights, and other necessary or properstores and implements for the voyage. (Sec.116)

VOYAGE AND DEVIATION

Q. What is deviation in marine insurancepolicy?

A: Deviation is a departure of the vessel fromthe course of the voyage, or an unreasonabledelay in pursuing the voyage, or thecommencement of an entirely new voyage.(Sec. 123)

Q: What are the four cases of deviation inmarine insurance?

A:1. Departure from the course of sailing

fixed by mercantile usage betweenthe places of beginning and endingspecified in the policy. (Sec. 121)

2. Departure from the most natural,direct, and advantageous routebetween the places specified if thecourse of sailing is not fixed bymercantile usage. (Sec. 122)

3. Unreasonable delay in pursuing thevoyage. (Sec. 123)

4. The commencement of an entirelydifferent voyage.

Q: What are the two kinds of deviation?

A:1. Proper - This will not vitiate a policy

of marine insurance becausedeviation is considered justified orcaused by actual necessity ~hich isequal in importance to such deviation.(Sec. 124)

2. Improper - The insurer becomesimmediately absolved from furtherliability under the policy for lossesoccurring subsequent to the deviationbecause deviation is considered to bewithout just cause. Every deviationnot specified in Sec. 124 is improper.(Sec. 125)

U N I V E R 5 I T Y 0 F 5 ANT 0 T 0 'M A 5

Fac u it a d: de CDerecfio Ci'fJi{

INSURANCE LAW: MARINE INSURANCE

. LOSS'

A:

Q: What are the two kinds of total loss?

1. Actual total loss; and2. Constructive total loss.

Q: What are the distinctions between thetwo?

A:- ACTUAL TOTAL - _. - -CONSTRUCtIvE --

LOSS ' TOTAL LOSSIt exists when thesubject matter ofthe insurance is

wholly destroyed orlost or when it is so

damaged as nolonger to exist in itsoriginal character.

It is one which the loss,although not actually

total, is of such acharacter that the

insured is entitled, if hethinks fit, to treat it astotal by abandonment

(Sec. 131)

The right of theinsured to claim thewhole insurance isabsolute. No need

to give notice ofabandonment.

(Sec. 1352

Abandonment by theinsured is necessary inorder to recover for a

total loss (Sec. 138) inthe absence of any

provision to thecontrary in theyolicy.

A:

Q: What causes actual total loss?

1. A total destruction of the thinginsured;

2. The irretrievable loss of the thing bysinking, or by being broken up;

! 3. Any damage to the thing whichrenders it valueless to the owner forthe purpose for which he held it; or

4. Any other event which effectivelydeprives the owner of the possession,at the port of destination, of the thinqinsured. (Sec. 130)

Note: Complete physical destruction is notessential to constitute actual total loss.

A:Q: What is constructive total loss?

1. Actual loss of more than :y., of thevalue of the object;

2. Damage reducing value by more than:y., of the value of the vessel and ofcargo; and

3. Expense of transshipment exceeds :y.,of the value of the cargo. (Sec. 131)

242

Q: OC Corporation purchased rice fromThailand, which it intended to sell locally.Due to stormy weather, the ship wassubmerged in seawater, and with it the ricecargo. When the cargo arrived in Manila,OC filed a claim for total loss with theinsurer, because the rice was no longer fitfor human consumption. Admittedly, therice could still be used as animal feed. IsRC's claim for total loss justified? Explain.

A: Yes. The rice, which was imported fromThailand for sale locally, is obviously intendedfor consumption by the public. The completephysical destruction of the rice is not essentialto constitute an actual total loss. Such a lossexists in this case since the rice, having beensoaked in sea water and thereby renderedunfit for human consumption, has becometotally useless for the purpose for which it wasimported. (1996 Bar Question)

Q: When is actual loss presumed?

A: It may be presumed from the continuedabsence of a ship without being heard of. Thelength of time which is sufficient to raise hispresumption depends on the circumstances ofthe case. (Sec. 132)

Q: In an insurance upon cargo, what is theliability of the insurer in case ofreshipment?

A: If the original ship be disabled, and themaster, acting with a wise discretion, as theagent of the merchant and the ship owners,forwards the cargo in another ship, suchnecessary and justifiable change of ship willnot discharge the underwriter on the goodsfrom liability for any loss which may take placeon goods subsequently to such reshipment(Sec. 133) The insurer may, however, requireadditional premium if the hazard be increasedby his extension of liability.

Q: What is the additional liability of theinsurer of goods referred to in thereshipment of cargo?

A: The marine insurer is bound for:1. Damages;2. Expenses of discharging;3. Storage;4. Shipment;5. Extra freightage; and6. All other expenses incurred in saving

cargo reshipped. (Sec. 134)

Note: The liability of the insurer cannot exceedthe amount of the insurance.


Q: When may the insured, by a contract ofmarine insurance, abandon the thinginsured?

A:1. If more than three-fourths thereof in

value is actually lost, or would have tobe expended to recover it from theperil;

2. If it is injured to such an extent as toreduce its value more than three-fourths;

3. If the thing insured is a ship, and thecontemplated voyage cannot belawfully performed without incurringeither an expense to the insured ofmore than three-fourths the value ofthe thing abandoned or a risk which aprudent man would not take underthe circumstances; or

4. If the thing insured is cargo orfreightage, and the voyage cannot beperformed, nor another ship procuredby the master, within a reasonabletime and with reasonable diligence toforward the cargo, without incurringthe like expense or risk mentioned inthe preceding sub-paragraph. (Sec.139)

Note: Freiqhtage cannot in any case beabandoned, unless tile ship is alsoabandoned.

Q: What is the three-fourth rule?

A: What is contemplated as "I. under the lawmust be more than "I.. When what was lostwas exactly "I., the rule cannot be applied.

Q: An insurance company issued a marineinsurance policy covering a shipment bysea from Mindoro to Batangas of 1,000pieces of Mindoro garden stones against"total loss only." The stones were loaded intwo lighters, the first with 600 pieces andthe second with 400 pieces. Because ofrough seas, damage was caused thesecond lighter resulting in the loss of 325out of the 400 pieces. The owner of theshipment filed claims against the insurancecompany on the ground of constructivetotal loss inasmuch as more than % of thevalue of the stones had been lost in one ofthe lighters. Is the insurance companyliable under its policy? Why?

A: The insurance company is not liable underits policy covering against "total loss only" theshipment of 1,000 pieces of Mindoro gardenstones. There is no constructive total loss thatcan be claimed since the "I. rule is to becomputed on the total 1,000 pieces of Mindorogarden stones covered by the single policycoverage. (1992 Bar Question)

Q: What is abandonment?

A: It is the act of the insured by which, after aconstructive total loss he declared therelinquishment to the insurer of his interest inthe thing insured.

Q: What are the requisites for the validity ofabandonment?

A:

,I

iThere must be an Iactualrelinquishment by the person insuredof his interest in the thing insured(Sec. 138)

1.

2. There must be a constructive totalloss (Sec. 139)

3. The abandonment must neither bepartial nor conditional (Sec. 140)

4. It must be made within a reasonabletime after receipt of reliableinformation of the loss (Sec. 141)

5. It must be factual (Sec. 142)

6. It must be made by giving noticethereof to the insurer which may bedone orally or in writing (Sec. 143)

7. The notice of abandonment must beexplicit and must specify theparticular cause of abandonment(Sec. 144)

Q: What is the form of notice ofabandonment?

A: Abandonment may be done orally, or inwriting; Provided that if the notice be doneorally a written notice of such abandonmentshall be submitted within 7 days from such oralnotice. (Sec. 143)

Q: What is the effect of a validabandonment?

A: It is equivalent to a transfer by the insuredof his interest, to the insurer, with all thechances of recovery and indemnity. The

UNIVERSITY OF SANTO TOMAS (, ..'t'~ 243Pacu(taa de !JJereclioCiviC.

INSURANCE LA \,\1: MARINE INSURANCE

insurer becomes entitled to all the rights whichthe insured possessed in the thing insured.(Sec. 146)

Q: What are the forms of acceptance ofabandonment?

A:1. i Express;2. II Implied from the conduct of the

insurer;3.1 Mere silence of the insurer for

unreasonable length of time afternotice. (Sec. 150)

Q: What are the effects of acceptance ofabandonment?

A:1. The insurer becomes at once liable

for the whole amount of the insuranceand also becomes entitled to all rightswhich insured possessed in the thinginsured. (Sec. 146)

2. It fixes the rights of the parties;whether express or implied, isconclusive upon them, andirrevocable. (Sec. 152)

3. It stops the insurer to rely on anyinsufficiency in the form, time, orright, of abandonment. Whether theinsured has a right to abandon isimmaterial where the abandonment isaccepted and there is no fraud.

4. On accepted abandonment of a ship,the freightage earned subsequent tothe loss belongs to the insurer of theship. But freightage earned previouslybelongs to the insurer of saidfreightage who is subrogated to therights of the insured up to the time ofthe loss. (Sec. 153)

XPN: Where the ground upon which itwas made proves to be unfounded. (Sec.152) Under Sec. 145, abandonment canbe sustained only upon the groundspecified in the notice thereof.

Q: What is the effect of the insurer's refusalto accept a valid abandonment?

A: If the insurer declines to accept a properabandonment, he is liable as upon an actualtotal loss less any proceeds the insured mayhave received on account of the damagedproperty as when the insured succeeds inselling the property as damaged (Sec. 154). Ifthe abandonment was improper, the insured

244 !team:lli.'!

may nevertheless recover to the extent of thedamage proved.

Q: What is the effect of insured's failure tomake abandonment?

A: The insured has an election to abandon ornot, and cannot be compelled to abandonalthough abandonment is proper. If the insuredfails to abandon, he may nevertheless recoverhis actual loss (Sec. 155).

MEASURE OF INDEMNITY

Q: When does co-insurance exist?

A: There is co-insurance if the value of theinsured's interest exceeds the amount ofinsurance; he is considered the co-insurer foran amount determined by the differencebetween the insurance taken out and the valueof the property.

A marine insurer is liable upon a partial lossonly for such proportion of the amount insuredby him as the loss bears to the value of thewhole interest of the insured in the propertyinsured (Sec. 157).

Note: Co-insurance applies only to marineinsurance. Logically, there cannot be co-insurance in life insurance. But co-insuranceapplies in fire insurance only when expresslystipulated by the parties.

There is co-insurance when the followingrequisites concur:

1. The amount of insurance is less thanthe insured's insurable interest;

2. The loss is partial.


Formula to determine the amount recoverable:

(Partial) Loss X Amount of Insurance = Amountof recovery

Value of thinginsured

Illustration:lf .a vessel valued at P1M is insured for onlyP800, 000 and is damaged to the extent ofP400, 000, the insurer will be required to payonly 80% of the loss suffered, or P320,000; theother 20% or P80,000 being borne by theinsured himself.

P400,000 or 2/5 X P800,000 = P320, 000P1M

The insured is considered a co-insurer as tothe uninsured portion of P200,000.

Note: If the loss is total, the insurer is liable forthe full amount of P800,or)0. On the otherhand, if the property is insured to its full value,the insured is entitled to recover the fullamount of the partial loss of P400,000.

Q: In case of loss, what is the insuredentitled to recover if profits to be realizedare separately insured?

A: If profits to be realized are separatelyinsured from the vessel or cargo, the insured isentitled to recover, in case of loss, suchproportion of the profits as the value of theproperty lost bears to the value of the wholeproperty. (Sec. 158)

Q: When is the loss of profits conclusivelypresumed?

A: When profits are valued and insured by acontract of marine insurance, a loss of them isconclusively presumed from a loss of theproperty out of which they were expected to.arise, and the valuation fixes their amount.(Sec. 160)

Q: What are the rules for estimating lossunder an open policy of marine insurance?

A:1. Value of the ship - In ascertaining the

value of the vessel, the value is to betaken as of the commencement of therisk and not its value at the time shewas built;

2. Value of cargo - The value of thecargo is its actual cost to the insured,when laden on board, or where thatcost cannot be ascertained, itsmarket value at the time and place of

lading it on board, but withoutreference to any loss incurred inraising money for its purchase, or toany drawback on its exportation, or tothe fluctuation of the market at theport of destination, or to expensesincurred on the way or on arrival;

3. Value of freightage - the grossfreightage, exclusive of primage,without reference to the cost ofearning;

Note: Primage is a compensationpaid to the captain after a successfulvoyage.

4. Cost of insurance - It is alwaysadded in calculating the value of theship, cargo, or freightage or othersubject matter in an open policy.(Sec. 161)

Q: What does the phrase "port of refugeexpenses" mean?

A: These are the additional expenses incurredin repairing the damages suffered by a vesselbecause of the perils insured against as wellas those incurred for saving the vessel fromsuch perils, such as the expense of launchingor raising the vessel or of towing or navigatingit into port for her safety ..These are items to beborne by the insurer in addition to a total loss ifthat afterwards takes place. (Sec. 163)

Q: What are the rights of the insured incase of general average?

A:GR: The insurer is liable for any generalaverage loss (Sec. 136) where it is payableor has been paid by the insured inconsequence of a peril insured against.

The insured may either hold the insurerdirectly liable for the whole of the insuredvalue of the property sacrificed for thegeneral benefit, subrogating him to his ownright of contribution or demand contributionfrom the other interested parties as soon asthe vessel arrives at her destination (Sec.135). .

XPN: There can be no recovery for generalaverage loss against the insurer:

1. After the separation of the interestsliable to contribution, that is to say,after the cargo liable for contributionhas been removed from the vessel; or


'Facu{taa de Derec h o Civif

INSURANCE LAW: MARINE INSURANCE

2. When the insured has neglected orwaived his right to contribution.

Note: General average is a principleof law whereby, when it is decided bythe master of a vessel, acting for allthe interest concerned to sacrifice apart of a venture exposed to acommon and imminent peril in orderto save the rest, the interests sosaved are compelled to contributeratably or proportionately to theowner of the interest sacrificed, sothat the cost of the sacrifice shall fallequally upon all. (Hector S. De Leon,The Law on Insurance, 2003)

Q: What is Free From Particular AverageClause (FPA Clause)?

A: A clause agreed upon in a policy of marineinsurance in which it is stated that the insurershall not be liable for a particular average. Theinsurer is liable only for general average andnot for particular average unless suchparticular average loss as the effect ofdepriving the insured of the possession at theport of destination of the whole of the thinginsured. (Sec. 136)

Q: What is the limit as to liability ofinsurer?

I

A: Th~ liability of the insurer for any generalaverage loss is limited to the proportion ofcontnbution attaching to his policy value wherethis is! less than the contributing value of thething insured. (Sec. 164)

246

Acaderuics CommitteeC/;airjJfD"OIl: Abraham D. (;clluill() 1T

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Mercantile Law Com m ittco.1'11/'1"" Ileml.-ll"l)' '1', 111ll1'"gue),

/1.1'.1"1 .• 1'11/'1<<"1I lead' Mnnilvn RosL' S. Sotei"

Members:L,dwin M;U'c T. Balelia

,\iI'L'L'n M. CachoSocrales llenjiL' I. I\"iarbilRon Chen-it: S. '(\.:iL'nd(J%a

i':disol1 j amcs I,', Paga!jhuan. Maybcllinc M. Sanliago


Q: What is fire insurance?

, . FIRE ·INSURANCE . ;" ,_

A: It is a contract of indemnity by which theinsurer, for a consideration, agrees toindemnify tile insured aqatnst loss of ordamage by fire, lightning, windstorm, tornadoor eerthqueke and other allied risks, whensuch risks are covered by extension to fireinsurance policies or under separate policies.(Sec. 167)

Note: The liability of an insurer is to pay fordirect loss only. The insurer may be liable topay for consequential losses if covered byextension to such fire policies or insured underseparate policy

Q: What are the distinctions of oceanmarine and fire policies?

A:I. OCEAN MARINE FIRE INSU N '

A policy of insuranceon a vessel engagedin navigation is acontract of marineinsurance although itinsures against firerisks only.

Where the hazard isfire alone and thesubject is anunfinished vessel,never afloat for avoyage, the contract toinsure is a fire risk,especially in theabsence of an expressagreement that it shallhave the incidents ofmarine policy, orwhere it insuresmaterials in a shipyardfor use in constructingvessels.

Also where a policyinsures against fire, avessel while moored.and in use as ahos ital

Q: Why is the distinction between marineand fire insurance important?

A:1. In marine insurance, the rules on

constructive total loss (Sees. 131,139) and abandonment (Sec. 138)apply but not in fire insurance;

2. In case of partial loss of a thinginsured for less than its actual value,the insured in a marine policy is a co-insurer of the uninsured portion (Sec.157), while the insured may onlybecome a co-insurer in fire insurance

if expressly agreed upon by theparties. (Sec. 172)

Q: When does alteration in the thinginsured entitle the insurer to rescind?

A: In order that the insurer may rescind acontract of fire insurance for any alterationmade in the use or condition of the thinginsured, the following requisites must bepresent:

1. The use or condition of the thing isspecially limited or stipulated in thepolicy;

2. Such use or condition as limited bythe policy is altered;

3. The alteration is made without theconsent of the insurer;

4. The alteration is made by meanswithin the control of the insured; and

5. The alteration increases the risk.

Note: A contract of fire insurance is notaffected by any act of the insured subsequentto the execution of the policy, which does notviolate its provislons even though it increasesthe risk and is the cause of the loss. (Sec. 170)

Q: What is the measure of indemnity inopen and valued policies in fire insurance?

A:" . VALUED' ,"

. OPEN POLICIES . POLICIESThe expense necessaryto replace the thing lostor injured in thecondition it was at thetime of the injury.

The parties arebound by thevaluation, in theabsence of fraud.

Q: What is a co-insurance clause?

A: It is that which requires the insured tomaintain insurance to an amount equal to thevalue or specified percentage of the value ofthe insured property under penalty ofbecoming co-insurer to the extent of suchdeficiency.

Note: The insured is not a co-insurer underfire policies in the absence of stipulation.


'Facu(tad de De re ch o Civi[ ~i~247

Q: What is a fall of building clause?

INSURANCE LAW: FIRE INSURANCE

A: It is that which provides, in a fire insurancepolicy, that if the building or any part thereoffalls, except as a result of fire, all insurance bythe policy shall immediately cease.

Q: What is an option to rebuild clause?

A: It gives the insurer the option to rebuild thedestroyed property instead of paying theindemnity, This clause serves to protect theinsurer against unfair appraisals friendly to theinsured. (Sec. 172)

·1

248

Acadcru ics CotnillittecOlClilpmofl: Abraham D. Gcnuin» II

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Mercantile Law CommittceJ"hjed ffead' I 1(1), T. A Illpagucy

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Edisoll.lames 1". J>~lgalilaL1all

Maybcllinc M. Santiago

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, ' ',.' CASUALTY INSURANCe .,&

Q: What is casualty insurance?

A: It is that which covers loss or liability arisingfrom accident or mishap, excluding thosefalling under types of insurance as fire ormarine, (Sec, 174)

Q: What are the two divisions of casualtyinsurance?

A:1. Accident or health insurance -

insurance against specified perilswhich may affect the person and/orproperty of the insured,

E.g, personal accident, robbery/theftinsurance

2, Third party liability insurance -Insurance against specified perilswhich may give rise to liability on thepart of the insured of claims forinjuries or damage to property ofothers.

Q: What is "third party liability insurance"?

A:1, Insurable interest is based on the

interest of the insured in the safety ofthe persons, and their property, whomay maintain an action against him incase of their injury or destructionrespectively,

2, In a third party liability (TPL)insurance contract, the insurerassumes the obligation by paying theinjured third' party to whom theinsured is liable, Prior payment by theinsured to the third person is not.necessary in order that the obligationmay arise, The moment the insuredbecomes liable to third persons, theinsured acquires an interest in theinsurance contract which may begarnished like any other credit

3, In burglary, robbery and theftinsurance, the opportunity to defraudthe insurer (moral hazard) is so greatthat insurer have found it necessaryto fill up the policies with manyrestrictions designed to reduce thehazard. Persons frequently excludedare those in the insured's service andemployment The purpose of theexception is to guard against liabilityshould theft be committed by one

having unrestricted access to theproperty,

4, Right of third party injured to sue theinsurer of party at fault depends onwhether the contract of insurance isintended to benefit third persons alsoor only the insured

Q: When does the injured person have theright to sue insurer of the party at fault?

A:1, Indemnity against third party liability -

injured third party can dlrectly sue theinsurer,

Purpose: To protect injured personagainst the insolvency of the insuredwho causes such injury.

2, Indemnity against actual loss orpayment - third party has no cause ofaction against 'the insurer. The thirdperson's recourse is limited to theinsured alone. The contract is solelyfor the insurer to reimburse theinsured for liability actually satisfiedby him,

Note: The insurer is not solidarily liable withthe insured, The insurer's liability is based oncontract; that of the insured is based o~ torts,Furthermore, the insurer's liability is limited bythe amount of the insurance coverage, I

iQ: Luis was the holder of an accidentinsurance policy effective Nov, 1, 1988 toOct 31, 1989. At a boxing contest held onJan. 1, 1989 and sponsored by hisemployer, he slipped and was hit by hisopponent. He fell and his head hit one ofthe posts of the boxing ring. He wasrendered unconscious and was dead onarrival at the hospital due to "intra-cranialhemorrhage." Can his father who is abeneficiary under said insurance policysuccessfully claim indemnity from theinsurance company? Explain.

A: Yes. Clearly, the proximate cause of deathwas the boxing contest Death sustained in aboxing contest is an accident (De la Cruz v.Capital Insurance & Surety Co., G.R. No. L-21574, June 30, 1966) (1990 Bar Question)


Pacu{taa de (j)ereclio Civit 'i~249

INSURANCE LAW: CASUALTY INSURANCE

Q: Sun-Moon Insurance issued a PersonalAccident Policy to Henry Dy with a facevalue of P500,OOO.A provision in the policystates that "the company shall not be liablein respect of "bodily injury' consequentupon the insured person attempting tocommit suicide or willfully exposinghimself to needless peril except in anattempt to save human life." Six monthslater Henry Dy died of a bullet wound in hishead. Investigation showed that oneevening Henry was in a happy moodalthough he was not drunk.

He was playing with his handgun fromwhich he had previously removed itsmagazine. He pointed the gun at his sisterwho got scared. He assured her it was notloaded. He then pointed the gun at histemple and pulled the trigger. The gun firedand Henry slumped on the floor.

Henry's wife Beverly, as the designatedbeneficiary, sought to collect under thepolicy. Sun-Moon Insurance rejected herclaim on the ground that the death of Henrywas not accidental. Beverly sued theinsurer. Decide and Discuss fully ..

A: Beverly can recover the proceeds of thepolicy from the insurer. The death of theinsured was not due to suicide or willfulexposure to needless peril which are excepted

"risks. The insured's act was purely an act ofnegligence which is covered by the policy andfor which the insured got the insurance for hisprotection. In fact, he removed the magazinefrom the gun and when he pointed the gun tohis temple he did so because he thought that itwas safe for him to do so. He did so to assurehis sister that the gun was harmless. There isnone in the policy that would relieve theinsurer of liability for the death of the insuredsince the death was an accident. (1995 BarQuestion)

Q: What is liability insurance?

A: It 'has been said to be a contract ofindemhity for the benefit of the insured andthose in privity with him, or those to whom thelaw upon the grounds of public policy extendsthe indemnity against liabllity.

250

Q: While driving his car along EDSA, Cesarsideswiped Roberto, causing injuries to thelatter, Roberto sued Cesar and the thirdparty liability insurer for damages and/orinsurance proceeds. The insurancecompany moved to dismiss the complaint,contending that the liability of Cesar hasnot yet been determined with finality.

1. Is the contention of the insurercorrect? Explain.

2. May the insurer be held liable withCesar?

A: No, the contention of the insurer is notcorrect. There is no need to wait for thedecision of the court determining Cesar'sliability with finality before the third party

.liability insurer could be sued. The occurrenceof the injury to Roberto immediately gave riseto the liability of the insurer under its policy. Inother words, where an insurance policyinsures directly against liability, the insurer'sliability accrues immediately upon theoccurrence of the injury or event upon whichthe liability depends. The insurer cannot beheld solidarily liable with Cesar. The liability ofthe insurer is. based on contract while that ofCesar is based on tort. If the insurer wassolldarily liable with Cesar, it could be made topay more than the amount stated in the policy.This would, however, be contrary to theprinciples underlying insurance contracts. Onthe other hand, if the insurer was solidarilyliable with Cesar and it is made to pay only upto the amount stated in the insurance policy,the principles underlying solidary obligationswould be violated. (1996 Bar Question)


Q: What's the difference between theliability of the insurer and that of theinsured in case for indemnity against thirdperson liability?

A:: ,'INSURe;R ,.' INSURED ,.;.~ ~

The liability is directbut the insurercannot be heldsolidarily liable withthe insured and otherparties at fault.

Liability is direct andcan be held liable withall the parties at fault.

Liability is based oncontract

Liability is based ontort.

The third-partyliability is only up tothe extent of theinsurance policy andthat required by law

The liability extends tothe amount of actualand other damages.

(Heirs of George Y.Poe v. MalayanInsurance Company,Inc. G.R. No. 156302,Apr. 7, 2009)

Q: What is a "no action" clause?

A: It is a requirement in a policy of liabilityinsurance which provides that suit and finaljudgment be first obtained against the insured,that only thereafter can the person injuredrecover on the policy. (Guingon v. Del Monte,G.R. No. L-21806, Aug. 17, 1967)

Note: A "no action" clause must yield to theprovisions of the Rules of Court regardingmultiplicity of suits. (Shatter v. RTC, G.R. No.78848, Nov. 14, 1988)

Academics CommitteeChaitper.mJt: Abraham D. Cenuillo 11

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,\ireen iVI.CachoSocrates Benjie 1. I\farbilRon Cherne S. Mendoza

Edis()l1 James 1", P<1galilauanMaybelline )\,1.San tiagfl

UNIVERSITY OF SANTO TOMAS ( ..~u,Pacu{taa de D'er ech o Civil 'V' 251

INSURANCE LAW: SURETYSHIP

SURETYSHIP

Q: w~at is suretyship?

A: It I is an agreement whereby the. suretyguarantees the performance by another of anundertaking or an obligation in favor of a thirdparty. (Sec. 175)

Q: What are the distinctions betweensuretyship and property insurance?

A: .SURETYSHIP PROPERTY

INSURANCEIt is an accessory The principalcontract. contract itself.There are three parties: There are only twothe surety, parties: insurer andobligor/debtor, and the insuredoblioee/creditor.More of a credit A contract ofaccommodation with indemnitythe surety assumingprimary liabilitySurety is entitled to No right of recoveryreimbursement from the for the loss theprincipal and his insurer may sustainguarantors for the loss it except when themay suffer under the insurer is entitled tocontract. subrogation.A bond may be May be cancelledcancelled by or with the unilaterally either byconsent of the obligee the insured or byor by the commissioner the insurer onor by the court. grounds provided

by law.Requires acceptance of Does not needthe obligee before it acceptance of anybecomes valid and third party.enforceable.A risk-shifting device, A risk-distributingthe premium paid being device, thein the nature of a premium paid beingservice fee. considered a

ratable contributionto a common fund.

Q: What is the nature of liability of surety?

A:1. Solidary with the bond obligor;

1

2·1 Limited to the amount in the bond (it! cannot be extended by implication);

3'1 It is determined strictly by the termsof the contract of suretyship inrelation to the principal contractbetween the obligor and the obligee.

Q: What are the rules in the payment ofpremiums in suretyship?

A:1. The premium becomes a debt as

soon as the contract of suretyship orbond is perfected and delivered to theobligor (Sec. 77);

2. The contract of suretyship or bondingshall not be valid and binding unlessand until the premium therefore hasbeen paid;

3. Where the obligee has accepted thebond, it shall be valid and enforceablenotwithstanding that the premium hasnot been paid; (Philippine PryceAssurance Corp. v. CA, GR. No.107062, Feb. 21,1994);

4. If the contract of suretyship or bond isnot accepted by, or filed with theobligee, the surety shall collect only areasonable amount;

5. If the non-acceptance of the bond bedue to the fault or negligence of thesurety, no service fee, stamps, ortaxes imposed shall' be collected bythe surety; and

6. In the case of continuing bond (for aterm longer than one year or with nofixed expiration date), the obligorshall pay the subsequent annualpremium as it falls due until thecontract is cancelled. (Sec. 177)


Q: What are the types of surety bonds?

A:1. Contract bonds These are

connected with . construction andsupply contracts. They are for theprotection of the owner against apossible default by the contractor orhis possible failure to paymaterialmen, laborers and sub-contractors.

The position of surety, therefore, is toanswer for a failure of the principal toperform in accordance with the termsand specifications of the contract.

There may be two bonds:

a. Performance bond Onecovering the faithful performanceof the contract; and

b. Payment bond - One coveringthe payment of laborers andmaterial men.

2. Fidelity bonds - They pay anemployer for loss growing out of adishonest act of his employee.

For the purposes of underwriting,they are classified as:

a. Industrial bond Onerequired by privateemployers to cover lossthrough dishonesty ofemployees; and

b. Public official bond - Onerequired of public officers forthe faithfui performances oftheir duties and as acondition of entertainingupon the duties of theiroffices.

3. judicial bonds - They are thosewhich are required in connection withjudicial proceedings.

Academics ComrnitteeChailpCf)fJJZ: Abraham D. GCl1uino T1

l/ia-Cbuir.FJI- ..L/ctidemiG: Jeannie :\. Laurcn tinu'··-'ia-Chuir.JfJ1· .Admin ~ ....1 ~'lIa'h-e:Aissa Celin e J-1. Luna

r /ice-ChairIor !-".'YfJlIl e,:.....De.ligl1: Loise Rae G. Naval

Mercantile Law Com mitte eJ"b;i-d Head- If oil' T. rl mpague)'

A.t'il .• f"b;i-d l-lcad. IIhnilyn Rose S. Sorci"

Members:l,d\Vin J\.hrc r. Baldia

Airccn M. CachoSocrates Bcnjic I. MarbilRon Cherrie S. Mendoza

l~:Ji:'iUnJames F. Pag,1iilallanMaybelline 111.Santiag()

U N I V E R 5 I T Y a F 5 ANT 0 TOM A 5 c't' IPacu{taa d e (])erecfio Ci'fJif9' 253

INSURANCE LAW: LIFE INSURANCE

~, , .' LIFE INSURANCE '.

Q: What is life insurance?

A: It is that which is payable on the death of aperson or on his surviving a specified period,or otherwise contingently on the continuanceof cessation of life (Sec. 180), It is a mutual

agreement by which a party agrees to pay agiven sum on the happening of a particularevent contingent on the duration of human life,in consideration of the payment of a smallersum immediately, or in periodical payments bythe other party.

A:

Q: What are the distinctions between life insurance and fire/marine insurance?

UOl::tl~~l!'~[ ~~=lH'l'.:.mm=lI~t-"1'l"f':"~LIjIt is a contract of investment not contract of

It is a contract of indemnity.indemnity.Always regarded as valuedpolicy. May be open or valued.

May be transferred or assigned to any person The transferee or assignee must have alleven if he has no insurable interest. insurable interest in the thing insured,

The consent of the insurer is not essential to theConsent, in the absence of waiver by the insurer,validity of the assignment of a life policy unless

I expresslL required. is essential in the assignment of the policy.I

Insurable interest in the life or health of the Insurable interest in the property insured mustperson insured need not exist after the insurance exist not only when the insurance takes effect but

I takes effect or when loss occurs. also when the loss occurs.Insurable interest need not have any legal basis. Insurable interest must have a legal basis.

Contingency that is contemplated is a certainThe contingency insured against mayor may notevent, the only uncertainty being the time when it

will take place. occur.The liability of the insurer to make payment is

Liability is uncertain because the happening ofcertain, the only uncertain element being whensuch payment must be made. the peril insured against is uncertain.

May be terminated by the insured but cannot beMay be cancelled by either party and is usuallycancelled by the insurer and is usually a long

for a term of one yearterm contract.The "loss" to the beneficiary caused by the death The reverse is generally true of the loss of

of the insured can seldom be measured property, i.e., it is capable of pecuniaryaccurately in terms of cash value. estimation.

The beneficiary is under no obligation to prove The insured is required to submit proof of hisactual financial loss as a result of the death of actual pecuniary loss as a condition precedent tothe insured in order to collect the insurance. collecting the insurance.

Q: What are the kinds of life insurancepolicies?

A:1. Ordinary life, general life or old line

policy - Insured pays a premiumevery year until he dies. Surrendervalue after 3 years.

2. Limited payment - 'Insured payspremium for a limited period. It ispayable only at the death of theinsured,

3, Endowment Insured pays apremium for a specified period. If heoutlives the period, the face value of

the policy is paid to him; if not, hisbeneficiaries receive benefit.

4. Term insurance - Insured pays onceonly, and he is insured for a specifiedperiod. If he dies within the period, hisbeneficiaries benefit. If he outlives theperiod, no person benefits from theinsurance. Also known as temporaryinsurance.

5. Industrial life - Life insurance entitlingthe insured to pay premiums weekly,or where premiums are payablemonthly or oftener;

6. Variable contract - Any policy orcontract on either a group orindividual basis issued by an


insurance company providing forbenefits or other contractualpayments or values thereunder tovary so as to reflect investmentresults of any segregated portfolio ofinvestment.

Q: What is the effect if the beneficiary willfully bring about the death of the insured?

A:GR: The interest of a beneficiary in a lifeinsurance policy shall be forfeited when thebeneficiary is the principal, accomplice;accessory in willfully bringing about thedeath of the insured, in which event, thenearest relative of the insured shall receivethe proceeds of said insurance, if nototherwise disqualified. (Sec. 12)

XPN:1. The beneficiary acted in self-defense;2. The insured's death was not

intentionally caused (e.g., - thruaccident);

3. Insanity of the beneficiary at the timehe killed the insured.

Q: When is the insurer liable in case ofsuicide?

A:1. The suicide is committed after the

policy has been in force for a periodof 2 years from the date of its issue orof its last reinstatement.

2. The suicide is committed after ashorter period provided in the policyalthough within the 2 year period

3. The suicide is committed in the stateof insanity regardless of the date ofcommission, unless suicide is anexcepted risk. (Sec. 180-A)

Note: The policy cannot provide a periodlonger than 2 years If the policy provides for alohqer period and the suicide is committedwithin said period but after 2 years, the insureris liable.

The insurer is not liable if it can show that thepolicy was obtained with the intention tocommit suicide even in the absence of anysuicide exclusion in the policy

Q: What is the measure of indemnity undera policy of insurance upon life or health?

A: Unless the interest of a person insured issusceptible of exact pecuniary measurement,the measure of indemriity under a policy ofinsurance upon life or health is the sum fixedin the policy. (Sec. 183)

Academics' CommrtteeC},ailper.mn: Abraham D. Genuine I1

Vice-Chair fiJl-//allklJlitJ: Jcannie r\. LaurcnrinoI/ia:-(}Jai,./nr /1dmil1 i~ FillllIlL-e: r\issa C91inc H. Luna

r 'i,r-Cbllir/llr 1_1')'11111 e:>-nc.r(~I/: j,oisc rac C;. Naval

Mercantile Law Committee.rllb/cd /-I,utl.· IT 01)' 'f. ;\ Il1paguey

A.lJI. SlIb/cd 1-1Ct1d- Manilyn Rose S. Sotelo


Aireen T\1. CachoSocrates Bcnjie 1. MarbilRon Cherric: S. Mendoza

Edison .Iames 1'. PagalilauanMaybcllinc M. Santiag"

UNIVERSITY OF SANTO TOMAS t~.?r-r-'Facu(taa de Der eclu: CiviC' ..•.• .J.J

INSURANCE LA W: COMPULSORY MOTOR VEHICLE INSURANCE

COMPULSORY MOTOR VEHICLE:.' LlABILlT--Y INSURANCE > -

Q: What is a no fault indemnity clause?

Q: What is motor vehicle liabilityinsurance?

A: It is a protection coverage that will answerfor legal liability for losses and damages forbodily injuries or property damage that may besustained by another arising from the use andoperation of a motor vehicle by its owner.

Q: What is the purpose of motor vehicleliability insurance?

A: To give immediate financial assistance tovictims of motor vehicle accidents and/or theirdependents, especially if they are poorregardless of financial capability of motorvehicle owners of operators responsible for theaccident sustained. (First Integrated BondingInsurance Co., Inc. v. Hernando, GR. No. L-51221, July 31, 1991)

Q: Who is a passenger?

A: Any fare paying person being transportedand conveyed in and by a' motor vehicle fortransportation of passengers forcompensation, including persons expresslyauthorized by law or by the vehicle's operatoror his agents to ride without fare. (Sec. 373 (b})

Q: Who is a third-party?

A: Any person other than a passenger asdefined! in this section and shall also exclude amember of the household, or a member of thefamily I within the second degree ofconsangUinity or affinity, of a motor vehicleowner [or land transportation operator, aslikewise defined herein, or his employee inrespect of death, bodily injury, or damage toproperty arising out of and in the course ofemployment. (Sec. 373, (c])

Q: What is the meaning of a "motor vehicleowner"?

A: It means the actual legal owner of a motorvehicle, whose name such vehicle is dulyregistered with the Land Transportation Office.(Sec. 373, (dJ)

Q: What is the meaning of "landtransportation operator"? (

A: It means the owner or owners of motorvehicles for transportation of a passenger forcompensation, including school buses. (Sec.373, (eJ)

256

A: It is a clause where the insurer is requiredto pay a third party injured or killed in anaccident without the necessity of proving faultor negligence on the part of the insured. Thereis a stipulated maximum amount to berecovered, (1994 Bar Question)

Q: What are the rules under the "no faultclause?"

A:1. The total indemnity in respect of any

one person shall not exceed P15,000for all motor vehicles (InsuranceMemorandum Circular No. 4-2006)(Sec. 378)

2. Proof of loss:a. Police report of accident;b. Death certificate and evidence

sufficient to establish properpayee;

c. Medical report and evidence ofmedical or hospitaldisbursement. (Sec. 378 [iiJ)

3. Claim may be made against onemotor vehicle only;

4. In case of an occupant of a vehicle,the claim shall lie against the insurerof the vehicle in which the occupant isriding, mounting or dismounting from;

5. In any other case, claim shall lieagainst the insurer of the directlyoffending vehicle;

6. In all cases, the right of the partypaying the claim to recover againstthe owner of the vehicle responsiblefor the accident shall be maintained.

Note: The claimant is not free to choose fromwhich insurer he will claim the "no faultindemnity," as the law, by using the word"shall", makes it mandatory that the claim bemade against the insurer of the vehicle inwhich the occupant is riding, mounting ordismounting from. That said vehicle might notbe the one that caused the accident is of nomoment since the law itself provides that theparty paying may recover against the owner ofthe vehicle responsible for the accident. (PerlaCampania de Seguros, Inc. v. Ancheta, GR.No. L-49599, Aug. 8, 1988)This no-fault claim does not apply to propertydamage. If the total indemnity claim exceedsP15, 000 and there is controversy in respectthereto, the finding of fault may be availed of


by the insurer only as to the excess. The firstP15,OOO shall be paid without regard to thefault.

Q: X was riding a suburban utility vehicle(SUV) covered by a comprehensive motorvehicle liability insurance (CMVLI)underwritten by Fast Pay InsuranceCompany when it collided with a speedingbus owned by RM Travel, Inc. The collisionresulted in serious injuries to X, Y,passengers of the bus; and Z, a pedestrianwaiting for a ride at the scene of thecollision. The police report established thatthe bus was the offending vehicle. The bushad a CMVLI policy issued by DragonInsurance Corporation. X, Y and Z jointlysued RM Travel and Dragon Insurance forindemnity under the Insurance Code of thePhilippines (P.O. 1460). The lower courtapplied the "no-fault" indemnity policy ofthe statute, dismissed the suit against RMTravel, and ordered Dragon Insurance topay indemnity to ali three plaintiffs. Do youagree with the court's judgment? Explain.

A: No. The cause of action of Y is based onthe contract of carriage, while that of X and Zis based on torts. The court should not havedismissed the suit against RM Travel. Thecourt should have ordered Dragon Insuranceto pay each of X, Y and Z to the extent of theinsurance coverage, but whatever amount isagreed upon in the policy should be answeredfirst by RM Travel and the succeeding amountshould be paid by Dragon Insurance up to theamount of the insurance coverage. The excessof the claims of X, Y and Z, over and abovesuch insurance coverage, if any, should beanswered or paid by RM Travel. (2000 BarQuestion)

Q: What is the authorized driver clause?

A: It indemnifies the insured owner againstloss or damage to the car but limits the use ofthe insured vehicle to:

1. The insured himself; or2. Any person who drives on his order

or with his permlssion. (Villacorta v.Insurance Commissioner, G.R. No.54171, Oct. 28, 1980)

Q: What is the main purpose of anauthorized driver clause?

A: Its main purpose is to require a personother than the insured, who drives the car onthe insured's order, such as, his regular driver,or with his permlsslon, such as a friend ormember of the family or the employees of acar service or repair shop to be duly licensed

drivers and have no disqualification to drive amotor vehicle. (Villacorta v. InsuranceCommission, G.R. No. L-54171, Oct. 28, 1980)

Q: Rick de la Cruz insured his passengerjeepney with Asiatic Insurers, lnc, Thepolicy provided that the authorized driverof the vehicle should have a valid andexisting driver's license. The passengerjeepney of Rick de la Cruz which wa~ at thetime driver) by Jay Cruz, figured in anaccident resulting in the death of apassenger. At the time of the accident, JayCruz was licensed to drive but it wasconfiscated by an LTO agent who issuedhim a Traffic Violation Report (TVR) justminutes before the accident. Could AsiaticInsurers, lnc., be made liable under itspolicy? Why?

A: Asiatic Insurers, Inc., should be made liableunder the policy. The fact that the driver wasmerely holding a TVR does not violate thecondition that the driver should have a validand existinq driver's license. Besides, such acondition should be disregarded becausewhatis involved is a passenger jeepney, and what isinvolved here is not own damage insurance butthird party liability where the injured party is athird party not privy to the contract ofinsurance. (2003 Bar Question)

Q: HL insured his brand new car with PinsCo for comprehensive coverage whereinthe insurance company undertook toindemnify him against loss or damage tothe car a) by accidental collision b) by fire,external explosion, burglary, or theft, and c)malicious act. After a month, the car wascarnapped while parked in the parkingspace in front of the Intercontinental Hotelin Makati. HL's wife who was driving saidcar before it was carnapped reportedimmediately the incident to variousgovernment agencies in compliance withthe insurance requirements. Because thecar could not be recovered, HL fileda claimfor the loss of the car with the insurancecompany but it was denied on the groundthat his wife who was driving the car whenit was carnapped was in the possession ofan expired driver's license, a violation ofthe "authorized driver" clause of theinsurance company.May the insurance company be held liableto indemnify HL for the loss of the insuredvehicle? Explain.

A: Yes. The car was lost due to theft. Whatapplies in this case is the "theft" clause, andnot the "authorized driver" clause. It isimmaterial that HL's wife was driving

lthe car

. . IUNIVERSITY OF SANTO TOMAS ~~ttl~257

Fa cu.It a d' d e ([)ereclio Civii '9'

INSURANCE LAW: COMPULSORY MOTOR VEHICLE INSURANCE

with an expired driver's license at the time itwas carnapped. (1993 Bar Question)

Q: Supposing that the car was brought byHL on installment basis and there wereinstallments due and payable before theloss of the car as well as installments notyet payable. Because of the loss of the car,the vendor demanded from HL the unpaidbalance of the promissory note. HLresisted the demahd and claimed that heWas only liable for the installments due andpayable before the loss of the car but nolonger liable for other installments not yetdue at the time of the loss of the car.Decide.

A: The promissory note is not affected bywhatever befalls the subject matter of theaccessory contract. The unpaid balance on thepromissory note should be paid and not onlythe inStallments due and payable before theloss of the car.

Q: What is the theft clause?

A: It is that which includes theft as among therisks insured against. Where a car is unlawfullyand wrongfully taken without the knowledgeand consent of the owner, such takingconstitutes "theft" and it is the theft clause, notthe authorized driver clause which shouldapply. (Palermo v. Pyramid lnc., G.R. No. L-36480, May 31, 1988)

Q: What is a cooperation clause?

A: It is that which provides that the insuredshall give all such information and assistanceas the insurer may require, usually includingattendance at trials or hearings.

Q: Who are the persons subject to thecompulsory motor vehicle liabilityinsurance requirement?

A:1. Motor vehicle owner (tV1VO)or one

who is the actual legal owner of amotor. vehicle in whose name suchvehicle is registered with the LTO; or

2. Land transportation operator (LTO) orone who is the owner of a motorvehicle or vehicles being used forconveying passengers forcompensation including schoolbuses.

258

Q: What are thecompulsory motorinsurance policy?

substitutesvehicle

for aliability

A: MVOs or LTOs, instead of a CMLVI policy,may either:

1. Post a surety bond with theInsurance Commissioner who shallbe made the obligee or creditor inthe bond in such amount oramounts required as limits ofindemnity to answer for the samelosses sought to be covered by aCMLVI policy; or

2. Make a cash deposit with theInsurance Commission in suchamount or amounts required aslimits of indemnity for the samepurpose.

Academics Com mit teeCf,(}irpenrw: Abraham D. Gcnuino II

[./i!1.'*()ltJirfor A£vdcm;,:e Jeannie A. J .aurcntinoI/j((!-C.hati);u' /ld;lIiu i:--, ,F'indl1cc.: Ais sa Coline , I. J .una

l/l~'(!-C.hair.l;J/' LqyrJUI e:'~ /)e.rigfl; J .oise Rae G. Naval

Mercantile Law CommitteeJub}ed UC(}r/.- 11(1), T. /\mpaguey

A.fyl. ~rflbjed '-/flU!- l'vlanilyn Rose S. Sotelo

Members:I':J",in Marc T. Baldi"

Airccn M. CachoSocrates llcnjic l. MarbilRon Chcrric S. Mendoza

Edison .lames I", PagalilauanMa),bcllillc M. Salltiago

• ..'~.l"".~.---- .


TRANSPORTATION LAWS

Q: What are the governing laws?

A:1. Coastwise shipping

a. New Civil Code - primary lawb. Code of Commerce - suppletory

law

2. Carriage from foreign ports toPhilippine portsa. New Civil Code - primary lawb. Code of Commerce - all matters

which are not regulated by theNCC

c. Carriage of Goods by Sea Act -suppletory to the Civil Code

3. Carriage from Philippine ports toforeign ports - the laws of the countryto which the goods are to bedelivered

4. Overland transportationa. New Civil Code - primary lawb. Code of Commerce - suppletory

law

5. Air transportationa. New Civil Code - primary lawb. Code of Commerce - suppletory

lawc. Warsaw Convention

convention for the unification ofthe rules on IntemationalCarriage by Air which was signedin Warsaw on Oct. 12, 1929.

Q: What is a contract of transportation?

A: It is a contract whereby a certain person orassociation of persons obligate themselves totransport persons, things, news from one placeto another for a fixed price. .

Q: Who are the parties to a contract oftransportation?

A:1. Carrier - Engaged in the business of

carrying or transporting passengersor goods or both, by land, water orair, for compensation, offering theirservices to the public (Art. 1732,NCC);

2. Shipper or consignor - A person,partnership or corporation whodelivers the goods to the carrier fortransportation and pays the

consideration or on whose behalfpayment is made;

3. Consignee - The party to whom thecarrier is to deliver the things beingtransported; the one to whom thecarrier may lawfully make delivery inaccordance with its contract ofcarriage;

Note: The shipper and the consigneemay be one person.

4. Passenger - A person who hasentered into a contract of carriage,express or'implied, with the carrierand is entitled to extraordinarydiligence from it.

Q: What is freight?

A: It is the price or compensation paid for thetransportation of goods by a carrier, at sea,from port to port. This term also pertains tothe hire paid for the carriage of goods on landfrom place to place, or on inland streams orlakes.

However, this term may be used in either ofthese two (2) senses:

1. To designate the price for thecarriage, also called freightage; or

2. To designate the goods carried.

Q: What is the test to establish shipper-carrier relationship?

A: When the control and possession of goodspasses to the carrier and nothing remains tobe done by the shipper, then it can be saidwith certainty that the relation of shipper andcarrier has been established (CampaniaMaritima v. Insurance Co. of North America,G.R. No. L-18965, Oct. 30, 1964).

Q: Is the ticket issued to a passenger bythe carrier a complete contract?

A: Yes, the ticket has all the elements of acomplete contract, namely:

1. The consent of the contractingparties;

2. Cause or consideration - The farepaid by the passenger as stated inthe ticket; and

3. Object - The transportation of thepassenger from the place ofdeparture to the place of destinationwhich are stated in the ticket.(Guerrero v. Madrigal Shipping Co.,G.R. No. L-12951, Nov. 17, 1959)


Pacu{tad de (j)ereclio Ci-ui]~.~, 259

TRANSPORTATION LA\X/S

Note: Issuance of a ticket is not indispensablein dealing with the contract of carriage ofpassengers.

Q: What are the 2 aspects of a ticket?

A:1. A contract to carry (at some future

time), which contract is consensualand is necessarily perfected by mereconsent; and

2. A contract 'of carriage' or 'of commoncarriage' itself which should beconsidered as a real contract for notuntil the carrier is actually used canthe carrier be said to have alreadyassumed the obligation of a carrier.(British Airways, Inc. v. CA, G.R. No.92288,Feb.9,1993)

Q: City Railways, Inc. (CRI) provides trainservice, for a fee, to commuters fromManila to Calamba, Laguna. Commuters arerequired to purchase tickets and thenproceed to designated loading andunloading facilities to board the train.Ricardo Santos purchased a ticket forCalamba and entered the station. Whilewaiting, he had an altercation with thesecurity guard of CRI leading to a fistfight.Ricardo Santos fell on the railway just as atrain was entering the station. RicardoSantos Was run over by the train. He died.

In the action for damages filed by the heirsof Ricardo Santos, CRI interposed lack ofcause of action, contending that themishap occurred before Ricardo Santosboarded the train and that it was not gUiltyof negligence. Decide.

A: CRI's contention that there is lack of causeof action is incorrect.

IA contract of transportation already existsbetween the carrier and the passenger at thattime since a ticket was issued. This isevidenced by the fact that a ticket was issuedto him and he presented himself at the properplace and in a proper manner fortransportation. Also, the duty of a commoncarrier to provide safety to its passengers soobligates it not only during the course of thetrip but for so long as the passengers arewithin its premises and where they ought to bein pursuance to the contract of carriage.Assuming that the employer of the securityguard is CRI, the latter now becomes liable forthe death of the passenger through thenegligence or willful acts of its employee,although he may have acted beyond the scope

260

of his authority or in violation of the orders ofthe common carrier. This liability does notcease upon proof that they exercised all thediligence of a good father of a family in theselection and supervision of their employees.(LRTA v. Navidad, G.R. No. 145804, Feb. 6,2003) (2008 Bar Question)

Acadcm ics Co m mirrecC.h(}irpeJ:rrJll: Abraham D. (;clluin() 11

I., ·i(e~Cj,tJirj(),. .///."(Jdcmit:r: J canni.. A. Lauren tinoVia!*Cf,a;rji;r/ldmi" e.~ FillfJl1a: Aissa Cclinc II. Luna

I/;<r-C,bmi-.fi!r 1J1)'01l1 C.,., f)e.r!~Il: Loise Rru- (;. Naval

Mercantile Law CommitteeJ,,;';i'd /1"£1'" I [oil' T ,11111'''gllc),

./[.r.r/ . .fllli;ed l lcad: Manil),n Rosc S. SOlclo

Members:I ':d",in Marc T. Baldi"

Airccn [Vi. Cael",Soccatcs Benjic I. MacbilRon Chcrric S. rVIcnJo%'il

Edison .lames F. Pagalilawl!1Maybe/line [Vi. Santiago


THE NEW CIVIL CODE'(ARTS. 1732·1766)

Q: What are common carriers?

A: Common carriers are . persons,corporations, firms or associations engaged inthe business of carrying or transportingpassengers or goods or both, by land, water,'or air, for compensation, offering their servicesto the public (Art. 1732).

Q: What are the elements of a commoncarrier:

A: PeBuLaCoPu1. Must be a Person, corporation, firm or

association;2. Must be engaged in the Business of

carrying or transporting passengersor goods or both;

3. The carriage or transport must eitherbe by Land, water or air;

4. The service is for Compensation; and5. The service is offered to the Public.

Q: What are the tests for determining, hether a party is a common carrier?

A:1. He must undertake to carry for ali

people indifferently;2. He must also be engaged in the

business of carrying goods for othersas a public employment, and musthold himself out as ready to engagein the transportation of goods orperson generally as a business andnot as a casual occupation;

3. He must undertake to carry goods ofthe kind to which his business isconfined;

4. He must undertake to carry by themethod by which his business isconducted and over his establishedroads; and

5. The transportation must be for hire(First Philippine Industrial Corporationv. CA, G.R. No. 12594B, Oec. 29,199B)

Note: The contract of carriage is basically acontract of lease of services.

A customs broker may be regarded as acommon carrier. Article 1732 does notdistinguish between one whose principalbusiness activity is the carrying of goods andone who does such c~rrying only as anancillary activity. (Schmitz Transport V.Transport Venture Inc" G.R. No. 150255, Apr.22,2005)

Q: What factors justify refusal to acceptcontract by a common carrier?

A:1. Suitability of the vessels of the

company for the transportation ofsuch products;

2, Reasonable possibility of danger ordisaster, resulting from theirtransportation in the form and underthe conditions in which they areoffered for carriage;

3. The general nature of the businessdone by the carrier; or

4. All the attendant circumstances whichmight affect the question of thereasonable necessity for the refusalby the carrier to undertake thetransportation of a class ofmerchandise. (Pal V. CA, G.R. No.119706, Mar. 14, 1996)

UNIVERSITY OF SANTO TOMAS ~~.,:,"'~

Pacu[tad de CDerecfio Ci'Vi!¥' 261

,TRANSPORTATION LAWS: NEW CIVIL CODE: COI\1MON CARRIERS

Q: Di~tih9UiShprivate carrier.

A: I

a common carrier from a

ICOMMON PRIVATE CARRIERCARRIER

Holds itself out to ,Agrees in some specialall persons who case with some privatechoose to employ individual to carry forhim, as ready to hire.carry for hire.

Requires Only ordinary diligenceextraordinarydiliqence.Bound to carry all Not bound to carry forwho offer such any reason, unless itgoods as it is enters into a specialaccustomed to agreement to do so.carry and tenderreasonablecompensation forcarrying them.Except as Parties may limit theprovided by law, carrier's liability,parties cannot provided that theagree on limiting limitation is not contrarythe carrier's to law, public morals orliability good customsIt is a public Does not hold itself outservice and is as engaged in thetherefore subject business for the public,to regulation. and is therefore not

subject to regulation asa common carrier

There is a No fault or negligencepresumption of is presumednegligence or faultin case of injury ordamage to goods.

Q: Can' a common carrier be converted intoa private carrier?

A: Yes, in case of a charter party contract, thecharter party may convert a common carrierinto a private carrier provided that it must be abareboat or demise charter where thecharterer mans the vessel with his own peopleand becomes, in effect, the owner for thevoyage or service stipulated (Cstiex Phils. v.Sulpicio Lines, GR. No. 131166, Sept. 30,1999).

Q: How is common carrier distinguishedfrom towage, arrastre and stevedoring?

II

A:1. Contract of towage - A contract

whereby a vessel pulls another.vessel from one place to anotherregardless of whether or not the latter

262

vesselis laden with merchandise.' It isnot a contract of carriage.

2. Arrastre - refers to hauling of cargo,comprehends the handling of cargoon the wharf or between tileestablishment of the consignee orshipper and the ship's tackle.

3. Stevedoring - refers to the handlingof the cargo in the holds of the vesselor between the ship's tackle and theholds of the vessel: (CompaniaMaritima v. Allied Free WorkersUnion, GR. No. L-43813, May 24,1977)

Q: If a vessel was not issued a certificate ofpublic convenience, and did not have aregular trip or schedule nor a fixed route,may it still be considered a common carrierand not a private carrier?

A: Yes. To be considered a common carrier, itis not necessary that the carrier be issued acertificate of public convenience, and thispublic character is not altered by the fact thatthe carriage of the goods in question wasperiodic, occasional, episodic, or unscheduled,

Art. 1732 of the Civil Code avoids making anydistinction between a person or enterpriseoffering transportation service on a regular orscheduled basis and one offering SUch serviceon occasional, episodic, or unscheduled basis.It also makes no distinction between onewhose principal business activity is thecarrying of person or goods or both, and onewho does such carrying on as an ancillaryactivity.

Neither does Art. 1732 distinguish between acarrier offering its services to the generalpublic, and one who offers services or solicitsbusiness only from a narrow segment of thegeneral population or limited clientele.(Loadstar Shipping Co., Inc. v. CA, G.R. No.131621, Sept. 28, 1999)


Q: What is the rule on "prohibition ondiscrimination"?

A:GR: The law requires common carriers tocarry for all persons, either passengers orproperty, for exactly the same charge for alike or contemporaneous service in thetransportation of like kind of traffic undersubstantially similar circumstances orconditions.

XPN: When the actual cost of handling andtransporting is different, then different ratesmay be charged:

1. Merchandise of like quantity may notbe considered alike - The quantity,kind and quality may be exactly thesame, and yet not be alike, so far asthe cost of transportation isconcerned;

2. Shipments may be alike althoughcomposed of different classes ofmerchandise - Difference in thecharge for handling and transportingmay only be made when thedifference is based upon actual cost.(United States v. Quinajon andQuitoriano, G. R. No. 8686, July 30,1915)

~l6f.l:\1116j_j.llij')lllllt.1Ij

Q: What is meant by extraordinarydiligence?

A: It is that extreme measure of care andcaution which persons of unusual prudenceand circumspection use for securing andpreserving their own property or rights. Thelaw requires common carriers to renderservice with the greatest skllt and utmostforesiqht.

Q: What is the reason for requiringcommon carriers to observe extraordinarydiligence?

A: The nature of the business of commoncarriers and the exigencies of public policydemand that they observe extraordinarydiligence.

Q: When does the duty to exerciseextraordinary diligence start and end withrespect to carriaqe of goods?

A: It lasts from the time the goods areunconditionally placed in the possession of,and received by the carrier for transportationuntil the same are delivered, actually orconstructively, by the carrier to the consigneeor to the person who has a right to receivethem. (Art. 1736)

Q: When does liability of the commoncarrier begin?

A: It begins with the actual delivery of thegoods for transportation, and not merely withthe formal execution of a receipt or bill oflading; the issuance of a bill of lading is notnecessary to complete delivery andacceptance. (Compania Maritima v. InsuranceCo. of North America, G.R. No. L-18965, Oct.30, 1964)

Q: WHen does the duty to exerciseextraordinary diligence start and end withrespect to transport of passengers?

A: From the moment the person whopurchases the ticket from the carrier presentshimself at the proper place and in a propermanner to be transported.

The relation of carrier and passengercontinues until the passenger has been landedat the port of destination and has left thevessel owner's dock or premises. Oncecreated, the relationship will not ordinarilyterminate until the passenger has, afterreaching his destination, safely alighted fromthe carrier's conveyance or had a reasonableopportunity to leave the carrier's premises.(Aboitiz Shipping Corp. v. CA, G.R. No. 84458,Nov. 6, 1989)

Q: If the passenger, who was still in thecarrier's premises after the lapse of onehour from the time he disembarked, wasinjured, may he still be considered apassenger? Should the common carrierstill exercise extraordinary diligence?

A: All persons who remain on the premiseswithin a reasonable time after leaving theconveyance are to be deemed passengers,and what is a reasonable time or a reasonabledelay within this rule is to be determined fromall the circumstances, and includes areasonable time to see after his baggage andprepare for his departure. The carrier-passenger relationship is not terminatedmerely by the fact that the person transported

UNIVERSITY OF SANTO TOMAS ~~-"--")263Pacu[taa de i})ereclio Civif' .

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has been carried to his destination if, forexample, such person remains in the carrier'spremises to claim his baggage. (AboitizShipping Corp. v. CA, G.R. No. 84458, Nov. 6,1989) IQ: Ma~ a common carrier be held liable to apassenger who was injured and eventuallydied While trying to board the vehicle?

IA: Yes. It is the duty of common carriers ofpassengers to afford passengers anopportunity to board and enter, and they areliable for injuries suffered by boardingpassengers resulting from the sudden startingup or jerking of their conveyances while theyare doing so.

The victim, by stepping and standing on theplatform of the bus, is already considered apassenger and is entitled all the rights andprotection pertaining to such a contractualrelation. (Dangwa Transportation Co., Inc. v.CA, G.R. No. 95582, Oct. 7, 1991)

Q: What is the presumption on the loss,destruction, or deterioration of goods?

A:GR: The common carrier is presumed tohave been at fault or to have actednegligently when the qoods transported arelost, destroyed or deteriorated.

Note: The presumption of fault ornegligence against the carrier is only adisputable presumption. The law, increating such a presumption merelyrelieves the owner of the goods, for thetime being, from introducing evidence tofasten the negligence on the former,because the presumption stands in theplace of evidence.

XPN: When the same is due to any of thefollowing causes only:

1. Flood, storm, earthquake, lightning orother natural .disaster or calamity.Provided, the following conditions arepresent:a. natural disaster was the

proximate and only cause;b. carrier exercised diligence to

prevent or minimize loss before,during and after the occurrenceof the natural disaster; andc. no delay. (Art. 1740, NCC)

2. Act of the public enemy in war,whether international or civil,provided:a. act was the proximate and only

cause;b. carrier exercised diligence to

prevent or minimize loss before,during and after the act; and

c. no delay. (Art. 1740, NCC)

3. Act or omission of the shipper orowner of the goods, provided:a. if proximate and only cause,

exempting;b. if contributory negligence,

mitigating.

4. The character of the goods or defectsin the packing or in the containers.Provided, carrier exercised duediligence to forestall or prevent loss.

Note: If the fact of improper packingis known to the carrier or its servants,or apparent upon ordinaryobservation, but it accepts the goodsnotwithstanding such condition, it isnot relieved from responsibility forloss or injury resulting therefrom.(Southern Lines lrtc., v. CA, G.R. No.L-16629, Jan. 31, 1962)

5. Order or act of competent authority.Provided, the authority is with powerto issue order.

Note: In all cases other than thoseenumerated above, there ispresumption of negligence even ifthere is an agreement limiting theliability of the common carrier in thevigilance over the goods.

Q: Are mechanical defects' consideredfortuitous events? Give illustrations.

A: No. (Sweet Lines, Inc. v. CA, G.R. No. L-46340, Apr. 29, 1983)

1. Tire blowout of a jeep is not afortuitous event where there exists aspecific act of negligence by thecarrier consisting of the fact that thejeepney was overloaded andspeeding at the time of the incident.(Juntilla v. Fontanar, G.R. No. L-45637, May 31, 1985)

2. Defective brakes cannot beconsidered fortuitous in character.(Vergara v. CA, G.R. No. 77679,Sept. 30, 1987)


Q: Is fire a natural disaster? .

A: No. This must be so as it arises almostinvariably from some act of man or by humanmeans. It does not fall within the category ofan act of God unless caused by lightning or byother natural disaster or calamity. It may evenbe caused by the actual fault or privity of thecarrier. (Eastern Shipping Lines v. lAC, G.R.No. L-69044, May 29, 1987)

Q: Is the occurrence of a typhoon afortuitous event?

A:GR: Yes, if all the elements of a naturaldisaster or calamity concur. This holds trueespecially if the vessel was seaworthy atthe time it undertook that fateful voyageand that it was confirmed with the CoastGuard that the weather condition wouldpermit safe travel of the vessel to itsdestination. (Philippine American GeneralInsurance Co., Inc. v. MGG MarineServices, Inc., G.R. No. 135645, Mar.. 8,2002)

XPN: If a vessel sank due to a typhoon,and there was failure to ascertain thedirection of the storm and the weathercondition of the path they would betraversing, it constitutes lack of foresightand minimum vigilance over its cargoestaking into account the surroundingcircumstances of the case. Thus, thecommon carrier will still be liable. (Arada v.CA, G.R. No. 98243, July 1, 1992)

Q: Pedro contracted with Juan for thehauling of 750 cartons of milk from awarehouse in Makati to Pedro'sestablishment in Urdaneta, Pangasinan.Juan loaded in Makati the merchandise onto his trucks: 150 cartons were loaded on a.truck driven by himself, while 600 cartonswere placed on board the other truck whichwas driven by Manny, Juan's driver andemployee. Only 150 boxes of milk weredelivered to Pedro. The other 600 boxesnever reached him, since the truck whichcarried these boxes was hijacked along theMacArthur Highway in Paniqui, Tarlac, byarmed men who took with them the truck,its driver, his helper and the cargo.Pedro demanded payment of the value ofthe lost merchandise and argued that Juanshould be held liable for the value of theundelivered goods for failure to exerciseextraordinary diligence. Decide.

A: A common carrier is liable even for acts ofstrangers like thieves or robbers, except where

such thieves or robbers acted "with grave orirresistible threat, violence or force." Therefore,Juan is not liable for the value of theundelivered merchandise which was lostbecause of an event that is beyond his control.(De Guzman v. CA, G.R. No. L-47822, Dec.22, 1988)

Q: M. Dizon Trucking entered into a haulingcontract with Fairgoods Co whereby theformer bound itself to haul the latter's 2000sacks of soya bean meal from Manila PortArea to Calamba, Laguna. To carry outfaithfully its obligation Dizonsubcontracted with Enrico Reyes thedelivery of 400 sacks of the soya beanmeal. Aside from the driver, three maleemployees of Reyes rode on the truck withthe cargo. While the truck was onits way toLaguna two strangers suddenly stoppedthe truck and hijacked the cargo.Investigation by the police disclosed thatone of the hijackers was armed with abladed weapon while the other wasunarmed. For failure to deliver the 400sacks, Fairgoods sued Dizon for damages.Dizon in turn set up a 3rd party complaintagainst Reyes where he contended that theloss was due to force majeure. Did thehijacking constitute force majeure toexculpate Reyes from any liability toDizon? Discuss fully.

A: No. The hijacking in this case cannot beconsidered force majeure. Only one of the twohijackers was armed with a bladed weapon. Asagainst the 4 male employees of Reyes, 2hijackers, with only one of them being armedwith a bladed weapon, cannot be consideredforce majeure. The hijackers did not act withgrave or irresistible threat, violence or force.(1995 Bar Question)

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TRANSPORTATION LAWS: NEW CIVIL CODE: COMMON CJ\RRIERS

Q: What is, the rule if there is contributorynegligence on the part of the shipper?

A: If the shipper or owner merely contributedto the loss, destruction or deterioration of thegoods, the proximate cause thereof being thenegligence of the common carrier, the lattershall be liable for damages, which however,shall be equitably reduced. (Art. 1741)

i

Q: ArJ there exceptions to Art. 1741?I

A: Yes. In a collision case (moving objectstrikes' another moving object) and allisioncases (moving object strikes a stationaryobject). In such cases, the parties are liable fortheir own damages.

Q: What are the defenses available to anycommon carrier to limit or exempt it fromliability?

A:1. Observance of extraordinary

diligence; or2. Proximate cause of the incident are

those mentioned in Art. 1734. (2001Bar Question)

Q: What is the rule as to unloading, storageand stoppage in transitu?

A:GR: The common carrier's duty to observeextraordinary diligence in the vigilance overthe goods remains in fUll force and effecteven when they are temporarily unloadedor stored in transit.

XPN: When the shipper or owner has\\\u\i~ ,,'<:o~ r:::,f, \\;\~ 'i1'B\;\\ r:::,f, '<:o\c>ppage intransitu.

Q: What is the right of stoppage intransitu?

A: It is the right exercised by the seller bystopping the delivery of the goods to a certainbuyer or consignee (because of insolvency)when such goods are already in transit.

266

Q: What is the diligence required inexercising the right of stoppage intransitu?

A: Ordinary diligence because of the following:1. It is holding the goods in the capacity

of an ordinary bailee orwarehouseman and not as a carrier;

2, There is a change of contract from acontract of carriage to a contract ofdeposit;

Note: If the seller instructs to deliverit somewhere else, a new contract ofcarriage is formed and the carriermust be paid accordingly.

l@jt4J·',··mrtU4·ii,t .•• mrnQ: What are. the rules regarding the time ofdelivery of goods and delay?

A:1. If there is an agreement as to time of

delivery - delivery must be within thetime stipulated in the contract or bill oflading;

2. If there is no agreement - deliverymust be within a reasonable time.(Saludo, Jr. v. CA, G.R. No. 95536,Mar. 23, 1992)

Q: To whom should delivery be made?

A: It must be delivered, actually orconstructively, to the consignee or to theperson who has a right to receive them,

Note: Delivery of the cargo to the customsautnonuas 'IS not delivery to the consignee :-to the person who has a right to receive ~~:;;-(lu Do & Lu Ym Corp. v. Binamira, G.R. No. L-9840, Apr. 22, 1957)

Q: If there is delay in the delivery of goods,what is the liability of the carrier?

A: The carrier shall be liable for damagesimmediately and proximately resulting fromsuch neglect of duty. (Saluda, Jr. v. CA, GRNo. 95536, Mar, 23, 1992)


Q: What are the Civil Code provisionsregarding delay in the transportation ofgoods?

A:1. Those who in the performance of

their obligations are guilty of fraud,negligence, or delay, and those whoin any manner contravene the tenorthereof, are liable for damages; (Art.1170)

2. If the common carrier negligentlyincurs in delay in transporting thegoods, a natural disaster shall notfree such carrier from responsibility;(Art. 1740)

3. If the common carrier, without justcause, delays the transportation ofthe goods or changes the stipulatedor usual route, the contract limitingthe common carrier's liability cannotbe availed of in case of the loss,destruction, or deterioration of thegoods; (Art. 1747)

4. An agreement limiting the commoncarrier's liability for delay on accountof strikes or riots is valid. (Art. 1748)

Q: Are stipulations limiting the carrier'sliability valid?

A: Yes, provided it be:1. In writing, signed by the shipper or

owner;2. Supported by a valuable

consideration other than the servicerendered by the common carrier; and

3. Reasonable, just and not contrary topublic policy (Art. 1744).

Q: What are void stipulations in a contractof carriage?

A:1. That the goods are transported at the

risk of the owner or shipper;

2. That the common carrier will not beliable for any loss, destruction, ordeterioration of the goods;

3. That the common carrier need notobserve any diligence in the custodyof the goods;

4. That the common carrier shallexercise a degree of diligence lessthan that of a good father of a family,or a man of ordinary prudence in thevigilance over the movablestransported;

5. That the common carrier shall not beresponsible for the acts or omissionsof his or its employees;

6. That the common carrier's liability foracts committed by thieves,· or ofrobbers who do not act with grave orirresistible threat, violence or fcirce, isdispensed with or diminished; .

7. That the common carrier is notresponsible for the loss, destructionor deterioration of goods on accountof the defective condition of the car,vehicle, ship, airplane or otherequipment used in the contract ofcarriage; and

8. Any similar stipulation that isunreasonable, unjust and contrary topublic policy. (Art. 1745)

Q: Are stipulations made in a contract ofprivate carriage subject to the same rulesas that of common carriers?

A: In a contract of private carriage, the parties.may freely stipulate their duties and obligationswhich perforce would be binding on them.Unlike in a contract involving a commoncarrier, private carriage does not involve thegeneral public. Thus, a charterer, in exchangefor convenience and economy, may opt to setaside the protection of the law on commoncarriers. When the charterer decides toexercise this option, he takes a normalbusiness risk. (Valenzuela Hardwood andIndustrial Supply, Inc. v. CA, G.R. No. 102316,June 30, 1997)


Eo culr a d' de i})ereclioCivif ~.·267


Q: What are some stipulations limiting theliability of common carriers which may bevalid?

A:1. An agreement limiting the common

carrier's liability for delay on accountof strikes or riots. (Art. 1748)

A stipulation that the commoncarrier's liability is limited to the valueof the goods appearing in the bill oflading, unless the shipper or ownerdeclares a greater value and pays

/

1 corresponding freight. (Art. 1749)

3., A contract fixing the sum that may berecovered for the loss, destruction,and deterioration of goods is binding

I provided that it is just and reasonableunder the circumstances and it hasbeen fairly and freely agreed upon.(Art. 1750)

2.

4. When a passenger is carriedgratuitously, a stipulation limiting thecommon carrier's liability fornegligence is valid, but not for willfulacts or gross negligence. However,the reduction of fare does not justifyany limitation of the common carrier'sliability. (Art. 1758)

Note: When a shipper shipped his goods on.board the vessel and paid the correspondingfreight, he in effect, impliedly accepted theterms and conditions stated in the bill of ladingas if he actually signed it. This is more sowhere he is both the shipper and consignee.Thus, such bill of lading is valid and binding.(American President Lines Ltd. v. Klepper, 110Phil.243)

But where the letters were so small that theyare hard to read, this would not warrant apresumption that the passenger was aware ofthose conditions such that he fairly and freelyagreed. He is not and cannot therefore bebound by such conditions printed at the backof the ticket. (Shewaram v. Philippine Airlines,Inc., GR No. L-20099, July 7, 1966)

Q: Maya stipulation limiting the commoncarrier's liability be annulled by the shipperor owner?

A: Yes, if the common carrier refused to carrythe goods unless the shipper or owner agreedto such stipulation. However, under thisprovision, annulment of the agreement limitingthe carrier's liability is still necessary (Alt.1746).

268

Note: There is no need to annull, if thecommon carrier without just cause:

1. Delays the transportation of thegoods; or

2. Changes the stipulated or usualroute, the contract limiting thecommon carrier's liability cannot beavailed of in case of loss, destruction,or deterioration of the goods. (Art.1747)

Q: What is the effect of the agreementlimiting liability to the presumption ofnegligence of the carrier?

A: Even if there is an agreement limiting theliability of the common carrier in the vigilanceover the goods, the common carrier is stilldisputably presumed to have been negligent incase of its loss, destruction or deterioration.(Art. 1752)

Q: What law shall govern the liability of thecommon carrier in case of loss,destruction, or deterioration?

A: The law of the country to which the goodsare to be transported.

Q: What if the parties stipulate that the lawof some other country shall govern, is thatvalid?

A: Yes. This is called a paramount clause - astipulation that a particular law will govern,provided that it is not against public policy.

Q: What are the rules with regard topassenger's baggage?

A:1. If the baggage is not in the personal

custody of passenger or hisemployee: The provisions of Articles1733 to 1753 shall apply to thepassenger's baggage; and

2. If the baggage is in the passenger'spersonal custody or his employee:a. The common carrier shall be

responsible for shipper'sbaggage· as depositaries,provided that notice was given tothem, or to their employees, ofthe effects brought by the guestsand that, on the part of theshipper, they take theprecautions which said commoncarriers or their substitutesadvised relative to the care andvigilance of their effects. (Art.1998, NCC)


b. The responsibility shall includethe loss of, or injury to thepersonal property of the shippercaused by the employees of thecommon carrier as well asstrangers; but not that which mayproceed from any force majeure.(Art. 2000, NCC)

c. The act of a thief or robber, whohas entered the carrier is notdeemed force majeure, unless itis done with the use of arms orthrough an irresistible force. (Art.2001, NCC)

Q: Marino was a passenger on a train.Another passenger, Juancho, had taken agallon of gasoline placed in a plastic baginto the same coach' where Marino wasriding. The gasoline ignited and explodedcausing injury to Marino who filed a civilsuit for damages against the railwaycompany claiming that Juancho 'shouldhave been subjected to inspection by itsconductor. The railway companydisclaimed liability resulting from theexplosion contending that it was unawareof the contents of the plastic bag andinvoking the right of Juancho to privacy.

1. Should the railway company beheld liable for damages?d. The common carrier is not liable

for compensation if the loss isdue to the acts of the shipper, hisfamily, or servants, or if the lossarises from the character of thethings brought into the carrier.(Art. 2002, NCC) A:

e. The common carrier cannot freehimself from responsibility byposting notices to the effect thathe is not liable for the articlesbrought by the passenger. Anystipulation between the commoncarrier, and the shipper wherebythe responsibility of the former asset forth in Articles 1998 to 2001is suppressed or diminished shallbe void. (Art. 2003, NCC)

-. tonio, a paying passenger, boarded a_~S bound for Batangas City. He chose a

at the front row, near the bus driver,ri old the bus driver that he had valuable

.• s in his hand carried bag which he thend beside the driver's seat. Not having

s = : for 24 hours, he requested the driver- zeep an eye on the bag should he doze

- during the trip. While Antonio wasas =ep, another passenger took the bag

and alighted at Calamba, Laguna.Id the common carrier be held liable by

- . nio for the loss?

'. r'es. Ordinarily. the common carrier is not~ e 'or acts of other passengers. But the--r;"lon carrier cannot relieve itself from::..::I J if the common carrier's employees

_.d have prevented the act or omission by3 ~ cising due diligence. In this case, thecassenqsr asked the driver to keep an eye on.- :; bag which was placed beside the driver'ssea . If the driver exercised due diligence, heco Id have prevented the loss of the bag.(1997Bar Question)

2. If it were an airline companyinvolved, would your answer bethe same? Explain briefly.

1. No. The railway company is not liablefor damages. In overlandtransportation, the common carrier isnot bound nor empowered to makean examination on the contents ofpackages or bags, particularly thosehandcarried by passengers. (Nocumv. Laguna Tayabas Bus Company,G.R. No. L-23733, Oct. 31, 1969)

2. If it were an airline company, thecommon carrier should be madeliable. In case of air carriers, it isunlawful to carry flammable materialsin passenger aircrafts, and airlinecompanies may open and investigatesuspicious packages and cargoespursuant to R.A. 6235. (1992 BarQuestion)

UNIVERSITY OFSANTO TOMAS

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Q: Who are hot considered passengers?

A:b. One who remains on a carrier for an

unreasonable length of time after hehas been afforded every safeopportunity to alight;

c. One who has boarded by fraud,stealth, or deceit;

d. One who attempts to board a movingvehicle, although he has a ticket,unless the attempt be with .theknowledge and consent of the carrier;

e. One who has boarded a wrong

I:vehicle, has been properly informed

1

0f such fact, and on alighting, is! injured by the carrier;

f. 'Invited guests and accommodationpassengers.

Note: The carrier is thus not obliged toexercise extraordinary diligence but onlyordinary diligence in these instances.

Q: What is the duty of a common carrier toits passengers?

A: A common carrier is bound to carry thepassengers safely as far as human care andforesight can provide, using the utmostdiligence of very cautious persons, with dueregard for all the circumstances. (Art. 1755)

Q: When does this duty begin to exist?

A: The duty exists from the moment theperson offers to be transported placing himselfin the care and control of the common carrierwho accepts him as such passenger. Theduty continues until the passenger has, afterreaching his destination, safely alighted fromthe carrier's conveyance or has had areasonable opportunity to leave the carrier'spremises and to look after his baggage andprepare for his departure.

Q: Is there a presumption of negligence insafety of passengers? .

A: In case of death of or injuries topassengers, common carriers are presumed tohave been at fault or to have acted negligently,unless they prove that they observedextraordinary diligence. (Art. 1756)

Q: In a court case involving claims for

270

damages arising from death and injury ofbus passengers, counsel for the busoperator files a demurrer to evidencearguing that the complaint should bedismissed because the plaintiffs did notsubmit any evidence that the operator or itsemployees were negligent. If you Were thejudge, would you dismiss the complaint?

A: No. In the carriage of passengers, thefailure of the common carrier to bring thepassengers safely to their destinationimmediately raises the presumption that suchfailure is attributable to the carrier's fault ornegligence. In the case at bar, the fact ofdeath and injury of the bus passengers raisesthe presumption of fault or negligence on thepart of the carrier. The carrier must rebut suchpresumption. Otherwise, the conclusion can beproperly made that the carrier failed toexercise extraordinary diligence as required bylaw. (1997 Bar Question)

Q: Are stipulations limiting the commoncarrier's responsibility for the safety ofpassengers valid?

A: No. The responsibility of a common carrierfor the safety of passengers as required inArticles 1733 and 1755 cannot be dispensedwith or lessened by stipulation, by posting ofnotices, by statements on tickets, or otherwise.(Art. 1757)

Q: What is the rule in case of non-payihgpassengers or if the fare is reduced?

A: When a passenger is carried gratuitously, astipulation limiting the common carrier's liabilityfor negligence is valid, but not for willful acts orgross negligence. However, the reduction offare does not justify any limitation of thecommon carrier'sl1ability. (Art. 1758)

Q: What is assumption of risk on the part ofpassengers?

A: Passengers must take such risks incident tothe mode of travel.

Note: Carriers are not insurers of any and allrisks to passengers and goods. It merelyundertakes to perform certain duties to thepublic as the law imposes, and holds itselfliable for any breach thereof. (Pi/api! v. CA,G.R. No. 52159, Oec. 22, 1989)

Q: Marites, a paying bus passenger, was hitabove her left eye by a stone hurled at thebus by an unidentified bystander as thebus was speeding through the NationalHighway. The bus owner's personnel lost


no time in bringing Marites to the provincialhospital where she was confined andtreated. Marites wants to sue the buscompany for damages and seeks youradvice whether she can legally hold thebus company liable. What will you adviseher?

A: Marites cannot legally hold the buscompany liable. There is no showing that anysuch incident previously happened so as toimpose an obligation on the part of thepersonnel of the bus company to warn thepassengers and to take the necessaryprecaution. Such hurling of a stone constitutesfortuitous event in this case. The bus companyis not an insurer of the absolute safety of itspassengers. (Pi/api/ v, CA; GR No. 52159,Dec. 22, 1989) (1994 Bar Question)

Q: Is a carrier liable to its passengers fordamages caused by mechanical defects ofequipments/appliances installed in thecarrier?

A: Yes, whenever it appears that the defectwould have been discovered by the carrier if ithad exercised the degree of care which underthe circumstances was incumbent upon it, withregard to inspection and. application of thenecessary tests. The manufacturer isconsidered as being in law the agent orservant of the carrier, as far as regards thework of constructing the appliance. The goodrepute of the manufacturer will not relieve thecarrier from liability.

The rationale of the carrier's liability is the factthat the passenger has neither choice norcontrol over the carrier in the selection and useof the equipment and appliances in use by thecarrier. Having no privity whatever with themanufacturer or vendor of the defectiveequipment, the passenger has no remedyagainst him, while the carrier usually has. It ISbut 10gicE:I.therefore, that the carrier, while notin insurer of the safety of his passengers,should nevertheless be held to ans~ver for theflaws of his equipment if such flaws were at alldiscoverable. (Necesito v. Paras, GR. No. L-10605, June 30, 1958)

Q: Are common carriers liable for acts ofits employees?

A: Common carriers are liable for the death ofor injuries to passengers through thenegligence or willful acts of the former's

employees, although such employees mayhave acted beyond the scope of their authorityor in violation of the orders of the commoncarriers.

The liability of the common carriers does notcease upon proof that they exercised all thediligence of a good father of a family in theselection and supervision of their employees.(Art. 1759)

Q: What is the rationale behind thisprinciple?

A: The basis of the carrier's liability forassaults on passengers committed by itsdrivers rests on the principle that it is thecarrier's implied duty to transport thepassenger safely. As between the carrier andthe passenger, the former must bear the risk ofwrongful acts or negligence of the carrier'semployees against passengers, since it, andnot the passengers, has power to select andremove them. (Maranan v. Perez, GR. No. L-22272, June 26, 1967)

!I

Q: What is the extent of liability of commoncarriers for acts of co-passengers orstrangers?

A: A common carrier is responsible for injuriessuffered by a passenger on account of thewillful acts or negligence of other passengersor of strangers, if the carrier's employeesthrough the exercise of the diligence of a goodfather of a family would have prevented orstopped the act or omission. (Art. 1763)

Q: Should the diligence of the passengerbe considered in determining liability incase of injury?

A: Yes. The passenger must observe thediligence of a good father of a family orordinary diligence to avoid injury to himself(Art. 1761). This means that if the proximatecause of the passenger's injury is hisnegligence, the common carrier is not liable.

Q: Who has the burden of proof in cases ofcontributory negligence?

A: The common carrier since it will benefitfrom such mitigated liability.


Pacu(taa de Wereclio Civit ~i~271


passenger in case of a

A:1. Culpa contractual - negligence based

on contract; filed against the commoncarrier wherein he is a passenger.

2. Culpa aquiliana - negligence basedon tort; filed against the drivers ofboth vehicles and the owners thereof.

3. Culpa criminal- negligence based ona crime; filed against the driver atfault if his act amounts to a crime.

Q: What are the defenses available in culpacontractual?

A:1. Exercise of extraordinary due

diligence;2. Due diligence in the selection and

supervision of employees;3. Fortuitous event;4. Contributory negligence of

passengers - it does not bar recoveryof damages for death or injury if theproximate cause is the negligence ofthe common carrier but the amount ofdamages shall be equitably reduced.(Art. 1762)

Q: What are the items of damages that maybe recovered in case of' death of apassenger (culpa contractual)?

A:1. An indemnity for the death of the

victim;2. An indemnity for loss of earning

capacity of the deceased;3. Moral damages;4. Exemplary damages;

Note: Carrier is not liable forexemplary damages where there isno proof that it acted in a wanton,fraudulent, reckless, oppressive ormalevolent manner

5. Attorney's fees and expenses oflitigation; and

6. Interest in proper cases. (Brinas v.People, G.R. No. L-30309, Nov. 25,1983)

Q: What is the liability with regard to moraldamages?

A:GR: Moral damages are not recoverablefor breach of contract of carriage in view ofArt. 2219-20 of the Civil Code.

XPN:1. Where the mishap results in the

death of the passenger; and

2. Where it is proved that the commoncarrier was guilty of fraud or bad faith,even if death does not result.

Q: What are the distinctions between anaction to enforce liability of the employer ofthe negligent driver under Art. 103 of theRevised Penal Code, and an action basedon quasi-delict?

A:ART. 103, RPC ART. 2180, NCC

(QUASI-DELICT)Employer is only Liability is primarysubsidiarily liable. and direct.There must be a Action may proceedjudgment of conviction independently fromagainst the negligent the criminal action.driver otherwise theaction against theemployer would be

JJremature.The defense of due The defense of duediligence in selection diligence in selectionand supervision of and supervision ofemployees cannot be employees may beinvoked. invoked.

Q: May the registered owner of the vehiclebe held liable for damages suffered by athird person in the course of the operationof the vehicle?

A: Yes. The registered owner of a publicservice vehicle is responsible for damages thatmay arise from consequences incident to itsoperation or that may be caused to any of thepassengers therein (Gelisan \I. Alday, G.R. No.L-30212, Sept 30, 1987). Also, the liability ofthe registered owner of a public service vehiclefor damages arising from the tortious acts ofthe driver is primary, direct, and joint andseveral or solidary with the driver. (Philtra ncoService Enterprises, Inc. v. CA, G.R. No.120553, June 17, 1997)


Q: What is the rationale behind the liabilityof the registered owner?

A: It rests upon the principle that in dealingwith vehicles registered under the PublicService Law, the public has the right toassume that the registered owner is the actual

:or lawful owner thereof. It would be very!difficult and often impossible as a practical

I matter, for members of the general public to,enforce the rights of action that they may have[for injuries inflicted by the vehicles beingi negligently operated if they should be requiredI to prove who the actual owner is. Thei registered owner is not allowedto deny liabilityby proving the identity of the allegedtransferee.Thus, the aggrieved party is not required to gobeyond the vehicle's certificate of registrationto ascertain the owner of the carrier. To permitthe ostensible .or registered owner to provewho the actual owner is, would be to set atnaught the purpose or public policy whichinfuses that doctrine. (Benedicta v. lAC, G.R.No. 70876, July 19, 1990)

Academics CommitteeCll(.Jirpel:l"()Jz: Abraham D. Genuine 1J

f/itC!-CbairjrJr Academics: Jeannie ,\, Laurentinof/ic'e-Cbair[(Jr Admilt 'L'" Fint/llce: J\iSS;l Celinc H. Luna

f "iw"O';'ir/or LLI)'olti c> [)'-'(gil: Loise Rae C;. Naval

Mercantile Law CommitteeJ/lbjed '-'ead' f T Diy T. 1\ Ihpagucy

//.l".Il. Subje" J-I!!lid: Manilyn Rose S. Sotelo


Aireen 1\.1.CachoSocrates Benjie 1. l\.farbilRon Chcrrie S. Mendoza

Edisonjames I", PagalibuanMaybelline 1\.1. Santiago

.~,..-'~.~ ..... :,,~'

UNIVERSITY OF SANTO TOMAS \', ••.•..• ) 273'Facu{taa de (j)erecno CiviC .

TRANSPORTATION LA \,\/S: CODE OF COJvIMERCE

CODE OF COMMERC~.~ ,(ART. 349 - 379) . "

.~,::;.,Q: What matters are governed by the Codeof Commerce?

A: In all matters not regulated by the New CivilCode, the rights and obligations of commoncarriers shatl be governed by the Code ofCommerce and by special laws,

Q: What is the rule regarding bay and riverlicense?

A: No vessel shall be permitted to engage inthe business of towing or transportation in thebays, harbors, rivers and inland watersnavigable from the sea unless proper licensehas been procured,

A bay and river license shall specify theparticular port or other body of water in whichthe vessel may engage in business.

Q: What vessels are exempted fromrequirement of bay and river license?

A:'1. Vessels 3 tons net or less;2. Yachts, launches, and other crafts

used exclusively for pleasure andrecreation;

3. Ship's boat and launches bearing thename and home port of the vesselplainly marked thereon; and

4, Vessels owned by the Government ofthe Philippines,

Q: What is a bill of lading?

A: It is a written acknowledgement of receipt ofgoods and agreement to transport them to aspecific place and to a named person or to hisorder,

Q: Is it indispensable?

A: The Code of Commerce does not demand,as a necessary requisite in the contract oftransportation, the delivery of the bill of ladingto the shipper, but gives right to both thecarrier and the shipper to mutually demand ofeach other the delivery of said bill. (CompaniaMaritima v. Insurance Co. of North America;G.R No. L-18965, Oct 30,1964)

274 Iteam:B

Q: How should a bill of lading be construed?

A: It partakes of the nature of a contract of !adhesion and as such must be construedstrictly against the party who drafted the sameor gave rise to any ambiguity therein. (Saluda,Jr. v. CA, G.R. No. 95536, Mar. 23, 1992)

Q: What are the two types of bill of lading?

1. Negotiable - If issued to the bearer orto the order of any person named insuch bill.

2. Non-negotiable - If issued to aspecific person named in such bill.

Q: What is a clean bill of lading?

A: It is a bill of lading which has no notation ofany defect or damages in the goods. Itconstitutes prima facie evidence of the receiptby the carrier of the goods as thereindescribed. (Lorenzo Shipping Corp. v. Chubband Sons, Inc., G.R No. 147724, June 8,2004)

Q: Is the surrender of the bill of ladingnecessary upon delivery of the goods?

A: Yes, If the 'carrier fails to require suchsurrender:

1. If non-negotiable - Action against thecarrier does not lie. .

2. If negotiable - Action by the shippermay lie against the carrier

Q: What is the two-fold character of a bill oflading?

A: A bill of lading operates both as a receiptand as a contract. It is a receipt for tile goodsshipped and a contract to transport and deliverthe same as therein stipulated. As a receipt, itrecites the date and place of shipment,describes the goods as to quantity, weight,dimensions, identification marks and condition,quality, and value. As a contract, it names thecontracting parties, which include theconsignee, fixes the route, destination, andfreight rate or charges, and stipulates therights and obligations assumed by the parties.(Phoenix Assurance Co., Ltd. v. United StatesLines, G.R No. L-24033, Feb. 22, 1968)


Q: What is the function of a bill of lading ina charter party?

A: It is merely a receipt and a documentof titlebecause the contract is the charter party.

Q: What are the three kinds of stipulationsoften made in a bill of lading and theircorresponding effects?

A:1. Stipulation exempting the carrier from

any and all liability for loss or damageoccasioned by its own negligence _invalid for being contrary to publicpolicy;

2. That providing for unqualifiedlimitation of such liability to an agreedvaluation - invalid for being contraryto public policy; and

3. One limiting the liability of the carrierto an agreed valuation unless theshipper declares a higher value andpays a higher rate of freight - validand enforceable. (Loadstar ShippingCo., Inc. v. CA,G.R. No. 131621,Sept. 28, 1999)

Q: When does a bill of lading becomebinding on a consignee?

A: After accepting the bill of lading, receivingnotices of arrival of the shipment, and failing toobject thereto, a consignee carinot now denythat it is bound by the terms in the bill oflading. (Keng Hua Paper Products Co. Inc. v.CA, G.R. No. 116863,Feb. 1~ 199~

Q: Star Shipping Lines accepted 100cartons of sardines from Master to bedelivered to 555 Company in Manila. Only88 cartons were delivered, however, thesewere in bad condition. 555 Companyclaimed from Star Shipping Lines the valueof the missing goods, as well as thedamaged .goods. Star Shipping Linesrefused because the former failed topresent a bill of lading. Resolve withreasons the claim of 555 Company.

A: Star Shipping Lines should pay the claim of555 Company. The mere fact that somecartons were lost and the 88 cartons weredamaged is sufficient proof of the fault of StarShipping Lines (Lorenzo Shipping Lines v.Chubb and Sons, Inc., G.R. No. 147724, June8, 2004). The fact that 555 Company failed topresent a bill of lading makes no difference,because it was the actual consignee (EasternShipping Lines, Inc. v. CA, 1990, G.R. No.

97412, July 12, 1994). Moreover, under Article353 of the Code of Commerce, the surrenderof the original bill of lading is not a conditionprecedent for a common carrier to bedischarged of its obligation. If surrender of theoriginal bill of lading is not possible,acknowledgment of delivery by Signing thedelivery receipt suffices. (Republic v. LorenzoShipping Lines, G.R. No. 153563, Feb. 7,2005) (2005 Bar Question) i

iQ: JRT entered into a contract with C Co ofJapan to export anahaw fans valued at$23,000. As payment thereof, a letter ofcredit was issued to JRT by the buyer. Theletter of credit required the issuance of anon-board bill of lading and prohibited thetransshipment. The President of JRT thencontracted a shipping agent to ship theanahaw fans through 0 Containers Lines,specifying the requirements of the letter ofcredit. However, the bill of lading issued bythe shipping lines bore the notation"received for shipment" and contained anentry indicating transshipment inHongkong. The President of JRT personallyreceived and Signed the bill of lading anddespite the entries, he delivered thecorresponding check in payment of thefreight. The shipment was delivered at theport of discharge but the buyer refused toaccept the anahaw fans because there wasno on-board bill of lading, and there wastransshipment since the goods weretransferred in Hongkong from MV Pacific,the feeder vessel, to MV Oriental, a mothervessel. JRT argued that the same cannotbe considered transshipment because bothvessels belong to the same shippingcompany.

JRT argued that assuming that there wastransshipment, it cannot be deemed tohave agreed thereto even if it signed thebill of lading containing such entrybecause it was made known to theshipping lines from the start thattransshipment was prohibited under theletter of credit and that, therefore, it had nointention to allow transshipment of thesubject cargo. Is the argument tenable?Reason.

A: No. JRT is bound by the terms of the bill oflading when it accepted the bill of lading withfull knowledge of its contents which includedtransshipment in Hongkong.Acceptance undersuch circumstances makes the bill of lading abinding contract (1993 Bar Ouestion)

U N I V E RS I TV 0 F SAN ToT 0 MAS ( •..4>-.< • 2 _Pacu{taa de (j)erecfto Civ i]

TRANSPORTATION LAWS: CODE OF COi\1MERCE

Q: What is the duty of the carrier if there isno period of time fixed for the delivery ofgoods?

A: The carrier shall be under the obligation toforward them with the first shipment of thesame or similar merchandise he may make tothe point where he must deliver them, andshould he not do so, the damages occasionedby the delay shall be suffered by him. (Art.358)

Q: Can the carrier change the route to betaken by the vessel? I

A: Generally, no. The route which the carrierand the shipper have agreed upon cannot bechanged unless by reason of terce majeure Ifthe carrier changes the route without justcause,! the carrier' shall be liable for alldamages which may be suffered by the goods.(Art. 359)

II

Q: On'a clear weather, MiV Sundo, carryinginsured cargo, left the port of Manila boundfor Cebu. While at sea, the vesselencountered a strong typhoon forcing thecaptain to steer the vessel to the nearestisland where it stayed for seven days. Thevessel ran out of provisions for itspassengers. Consequently, the vesselproceeded to Leyte to replenish itssupplies.

Assuming that the cargo was damagedbecause of such deviation, who betweenthe insurance company and the owner ofthe cargo bears the loss? Explain.

A: The insurance company should bear theloss. Since the deviation was caused by astrong typhoon, it was caused bycircumstances beyond the control of thecaptain, and also to avoid a peril whether ornot insured against. Deviation is 'thereforeproper. (2004 Bar Question)

Q: May the shipper change the consigneeand the destination of the goods?

A: Yes. Before the ship where the goods areboarded leaves, the shipper may change theconsignee and the destination of the goods.After the ship has left, only a change of theconsignee is allowed. In any case the bill oflading subscribed by the carrier must bereturned to the shipper, if one were issued,exchanging it for another containing thenovation of the contract. (Art. 360 in relation toArt. 1532 of the NCC)

276

Q: When maya consignee refuse to acceptthe goods?

A:1. When a part of the goods transported

are delivered and the consignee isable to prove that he cannot makeuse of the part without the others;(Aft 365)

2, If the goods are damaged and suchdamage renders the goods uselessfor the particular purpose for whichthere are to be used; (Art. 365)

3. When there is delay on account of thefault of the carrier; (Art. 371) or

4. If the cargo consists of liquids andthey have leaked out, nothingremaining in the containers but one-fourth (Y-o) of their contents, onaccount of inherent defect of cargo.(Art. 687) ,

Note: In all cases, the shipper may exercisethe right of abandonment by notifying thecarrier. Ownership over damaged goodspasses to the carrier and carrier must payshipper the market value of the goods at pointof destination.

Q: When does Article 366 of the Code ofCommerce apply?

A: It applies in case of domestic transportation(inter-Island) where there is damage to thegoods transported.

Note: Art. 366 of the Code of Commercereads: "Within the 24hrs. following the receiptof the merchandise, a claim may be broughtagainst the carrier on the account of damageor average found therein on opening thepackages, provided that the signs of thedamage or average giving rise to the claimmay not be known from the exterior part of thepackages, and in case that they may be soascertained, said claim shall only be admittedat the time of the receipt of the packages. Afterthe periods mentioned have elapsed, or afterthe transportation charges have been paid, noclaim whatsoever shall be admitted against thecarrier with regard to the condition in Which thegoods transported were delivered,"


: In filing claims, what are the periods incovering damages from carriers for

carriage of goods?

1. Inter-island - in case the goodsarrived in damaged condition theclaim should be filed:a. Immediately after delivery - if the

damage is apparent; orb. Within 24 hours from delivery - If

the damage is not apparent.

2. Overseas - Under Sec. 3(6), of theCarriage of Goods by Sea Act(COGSA), where goods arrived in adamaged condition from a foreignport to a Philippine port of entry, theclaim should be filed:a. Upon the discharge of goods - If

the damage is apparent; orb. Within 3 days from delivery - if

the damage is not apparent.

18: See discussion on the Carriage of- =-= - by Sea Act.

. V.rnat are the requisites before claim for-- • ages under Art. 366 may be

anded?

Consignment of goods through acommon carrier, by a consignor inone place to a consignee in anotherplace; and

2 The delivery of the merchandise bythe carrier to the consignee at theplace of destination (New ZealandIns. Co., Ltd. v. Choa Joy, G.R. No.L-7311, Sept. 30, 1955).

hat is the effect of paying the.ra portation charges in the filing of an

2... ion on account of damages to goods?

'..""'-If paid before checking the goods-The right to file a claim is not waived.

2. If paid after the goods were checked- The right to file a claim is alreadywaived (Southern Lines, Inc. v. CA,G.R. No. L-16629, Jan. 31, 1962).

ote: The filing of claim is a condition:yecedent for recovery of damages.

Q: What happens if there are disputes withregard to the condition of the goodstransported at the time of their delivery tothe consignee'?

A: The goods shall be examined by expertsappolnteo by the parties and, in case ofdisagreement, by a third one to be appointedby judicial authority, the result of theexamination being reduced to writing; and if aperson interested should not agree to thereport of the experts and do not settle theirdisputes, said judicial authority shall order thedeposit of the merchandise in a safewarehouse, and the parties interested shallmake use of their rights in the proper manner.(Art. 367)

Note: If the goods are perishable, the goodsshall be subjected to judicial sale.

Q: To whom are the goods deliverable?

A:GR: The carrier has the obligation todeliver to the consignee who has beendesignated by the shipper.

iXPN: Consignation is allowed lif oneconsignee:

1. cannot be found;2. refuses to accept the goods; or3. refuses to pay freightage.

Q: What is the rule with regard to paymentby consignee?

A: The consignee cannot defer payment after24 hours from delivery. In case there is delayin payment, the carrier may demand thejudicial sale of the goods for an amountsufficient to cover the transportation chargesand expenses. This right shall prescribe within30 days from delivery. After such period, thecarrier loses his right but he is still consideredas an ordinary creditor, meaning, he issubordinated to insolvency proceedings. (Aft374-376)

In caseof non-payment of fare of a passenger,the carrier may hold on to the personal effectsof the passenger but not on the goods coveredby the bill of lading.

UN I V ER5 I T Y Of SAN ToT 0 MAS f-.....' 27Pacu(tac! de (j)erecno Civif

TRANSPORTATION LAWS: CODE OF CONIMERCE

Q: Wh~t is the doctrine of combined orconnecting services?

IA: The carrier which delivered the goods to theconsiqnso shall assume the obligations, rightsand actions of those who preceded him in theconveyance of the goods.

The shipper or consignee should proceedagainst the one who executed the contract oragainst the others who received the goodswithout reservation. But even if there isreservation, they are not exempted fromliabilities that they may have incurred byreason of their own acts. (Art. 373)

The carrier may then file a third-partycomplaint against the one who is reallyresponsible. The carrier is an indispensibleparty. But the shipper or consignee may sueall of them as alternative defendants.

. . MARITIME"COMMERCE .

Q: What is the real and hypothecary natureof maritime transactions?

A:4. Real - Maritime transactions bind

third persons. Thus, maritime lienover the vessel binds third persons.However, as evidence of this 'real'nature of the maritime law we have:a. the limitation of the liability of the

agents to the actual value of thevessel and the freight money;and

b. the right to retain the cargo andthe embargo and detention of thevessel even in cases where theordinary civil law would not allowmore than a personal actionagainst the debtor or personliable. (Phifippine Shipping Co. v.F. G. Vergara, G.R. No. 1600,June 1, 1906); (LuzonStevedoring Corp. v. CA, G.R.No. L-58897, Oec 3, 1987)

5. Hypothecary - owner's liability overthe vessel is limited to the vesselitself.

The real and hypothecaty, nature ofmaritime law simply means that theliability of the carrier in connectionwith losses related to maritime

! contracts is confined to the vessel,: which is hypothecated for suchobligations or which stands as theguaranty for their settlement. It has

278 Iteam:&

its origin by reason of the conditionsand risks attending maritime trade inits earliest years when such trade,was replete with innumerable andunknown hazards since vessels hadto go through largely unchartedwaters to ply their trade. (AiJoitizShipping Corp. v. General AccidentFire and Life Insurance Cotp., G.R.Nos. 10044-16, Jan. 21, 1993)

Q: A vessel is considered what kind ofproperty?

A: Under Article 585 of the Code ofCommerce, a vessel is essentially personalproperty because it is movable. But theSupreme Court has characterized maritimetransactions as having a real nature (Rubisoand Gelito v. Rivera, G.R. No. 11407, Oct. 30,1917) in so far as these transactions aresimilar to transactions over real property withrespect to effectivity against third personswhich are effected through registration.

Q: What is a merchant vessel?

A: It refers solelyto merchant ships, which areengaged in the transportation of passengersand freight from one place to another whethercoastal or foreign, It is considered personalproperty.

Q: What are the requisites for a ship to beconsidered a merchant vessel?

A: It must:4. Not be a mere accessory to another

vessel;

5, Be licensed to engage in thetransportation of passengers and/orfreight;

6. Be by sea - not merely in rivers, inlet,lakes, coves or bays, whether inforeign or coastwise trade.


P.D.1521,(The Ship Mortgage Decre of'. - 1978)

Q: What is maritime lien?

A: It constitutes a present right of property inthe ship, a jus in re, to be afterward enforcedin admiralty by process in rem. Any personfurnislling repairs, supplies or othernecessaries to a vessel on credit will have amaritime lien on the vessel. (PNB v. CA, GR.No. 128661, Aug 13,2000)

Note: P.O. 1521 is an action in rem inadmiralty - an action against the vessel alonewithout including the owner. This is allowedbecause a vessel in transportation has its ownjuridical personality.

Q: In what cases is the law applicable?

A: It is applicable in cases of domestic andoverseas shipping.

Q: What is the purpose of the mortgage?

A: It is to finance the construction, acquisition,purchase of vessels or initial operation ofvessels. (Sec. 2)

The mortgage must be recorded with theMaritime Industry Authority (MARINA),otherwise, it will only be valid between theparties and cannot be enforced against thirdparties except those who have actual noticethereof and it shall not be a preferredmortgage. (Memorandum Circular No. 100)

Q: Who may constitute a ship mortgage?

A:1_ Any citizen of the Philippines; or2_ Any association or corporation, at

least 60% of the capital of which isowned by citizens of the Philippines.'(Sec. 2)

Note: P.O. 1521 was enacted primarily toprotect Filipino suppliers and was not intendedto create a lien from a contract for suppliesbetween foreign entities delivered in a foreignport. (Crescent Petroleum v. MIV LokMaheshwari, GR. No. 156969, Nov. 11,2005)

Q: When shall a ship mortgage beconsidered as a preferred mortgage?

A:1. When recorded;2. An affidavit is filed with the record of

such mortgage to the effect that themortgage is made in good faith andwithout any design to hinder, delay,or defraud any existing or futurecreditor of the mortgagor or any lienor of the mortgaged vessel; and

3. The mortgage does not stipulatethatthe mortgagee ,waives the preferredstatus thereof, (Sec. 4)

Q: What are the grounds for a vessel to bearrested?

A:1. .Failure to comply with the preferred

mortgage conditions; or2. Non-payment of necessaries and

maritime liens,

Q: What is the procedure in judicialforeclosure of a vessel?

A:1. File a petition for judicial foreclosure

of a preferred ship mortgage;2. Apply, ex parte, for an order for the

arrest of the mortgaged vessel;3. An affidavit must be attached

showing that the preferred mortgageor maritime liens were violated orunpaid;

4. Applicant files a bond; and5. The court shall then issue the order of

arrest. (Sec. 11)

Q: What is the procedure in the arrest,seizure and extra-judicial foreclosure of avessel?

A: Chattel Mortgage Law shall apply, For thepurpose of taking possession of the vessel:

1. The creditor may secure from a judgeof the Regional Trial Court of theprovince where the vessel may befound or where the creditor or debtorresides, an order for the arrest orseizure of the vessel.

2. Upon such order of seizure or arrestbeing issued, the sheriff shallimmediately take possession of thevessel or vessels for the. purpose offoreclosure and sale.


Pacu(taa de (])erecfio Ci ui I ~9~279

TRANSPORTATION LAWS: SHIP MORTGAGE DECREE OF 1978

Q: Can the order of arrestlseizure bedischarged?

Doctrine of Limited Liabili

A: Yes:1. If properly arrested - By posting a

counterbond or cash deposit doublethe amount of the claim. (Sec. 12)

2. If improperly arrested Nocounterbond is necessary becausethe vessel is not deemed to havebeen arrested.

Q: What iscounterbond?

A: I3.

the purpose of

To fumish another security other thanthe vessel; and

4. I It takes the place of the vessel.

Note: If posted by a fake insurance company,the vessel will be arrested.

Q: What is the order of preference underthis law?

A: A properly registered mortgage lien overthe vessel becomes a preferred credit oversaid vessel. This lien has priority over allclaims against the vessel except the followingclaims in the order stated:

1. Costs taxed by the court and taxesdue to the government;

2. Crew's wages;3. General average;4. Salvage including contract salvage;5. Maritime liens arising prior in time to

the recording of the preferredmortgage; .

6. Damages arising out of tort, e.g.collision damage;

7. Preferred mortgage registered prior intime.

Note: The preferred mortgage lien will then bepaid after the above items have already beencomplied with.

Q: What if the proceeds of the sale are notsufficient to pay all creditors included inone class?

A: The residue shall be divided among thempro rata. All credits not paid shall subsist asordinary credits enforceable by personal actionagainst the debtor. The unpaid portion shallbe enforceable by personal action against thedebtor. (Sec. 17)

280

the

Q: What is the doctrine of limited liability?

A: Also called the "no vessel, no liabilitydoctrine", it provides that liability of ship owneris limited to ship owner's interest over thevessel. Consequently, in case of loss, the shipowner's liability is also extinguished. Limitedliability likewise extends to ship'sappurtenances, equipment, freightage, andinsurance proceeds.

The ship owner's or agent's liability is merelyco-extensive with his interest in the vessel,such that a total loss of the vessel results inthe liability's extinction. The vessel's totaldestruction extinguishes maritime liens'because there is no longer any res to Whichthey can attach. (Monarch Insurance v. CA,G.R. No. 92735, June 8, 2000)

Q: What is the rationale of this doctrine?

A: To offset against innumerable hazards andperils in sea' voyage and to encourage shipbuilding and maritime commerce. Byabandonment, the ship owner and ship agentexempt themselves from liability, thus avoidingthe possibility of risking his whole fortune inthe business. (Real and tiypciiiecer» nature ofMaritime Law)

Q: What are the cases in which the doctrineof limited liability is allowed?

A:1. Civil liability of the ship agent or

shipowner for the indemnities in favorof third persons; (Art. 587)

2. Civil liability of the co-owners of thevessel for the results of the acts ofthe captain; (Art. 590)

3. If the vessel and her cargo be totallylost, by reason of capture orshipwreck, all the rights shall beextinguished, both as regards theright of the crew to demand wagesand the right of the ship agent torecover the advances made; (Aft643) or

4. Extinction of civil liability incurred bythe shipowner or agent in cases ofmaritime collisions. (Art. 837)


Q: What are the exceptions to the doctrineof limited liability?

A:c. Repairs and provisioning of the

vessel before the loss of the vessel;(Art. 586)

d. Insurance proceeds. If the vessel isinsured, the proceeds will go to thepersons entitled to claim from theshipowner; (Vasquez v. CA, G.R. No.L-42926, Sept. 13, 1985)

e. Workmen's Compensation cases(now Employees' Compensationunder the Labor Code); (Oching et.at. v. San Diego, G.R. No. 775, Dec.17, 1946)

f. When the shipowner is guilty of faultor negligence;

Note: But if the captain is the onewho is guilty, doctrine may still beinvoked, hence, abandonment is stillan option.

g. Private carrier; or11. Voyage is not maritime in character.

Q: On October 30, 2007, MN Pacific, aPhilippine registered vessel owned byCebu Shipping Company (CSC), sank onher voyage from Hong Kong to Manila.Empire Assurance Company (Empire) isthe insurer of the lost cargoes loaded onboard the vessel which were consigned toDebenhams Company. After it indemnifiedDebenhams, Empire as subrogee filed anaction for damages against CSC.

1. Assume that the vessel wasseaworthy. Before departing, thevessel was advised by theJapanese Meteorological Centerthat it was safe to travel to itsdestination. But while at sea, thevessel received a report of atyphoon moving within its generalpath. To avoid the typhoon, thevessel changed its course.However, it was still at the fringe ofthe typhoon when it wasrepeatedly hit by huge waves,foundered and eventually sank.The captain and the crew weresaved except three (3) whoperished. Is CSC liable to Empire?What principle of maritime law isapplicable? Explain.

2. Assume that the vessel was notseaworthy as in fact its hull had.leaked, causing flooding in the

vessel. Will your answer ?e thesame? Explain.

3. Assume the facts in question b.Can the heirs of the three (3) crewmembers who perished recoverfrom CSC? Explain fully.

A:1. CSC is not liable to Empire. In this

case, there is a fortuitous event thattook place which is tile proximate andonly cause of the loss. It also appearsthat there is exercise of due diligenceto prevent or minimize the lossbefore, during and after theoccurrence of the disaster orcalamity. Thus, tile doctrine of limitedliability is applicable in this situationwhich limits the liability of ship ownerto the value of the vessel, ship'sappurtenances, equipment,freightage, and insurance proceeds.In other words, the shipowner'sliability is merely coextensive with hisinterest in the vessel such til at a totalloss thereof, as what happened in thiscase, results in its extinction.

2. CSC will now be liable to Empire ifthe vessel was not seaworthy. Thedoctrine of limited liability is notapplicable in cases where there isfault or negligence on the part of thecommon carrier.

3. The heirs of the three crew membersmay recover under the Workmen'sCompensation Act (now Employee'sCompensation under the LaborCode). The total loss of the vesselnor the doctrine of limited liabilitycannot affect the rights of the heirs tocompensation as it is one of therecognized exceptions to theapplicability of the rule. (2008 barQuestion)

Q: Thinking that the impending typhoonwas still 24 hours away, MV Pioneer leftport to sail for Leyte. There was amiscalculation of the typhoon signals byboth the ship-owner .and the captain as thetyphoon came earlier and overtook thevessel. The vessel sank and a number ofpassengers disappeared with it. I

IRelatives of the missing passengersclaimed damages against the ship-owner.The ship-owner set up the defense thatunder the doctrine of limited liability, hisliability was co-extensive with his interest

UNIVERSITY OF SANTO TOMAS f"~';281'Facu(tad de CDerecfto CiviC ..,.


in the vessel. As the vessel was totally lost,his liability had also been extinguished.

r.'.#hfH.' ,',,[4a'

How will you advice the claimants?Discuss the Doctrine of Limited Liability inMaritime Law.

A: Under the doctrine of limited liability in mari-time law, the liability of the shipowner arisingfrom the operation of a ship is confined to thevessel, equipment, and freight, or insurance, ifany, so that if the ship owner abandoned theship, equipment, and freight, his liability isextinguished. However, the doctrine of limitedliability does not apply when the ship owner orcaptain is guilty of negligence as in this case.(1999 Bar Question)

Q: Assuming that the vessel Was insured,may the claimants go after the insuranceproceeds?

A. Yes. In case of a lost vessel, the claimantsmay go after the proceeds of the insurancecovering the vessel. (1999 Bar Question)

Q: X Shipping Company spent almost afortune in refitting and repairing its luxurypassenger vessel, the MV Marina, whichplied the inter-island routes of the companyfrom La Union in the north to Davao City inthe south. The MV Marina met an untimelyfate during its post-repair voyage. It sankoff the coast of Zambales while en route toLa Union from Manila. The investigationshowed that the captain alone wasnegligent. There were no casualties in thatdisaster. Faced with a claim for thepayment of the refitting arid repair, XShipping Company. asserted exemptionfrom liability on' the basis of thehypothecary or limited liability rule underArticle 587 of the Code of Commerce. Is XShipping Company's assertion valid?Explain.

A: No. The assertion of X Shipping Companyis not valid. The total destruction of the vesseldoes not affect the liability of the ship ownerfor repairs on the vessel completed before itsloss. (2000 Bar Question)

Q: What is the concept of abandonment inmaritime commerce?

A: The ship owner or ship agent shall be civillyliable for the indemnities in favor of thirdpersons arising from acts of the captain andhis conduct in the case of the qoods.loaded onthe vessel. But the owner/agent may exempthimself from liability by abandoning the vesselwith all her equipments and the freight it mayhave earned during the voyage.

Q: What is the extent of the ship agent's orship owners's liability?

A: The vessel with all her equipment and the-freiqht it may have earned during the voyage,and to the insurance thereof if any. (Yangco v.Laserna, G.R. No. 47447, Oct. 29, 1941)

Q: Who may exercise the right ofabandonment?

A: The shipowner, the ship agent and/or thebareboat charterer can exercise the right ofabandonment. But in the case of co-ownershipof a vessel, a co-owner may exempt himselffrom liability by the abandonment of only thepart of the vessel belonging to him.

Q: When is the right of abandonment notapplicable?

A: It does not apply to cases where the injuryor average was occasioned by the shipowner'sown fault. (Luzon Stevedoring Corp. v. CA,G.R. No. L-58897, Dec. 3, 1987)

Q: What is the effect of abandonment?

A: It amounts to:1. An offer of the value of the vessel;

and

2. Cessation of responsibility of the shipowner and ship agent. The offer ofthe value of vessel and freight isdirected towards the injured parties.(Switzerland General Insurance Co.,Ltd. v. Ramirez, G.R. No. L-48264,Feb. 21, 1980)


Q: What are the requisites of abandonmentin marine insurance? Q: Who <Ire the parties in maritime

commerce?

A:1. Actual relinquishment of claim of

ownership;

2. Constructive total loss (loss, injury orexpenses suffered must be more thanY.. of the value of the thingabandoned);

3. The abandonment must neither bepartial nor conditional;

4. Must be done within reasonable timeafter receipt of reliable information ofconstructive total loss;

5. Notice to the insurer, whether orallyor in writing must be explicitspecifying the cause ofabandonment; and

6. If done orally, a written notice mustbe given within 7 days from such oralnotice.

Q: What are the distinctions betweenabandonment in maritime commerce fromabandonment in maritime insurance.

A:i;" ',/" .?MA~ITJME MARITIME "roo , COMMERCE " INSURANCE

Abandonment is made Abandonment is notby the shipowner/ship necessarily made by

agent the shipowner/shipagent

The thing abandoned The thing abandonedis the vessel with all is the thing insured,

its appurtenances and not necessarily thefreight vessel

Basis is breach of Basis is constructive.maritime contract total loss in which the

because of the loss, injury orconduct of the captain expenses be morein the vigilance over than Y.. of the valuethe goods and safety of the thing insured

of passengers which is abandoned.Purpose is to limit the Purpose is to recover

liability of the ship from the insurerowner or agent to third indemnity for a totalpersons to the value loss, although theof the vessel with her thing insured doesappurtenances and not suffer actual total

freight loss.

A:1.2.3.

4.5.

6.

Shipowners and ship agents;Captain or master of the vessel;Officers of the vessel (Sailing or firstmate, the quarter mate or secondmate, the engineers);Seamen (sailors or crew);Persons who make up thecomplement of the vessels, includingthe stokers and supercargoes; andPilot.

mnx·I%l§tilit·fJ@il!i1Q: Who is the shipowner of a vessel?

A: The person in possession, management,control over the vessel, and the right to directher navigation. While in their possession, theship owners also receive freight earned andpaid. i

Q: Who is a ship agent?

A: The person entrusted with provisioning orrepresenting the vessel in the port in which itmay be found. Hence, whether acting as agentof the owner of the vessel or as agent of thecharterer, he will be considered as the shipagent and may be held liable as such, as longas he is the one that provisions or representsthe vessel. (Macondray & Co., Inc. v.Provident Insurance Corp, G. R. No. 154305,Dec. 9, 2004)

Q: What are the civil liabilities of shipowners and agents?

A:1. Damages suffered by a 3rd person for

tort committed by the captain;2. Contracts entered for provisioning

and repair of vessel;3. Indemnities in favor of 3rd persons

arising from the conduct of thecaptain from the care of goods; and

4. Damages in case of collision due tofault or negligence or want of skill ofthe captain.


Pacu{taa de 'D'erech o Ci if 3


Q: What are the powers, functions, andliabilities of ship agents? Captains and Masters of the Vessel

A:1. Indemnity for expenses incurred for

ship's benefit. A:

Q: What is the three-fold character of thecaptain?

2. , Discharge of captain and/or crewI members. The following are the rules

observed by the ship agent:

a. Captain and/or crew member'scontract not for a definite periodor voyage:i. Before vessel sets out to sea:

. Ship agent at his discretionmay discharge the captain andmembers of the crew. Shipagent must pay captain and/orcrew members salaries earnedaccording to their contracts,and ·without any indemnitywhatsoever, unless there is anexpressed agreement;

ii. During voyage: Captain and/orcrew member shall receivesalary until return to the portwhere contract was made.Article 637 of the Code ofCommerce enumerates thejust causes for discharge.

b. Where captain and members ofthe crew's contracts with shipagent be for a definite period orvoyage:i. Captain and/or crew members

may not be discharged untilafter the fulfillment of theircontracts, except by reason ofinsubordination in seriousmatters, robbery, theft,habitual drunkenness, ordamage caused to the vesselor to its cargo through maliceor manifest or provennegligence. (Art. 605, Code ofCommerce)

ii. If the captain should be thevessel's co-owner, he may notbe discharged unless shipagent returns his amount. ofinterest therein. In the absenceof agreement between theparties, interest shall beappraised by expertsappointed in the mannerestablished by civil procedure.

1. General agent of the ship owner;2. Vessel's technical director; and3. Government representative of the flag

he navigates under.

Q: What are the inherent powers of the shipcaptain?

A:3. To appoint or make contracts with the

crew in the ship agent's absence, andto propose said crew, should saidagent be present; but the ship agentmay not employ any member againstthe captain's express refusal;

4. To command the crew and direct thevessel to the port of its destination, inaccordance with the instructions hemay have received from the shipagent;

5. To impose correctional punishment:a. Upon those who fail to comply

with orders; orb. Those wanting in discipline;

6. To make contracts for the charter ofthe vessel in the absence of the shipagent or of its consignee;

7. To adopt all proper measures to keepthe vessel well supplied andequipped, purchasing all that may benecessary for the purpose, providedthere is no time to request instructionfrom the ship agent;

8. To order, in similar urgent caseswhile on a voyage, the repairs on thehull and engines of the vessel and inits rigging and equipment, which areabsolutely necessary to enable it tocontinue and finish its voyage. (Art.610)


Q: What are the obligations of the captain?

A:1. Inventory of equipment;2. Keep a copy of Code of Commerce

on board;3. Have a log book, freight book,

accounting book;4. Conduct a marine survey of vessel

before loading;5. Remain on board while loading;6. Demand pilot on departure and on

arrival at each port;7. Be on deck when sighting land; .8. Arrivals under stress: to file marine

protest in 24' hours;9. Record bottomry loan with Bureau of

Customs;10. Keep papers and properties of crew

members who might die;11. Conduct himself according to the

instuctions of the ship agent;12. Report to ship agent on arrival;13. Observe rules on the situation of

lights and maneuvers to preventcollisions;

14. Remain on board til the last hope tosave the vessel is lost and to abide bythe decision of the majority whether toabandon or not;

15. In case of shipwreck: file marineprotest, within 24 hours; and

16. Comply with rules and regulation onnavigation. (Art. 612)

Q: In what cases shall the ship owner/agentbe liable to the damages caused by thecaptain?

A:2. Damages suffered by the vessel and

its cargo by reason of want of skill ornegligence on his part;

3. Thefts committed by the crew,reserving his right of action against"the guilty parties;

4. Losses, fines, and confiscationsimposed an account of violation ofcustoms, police, health, andnavigation laws and regulations;

5. Losses and damages caused bymutinies on board the vessel or byreason of faults committed by thecrew in the service and defense ofthe same, if he does not prove that hemade timely use of all his authority toprevent or avoid them;

6. Those caused by the misuse of thepowers;

7. For those arising by reason of hisgoing out of his course or taking acourse which he should not have

taken without sufficient cause, in theopinion of the officers of the vessel, ata meeting with the shippers orsupercargoes who may be on board.No exceptions whatsoever shallexempt him from this obligation;

8. For those arising by reason. of Ilisvoluntarily entering a port other thanthat of his destination, outside of thecases or without the formalitiesreferred to in Article 612; and

9. For those arising by reason of non-observance . of the provisionscontained in the regulations onsituation of lights and maneuvers forthe purpose of preventing collisions(Art. 618).

Note: Ship owner/agent is not liable for theobligations contracted by the captain if thelatter exceeds his powers and privilegesinherent in his position of those which mayhave been conferred upon him by the former.However, if the amount claimed were used forthe benefit of the vessel, the ship owner orship agent is liable.

Q: In what causes shall the captain be notliable for loss or injury to persons orcargo?

A:1. Force majeure; and2. Obligations contracted for the

vessel's benefit, except when thecaptain expressly agrees to be liable.

Q: May the captain have himselfsubstituted by another?A: No, in the absence of consent from the shipagent, and should he do so he shall be liablefor all the acts of the substitute. (Art. 615)

A:

crew lof the

\1. Sailing/first mate - Second chief of

the vessel. The first mate takes overthe vessel in the captain's inability todischarge powers.

2. Second mate - Takes command ofthe vessel in case ofdisability/discharge of the captain andfirst mate.

3. Engineers - Officers in-charge of thevessel's motor apparatus. In eventtwo or more of them are hired, oneshall be chief engineer.

Q: Who are the officers andvessel?


Pacu{taa de CJ)ereclio Ci'rif


4. Members of the vessel - Crewmembers hired by the ship agent. Incase of ship agent's absence, theyare hired by the captain. In no casemay the ship agent or captain take anumber of foreigners more than 1/5 ofthe vessel's complement.

Q: When may the captain and crewmembers rescind their contractualemployment?

A: In case of:1. War;2. Change of destination;3. Outbreak of disease; or4. New owner of vessel. (Art. 647)

Q: Who makes up the complement of thevessel?

A: All persons embarked, from the captain tothe cabin boy, necessary for the management,maneuvers, and service. It includes the crew,sailing mates, engineers, stockers, and othersworking on borad not having specific names.But it does not include the passengers. (Art.648)

Q: Who are supercargoes?

A: Persons assigned with administrative dutiesby the ship agent or shippers. They keepaccount of the vessel's transaction. (Art. 649)

I ,

Q: WhJ are pilots? .!

A: Persons duly qualified, and licensed, toconduct a vessel into or out of ports, or incertain waters. These are persons taken onboard at a particular place for the purpose ofconducting a ship through a river, road orchannel, or from a port.

Note: The pilot is the master pro hac vice inthe command and navigation of the ship.

Q: What is the nature of the liability of apilot in case of collision?

A: A pilot is personally liable for damagescaused by his own negligence or default to theowners of the vessel, and to third parties fordamages sustained in a collision. Suchnegligence of the pilot in the performance ofduty constitutes a maritime tort. (Far EasternShipping v. CA, G.R. No. 130068, Oct. 1,1998)

Q: When may the .master of the vesselinterfere with or even displace the pilot?

286

A: When the pilot is obviously incompetent or. intoxicated and the circumstances require thatthe master displace a pilot because ofincompetency or physical incapacity. If,however, the master does nor observe that apilot is incompetent or physically incapacitated.the master is justified in relying on the pilot. butnot blindly.

Note: The master's failure to interfere with ordisplace the pilot when necessary makes themaster personally liable for any resultingdamage caused. (Far Eastem Shipping v. CA,G.R. No. 130068, Oct. 1, 1998)

Special Contracts of Maritime Commerce

Q: What is a charter party contract?

A: A contract whereby the whole or part of theship is let by the owner to a merchant or otherperson for a specified time or use for theconveyance of goods, in consideration of thepayment of freight. (Caltex v. Sulpicio Lines,G.R. No. 131166, Sept. 30, 1999)

Q: What are the classes of charter party?

A:1. Bareboat or demise - the ship owner

gives possession of the entire vesselto the charterer. In turn, the charterersupplies, equips, and mans thevessel. The charterer is the owner prohac vice.

2. Contract of affreightment - the ownerof the vessel leases a part or all of itsspace to haul goods for others. It caneither be:a. Time charter Vessel is

chartered for a particular time orduration. While the ship ownerstill retains possession andcontrol of the vessel, thecharterer has the right to use allvessel's facilities. The charterermay likewise designate vessel'sdestination.

b. Voyage charter - Vessel ischartered for a particular voyageor series of voyages.

Q: What is meant by owner pro hac vice?

A: The charterer is considered the owner ofthe vessel for the voyage or service stipulated.The charterer and not the owner of the vesselis liable for vessel's expenses, includingseaman's wages.


Q: What is a voyage charter? Q: What are the obligations of charterer?

A: A voyage charter is a contract wherein theship was leased for a single voyage for theconveyance of goods, in consideration of thepayment of freight. The shipowner retains thepossession, command and navigation of theship, the charterer merely having use of thespace in the vessel in retum for his payment offreight. An owner who retains possession ofthe ship remains liable as carrier and mustanswer for loss or non-delivery of the goodsreceived for transportation. (Cebu SalvageCorp. vs. Philippine Home Assurance Corp.,G.R. No. 150403,Jan. 2~ 200~

Note: The same concept applies to a timecharter.

Q: What are the distinctions between abareboat or demise charter party fromcontracts of affreightment?

A:

BAREBOATIDEMISE CONTRACT OFCHARTER

CONTRACT AFFREIGHTMENTShip owner remains

liable and carriermust answer for any

breach of duty.

Negligence of thecharterer gives rise toits liability to others.

Charterer is regardedas owner pro hac vice.

Ship ownertemporarily.relinquishes

possession andownership of the

vessel.

Charterer is notregarded as owner.Ship owner retainsownership over thevessel. (CoastwiseLighterage v. CA,G.R. No. 114167,

Julv 12, 1995)

Q: What are the rights and obligations ofship owner or ship agent?

A:1. If vessel is wholly chartered, not to

accept cargo from others;2. To preserve the represented

capacity;3. To unload cargo clandestinely placed;4. To substitute another vessel when

cargo is less than 3/5 capacity;5. To leave port when charterer does

not bring cargo to vessel within thelay/ extra-lay days agreed upon;

6. To place vessel in a condition tonavigate; and

7. To bring vessel to nearest neutralport in case of war.

A:1. Pay the agreed price;2. Pay freightage on unboarded cargo;3. Pay losses to others for

unloadinglloading uncontracted orillicit cargo;

4. To wait if vessel needs repair; and5. Pay expenses for deviation.

Q: May the charterer unload the vesseleven before reaching the port ofdestination?

A: Yes:1. Before beginning the trip, paying half

of the freightage;2. Before reaching the port of

destination, freightage is paid in full.

Q: What are the instances when a charterparty may be rescinded?

A:1. At the request of the charterer:

4. By abandoning the charter andpaying half the price;

5. Error in tonnage or flag;6. Failure to place vessel at

charterer's disposal; i.7. Return the vessel due to pirates,

enemies, and bad weather;8. Arrival at port for repairs - if

repairs take less than 30 days,pay full freightage; if more than,freightage in proportion to thedistance covered.

2. At the request of the ship owner:a. If extra lay days terminate

without the cargo being placedalongside vessel; and

b. Sale by the owner of the vesselbefore loading by the charterer.

3. Due to fortuitous event:a. War - There is a governmental

prohibition of commercialintercourse, intended to bringabout an entire cessation for thetime being of all trade whatever;

b. Blockade A sort ofcircumvallation around a placeby which all foreign connectionand correspondence is, as far ashuman power can effect it, to becut off;

c. Prohibition to receive cargo atport of destination;

d. Embargo =, A proclamation ororder of State, usually issued in

UNIVERSITY OF SANTO TOMAS ~>.~!287Pacurtaa de De re ch a Civif 'V


times of war or threatenedhostilities, prohibiting thedeparture of ships or goods fromsome or all the ports of suchState until further order; or

e. Inability of the vessel to navigate.(Art. 640)

Q: What is a primage?

A: The bonus paid to the captain for asuccessful voyage.

Q: What is a demurrage?

A: It is the sum due, by express contract, forthe detention of the vessel for a time longerthan time set for loading. It is another name fora penal clause to compensate the owner of thevessel for its non-use.

Q: What are lay days?

A: The period when the vessel shall bedelayed in port for loading and unloading.

Q: What are extra lay days?

A: The days which follow after the lay dayshave lapsed.

Q: What is deadfreight?

A: Amount paid by or recoverable from acharterer of a ship for the portion of the ship'scapacity the latter contracted for but failed tooccupy.

Q: What is transshipment?

A: The act of taking cargo out of one ship andloading it in another, or the transfer of goodsfrom the vessel stipulated in the contract ofaffreightment to another vessel before theplace of destination named in the contract hasbeen reached, or the transfer for furthertransportation from one ship or conveyance toanother.

Q: What is loan on bottomry?I

A: ~ loan secured by the ship owner or shipagent guaranteed by the vessel itself andpayable only upon the arrival of vessel atdestination. It can be secured by the captainoutside the residence of the ship owner or shipagent.

Q: What is loan on respondentia?

A: A loan secured by the owners of the cargopayable upon safe arrival of cargo at

288 Iteam:hijli.,W

destination. The ship owner, agent or captaincannot secure the loan.

Q: What is the effect on the loan when thesecurity on the loan on bottomry orrespondentia is lost during voyage?

A:GR: If the ship of goods given as securityin a loan on bottomry or respondentia islost during voyage, the loan isextinguished.

XPN: Loan still exists where:-1-.- Loss is due to inherent defect of the

ship or goods;2. Loss is due to the barratry on the part

of the captain;3. Loss is due to the fault or malice of

the borrower;4. The vessel was engaged in

contraband; or5. The cargo loaded on the vessel be

different from that agreed upon.

Q: What are the common elements ofbottomry and respondentia?

A:1. Exposure of security to marine peril;

and

2. Obligation of the debtor conditionedonly upon safe arrival of the securityat port of destination. (Art. 732)

Q: What are the distinctions between loanon bottomry or respondentia and ordinaryloan?

A:BOTTOMRY OR

ORDINARY LOANRESPONDENTIANot subject to the Subject to the Usury

Usury Law. LawLiability is contingent

Absolutely payableupon the safe arrivalof the vessel.

The last lender is the The first lender is thepreferred creditor. preferred creditor

Q: When is loan on bottomry orrespondentia regarded as simple loan?

A:1. Lender loaned an amount larger than

the value of the object due tofraudulent means employed by theborrower. (Sec. 726, Code ofCommerce)


2. Full amount of the loan is not used forthe cargo or given on the goods if allof them could not have been loaded,the balance will be considered asimple loan. (Art. 727, Code ofCommerce)

3. If tile effects on which the money istaken is not subjected to any risk.(Art. 729, Code of Commerce)

Q: When loan on bottomry or respondentiaand marine. insurance concur, how muchdoes the insurer and lender recover in thevalue saved in case of shipwreck?

A: The value of what may be saved in case ofshipwreck shall be divided between the lenderand the insurer, in proportion to the legitimateinterest of each one, taking into considerationthe principal with respect to the loan.

Note: The insurable interest of the owner ofthe vessel is tile value of the vessel less theloan.

Accidents in Maritime Commerce

Q: What are the accidents in maritimecommerce?

A:1. Averages;2. Arrival under stress;3. Collision; Ot'4. Shipwreck.

Q: What are averages?

A: All extraordinary or accidental expenseswhich may be incurred during the voyage for.the preservation of the vessel or cargo or both.

Q: What are the kinds of averages?

A:1. General average - Damages or

expenses deliberately caused inorder to save the vessel, its cargo orboth from real and known risk.

2. Particular average - Damages orexpenses caused to the vessel orcargo that did not inure to thecommon benefit, and borne byrespective owners.

Q: What are the requisites for generalaverage?

A:1. Common danger present;2. Deliberate sacrifice of part of the

vessel or cargo;3. Successful saving of vessel and/or

cargo; and4. Proper procedure and legal steps.

Q: Who shall satisfy the amount of thegeneral averages?

A: All persons having an interest in the vesseland cargo therein at the time of the occurrenceof the average shall contribute. (Art. 812)

Q: Who shall satisfy the amount of theparticular averages?

A: The owner of the things which gave rise tothe expenses or suffered the damage shallbear the simple or particular averages (Art.810).

Q: What are the distinctions betweengeneral average and particular average?

A:GENERAL PARTICULARAVERAGE AVERAGE

Both the ship and No common da~ger tocargo are subject to both the vessel andthe same danger the cargoThere is a deliberate Expenses andsacrifice of part of the damages are notvessel, cargo, or both deliberately madeDamage or expenses Did not inure toincurred to the common benefit andvessel, its cargo, or profit of all personsboth, redounded to interested in the.the benefit of the vessel and her cargo.respective owners.All those who have Only the owner of thebenefited shall satisfy goods benefiting fromthe average. the damage shall bear

the expense ofaveraqe.

Q: What are goods not covered by generalaverage even if not sacrificed?

A:1. Goods not recorded in the books or

records of the vessel (Art. 855[2])2. Fuel for the vessel if there is more

than sufficient fuel for the voyage(Rule IX, York-Antwerp Rule)


Pacu{taa de CDerecfio Ci-ui] ~~289


Q: What is jettison?

A: Act of throwing overboard part of a vessel'scargo or hull in hopes of saving a ship fromsinking.

Q: What is the order of goods to be .castoverboard in case of jettison?

A:3. Those on deck, preferring the bigger

bulk with least value.4. Those below upper deck, beginning

with the heaviest with least utility.

Q: Distinqulshbetwsan overseas and inter-island trade regarding reimbursement andpayment of general averages on jettisoneddeck cargo.

A:1. In case of overseas trade, the York-

Antwerp Rules prohibit the loading ofcargo on deck. In case such cargo isjettisoned, the owner will not beentitled to reimbursement in view ofthe violation. If the cargo were saved,the owner must contribute to generalaverage.

2. In case of interisland trade, the York-Antwerp Rules allow deck cargo. Ifthe cargo loaded on deck is jettisonedas a result of which the vessel wassaved, the cargo owner is entitled toreimbursement. If the cargo is saved,the cargo owner must contribute tothe general average.

Reason: In interisland trade, voyages areusually short and there are intervening islandsand the seas are generally not rough. Inoverseas trade, the vessel is exposed formany days to the peril of the sea making deckcargo is dangerous to navigation.

Q: MV SuperFast, a passenger-cargovessel owned by SF Shipping Companyplying the inter-island routes, was on itsway I to Zamboanga City from the Manilaport when it accidentally, and without faultor negligence of anyone on the ship, hit ahug~ floating object. The accident causeddamiage to the vessel and loss of anaccornpanyinq crated cargd of passengerPRo In order to lighten the vessel and saveit from sinking and in order to avoid risk ofdamage to or loss of the rest of the shippeditems (none of which was located on thedeck), some had to be jettisoned. SFShipping had the vessel repaired at its portof destination. SF Shipping thereafter filed

290 !team:l,ijll.t&

a complaint demanding all the other cargoowners to share in the total repair costsincurred by the company and in the valueof the lost and jettisoned cargoes. InanSWer to the complaint, the shippers' solecontention Was that, under the Code ofCommerce, each' damaged party shouldbear its or his own damage and those thatdid not suffer any loss or damage were notobligated to make any contribution in favorof those who did. Is the shippers'contention valid? Explain.

A: No. The shippers' contention is not valid.The owners of the cargo jettisoned, to save thevessel from sinking and to save the rest of thecargoes, are entitled to contribution. Thejettisoning of said cargoes constitutes generalaverage loss which entitles the owners thereofto contribution from the owner of the vesseland also from the owners of the cargoessaved.

SF Shipping is not entitled tocontribution/reimbursement for the costs ofrepairs on the vessel from the shippers. (2000Bar Question)

Arrival Under Stress

Q: What is arrival under stress?

A: It is the arrival of a vessel at the nearestand most convenient port, if during the voyagethe vessel cannot continue the trip to the portof destination on account of the lack ofprovisions, well-founded fear of seizure,privateers or pirates, or by reason of anyaccident of the sea disabling it to navigate.(Art. 819)

Note: In arrival under stress, the captain mustfile a Protest which is merely a disclaimer forthe shipowner not to be liable.

Q: When is arrival under stress unlawful?

A:1. Lack of provisions is due to

negligence to carry according tousage and customs;

2. Risk of enemy not well known ofmanifest;

3. Defee! of vessel is due to improperrepair; or

4. Malice, negligence, lack of foresightor skill of captain. (Art. 820)


Collision and Allision

Q: What is collision?

A: It is the impact of two moving vessels.

Q: What is allision?

A: It is the impact between a moving vesseland a stationary one.

Q: What are the zones of time in thecollision of vessel?

A:1. First zone - all time up to the moment

when risk of collision begins.Note: One vessel is a privilegedvessel and the other is a vesselrequired to take action to avoidcollision.

2. Second zone - time between momentwhen risk of collision begins andmoment it becomes practically acertainty.

Note: In this zone, the conduct of thevessels are primordial. It is in thiszone that vessels must observenautical rules, unless a departuretherefrom becomes necessary toavoid imminent danger. The vesselwhich does not make such strictobservance is liable.

3. Third Zone. - time when collision iscertain and up to the time of impact.Note: An error at this point no longerbears' any consequence.'

Q: What is an error in extremis?

A: The sudden movement made by a faultlessvessel during the third zone of collision withanother vessel which is at fault under thesecond zone. Even if sudden movement iswrong, no responsibility will fall on the faultlessvessel.

Q: What are the rules governing liabilitiesof parties in case of collision?

A:1. One vessel at fault - The ship owner

of such vessel shall be liable for allresulting damages.

2. Both vessels at fault - Each vesselshall suffer their respective losses butas regards ""/the owners of the

cargoes, both vessels shall be jointlyand severally liable.

3. Vessel at fault not known - Each. vessel shall suffer its own losses andboth shall be solidarlly liable for losesor damages on the cargo. (Doctrineof Inscrutable Fault)

4. Fortuitous event - Each shall bear its.own damage.

5. Third vessel at fault - The thirdvessel shall be liable for losses anddamages sustained.

Q: What is the role of a "protest" withrespect to collisions?

A: The action for recovery of damages arisingfrom collisions cannot be admitted if a protestor declaration is not presented within twenty-four hours before the competent authority ofthe point where the collision took place, or thatof the first port of arrival of the vessel, if inPhilippine territory, and to the Filipino consul ifit occurred in a foreign country (Art. 835).1

INote: Failure to make a protest is net animpediment to the maintenance of a civil rctionbased on quasi-delict. i

Q: When is a protest required?

A:1. Arrival under stress; (Art. 612 [8])2. Shipwreck; (Arts. 601 [15J, 843)3. If the vessel has gone through a

hurricane or where the captainbelieves that the cargo has suffereddamages or averages; (Art. 642) and

4. Maritime collision. (Art. 835)

Q: Who can file a maritime protest?

,A:1. In case of maritime collision, the

passenger or other personsinterested who may be on board thevessel or who were in a conditionwho can make known their wishes(Arts. 835-836) or the captain himself.(Verzosa and Ruiz, Rementeria y Cia.v. Lim, G.R. No. 20145, Nov. 15,1923)

2. The captain in cases of:a. Arrival under stress;b. Shipwreck; orc. If the vessel has gone through a

hurricane or where the captainbelieves that the cargo hassuffered damages or averages.

UNIVERSITY OF SANTO TOMAS ,~.~ 291Pacu(tad de (j)ereclio Cioil 'V

TRANSPORTATION LAWS: SHIP MORTGAGE DECREE OF 1978I

Q: liwo vessels figured in a collision alongthe i Straits of Guimaras resulting incon~iderable loss of cargo. The damagedvessels were safely conducted to the Portof Iloilo. Passenger A failed to file amaritime protest. B, a non-passenger but ashipper Who suffered damage to his cargo,likeWise did not file a maritime protest atall. Can A and B successfully maintain anaction to' recover losses and damagesarising from the collision? Reason briefly.

A: B, the shipper can successfully maintain anaction to recover losses and damages arisingfrom the collision notwithstanding his failure tofile a maritime protest since the filing thereof isrequired only on the part of A, who, being apassenger of the vessel at the time of thecollision, was expected to know thecircumstances of the collision. A's failure to filea maritime protest will therefore prevent himfrom successfully maintaining an action torecover his losses and damages. (Art 836)

Alternative Answer:A can maintain an action to recover damagesif he was not in a condition to make known hiswishes. B can maintain an action to recoverdamages since he was not on board thevessel. (Art. 836) (2007 Bar Question)

Q: A severe typhoon was raging Whim thevessel SS Masdaam collided With MIVPrincess. It is conceded that the typhoonwas the major cause of collision, althoughthere was a very strong possibility that itcould have been avoided if the captain ofthe SS Masdaam was not drunk and thecaptain of the MIV Princess Was not asleepat the time of collision.

Who should bear the damages to thevessels and their cargoes?

A: The ship owners of SS Masdaam and MNPrincess shall each bear their respective lossof vessels. For the losses and damagessuffered by their cargoes, both ship ownersare solidarily liable. (1998 Bar Question) ,

Q: W.hat is a shipwreck?I

A: ~he loss of the vessel at sea as aconsequence of its grounding, or runningagai~st an object in sea or on the coast. If thewreck was due to malice, negligence, or lackof skill of the captain, the owner of the vesselmay demand indemnity from said captain.

292

Q: Who shall bear the losses in shipwreck?

A:GR: The loss of a ship and her cargo shallfail upon their respective owners. (Art. 840)

XPN: If the wreck Was due to malice,negligence, or lack of skill of the captain, orbecause the' vessel put to sea wasinsufficiently repaired and equipped, theship agent or the shippers may demandindemnity from the captain for the damagecaused to the vessel or to the cargo by theaccident, (Art. 841)

Academics CommitteeC/Jm;pCIJIIII: Abraham D. Cenuino II

//icc-C/.JtJir.Fw /1~'(JdeJJ/i,.:f: Jeannie A. Lnurcnrinol/ia:-Cbairjhr Admi" e.,:"l-'i-lIan(t.': Aissa Celine I-I. Luna

V,<"-O'cJir/or LiYII,,1 e:", f)e.r{~1/.' Loise Rae (;. Naval

Mercantile Law Comm ittecJulied Head: "in!y '1'. /\mpaguey

A.r.rl. Jubjcd tlcad: Manilyn Rose S. Sotelo

Members:Edwin Marc T. Baldi"

/\ ircen 1\1. Cncb»Socrates Belljie I. MarbilRon Cherric S. Mcndoxa

[~dison James I', Pngali!auanMaybcllinc M. Santiago


Q: What are the two concepts of Salvage?

A:1. Service which one person renders to

the owner of a ship or goods by hisown labor, preserving the goods orthe ship which the owner or thoseentrusted with the care of them haveeither abandoned in distress at sea,or are unable to protect or secure.

2. Compensation allowed to persons bywhose voluntary assistance a ship atsea or her cargo or both have beensaved in whole or in part fromimpending sea peril or such propertyrecovered from actual peril or loss, asin cases of shipwreck, derelict orrecapture.

Q: What are the requisites to a validsalvage claim?

A:1. Valid object of salvage;2. Object must have been exposed to

marine peril (not perils of the ship);3. Services voluntarily rendered when

not required as an existing duty orfrom special contract; and

4. Services are successful, total orpartial.

Q: What is the right of a salvor over theobject salvaged?

A: A salvor acquires a right to be paid for hisservices a reasonable and propercompensation out of the property itself. He hasan interest in the property called a lien. He is,to all intents and purposes, a joint owner and ifthe property is lost he must bear his share likethe other joint owners. (Erlanger v. SwedishEast Asiatic, G.R. No. L - 10051, Mar. 9,1916)

Q: What may be the subjects of salvage?

A:1. Ship itself;2. Jetsam - goods which are cast into

the sea;3. Flotsam - goods which float upon the

sea when cast overboard; or4. Ligan or Lagan - goods cast into the

sea tied to a buoy so that they maybe found again by the owners. (p.17:],Judge Diaz)

Note: Taking passengers from a sinking ship,without rendering any service in rescuing thevessel, is not a salvage service, the samebeing a duty of humanity and not for reward.

Q: Who are the persons who have no rightto a reward for salvage?

A:1. Crew of the vessel saved;

2. Person who commenced salvage inspite of opposition of the captain orhis representative; and

3. A person who fails to deliver asalvaged vessel or cargo to theCollector of Customs

Q: What is a derelict?

A: It is a ship or her cargo which is abandonedand deserted at sea by those who are incharge of it, without any hope of recovering it,or without any intention of returning to it. It is aproper subject of salvage.

Q: What is the procedure in the claiming ofreward in case of a derelict? .

A:1. The salvor must bring the cargo or

tow the vessel to the nearest portwhere it will be delivered to thecollector of customs, the provincialtreasurer or to the municipal mayorwho will advertise the fact of salvage;

2. If the owner of the salvaged cargo orvessel apears, he may takepossession of the cargo or vesselpaying a reward not exceeding 50%of the value of the object salvaged;

3. If no claim is made within 3 monthsafter the publication of tileadvertisement, the thing/s saved shallbe sold at public auction and theproceeds, after deducting the rewardand expenses, shall be deRositedwith the Treasury; I

4. If no one claims the same after 3years, % shall go the salvors and % tothe government.


Pacu{taa de CDereclio Civi] .~293

TRANSPORTATION LAWS: SALVAGE LAW

Q: When is a service regarded as that oftowage or that of salvage?

A: If a vessel, by towing, is aided to escapepresent or .prospectlvs danger, the servite willbe regarded as one of salvage, and thetowage as merely incidental. If the towage ismade not for the purpose of aiding the vessealfrom escaping present or prospective dangerbut taking it to some other place, then theservice will be regarded as that of simpletowage. (Alhambra Cigar & Cigarette Factoryv. La Granja, 40 Off. Gaz. t t'" Supp. 252)

294

Academics Com m ittccC:hmipclTfll1: Abraham D. (;cnuino 11

I/i·~r-Ch(jir./or /-lmdemitJ: J eannie 1\. I .aurentinoI/i,"-Chtlzijill' Admill i,N FiIl,lI/<': Aissn Coline 11. J .una

l/i~'e-CJI"irjf)r iJf),fJlIl i'" lJe'''{~II: Loise Rae (;. Naval

Mercantile Law CommittceJubjed l-tcad: Hoi), 'J'. /\Illpagul')'

/l.f.r/. JII/?/(!d Head- Manilvn Rn:->cS. Sotdo

Members:Edwin Mnrc'!' llaldia

Airccu M. CachoSocrates Bcnjic I. MarbilRon Chcrric S. Mendoza

Edison James F. PagalilauanrViaybclLinc M. Santiago


'CARRIAGE OF GOODS BY SEA ACT, (COGSA) (C. 65)

Q: When will COGSA apply?

A: It will only be applied in terms of loss ordamage of goods transported to and fromPhilippine ports in foreign trade. It may alsoapply to domestic trade when there is aparamount clause in the contract.

Q: What is the evidentiary value of a bill oflading?

A:GR: It is a peculiar contract because theevidence of the contract of carriage is thebill of lading. The bill of lading is thecontract of carriage.

XPN: With respect to charter parties, thecontract of carriage is the charter partycontract. The bill of lading merely becomesa document of title. It specifically becomesa receipt over thl" goods.

XPN to XPN: When the bill of lading issubsequently negotiated to a third party,follow the general rule. It now becomes thecontract of carriage and not the charter-party contract.

Note: Issuance of the bill of lading is merelypermissive as it shall be issued only upondemand of the shipper.

Q: What is the "tackle to tackle" rule?

A: It states that the shipper shall beresponsible for the goods the moment itpasses through one side of the ship for thepurpose of loading until it passes through theother side for discharging.

Q: What are the responsibilities of thecarrier?

A: The carrier shall be bound to exercise duediligence to:

1. make the ship seaworthy;2. properly man, equip, and supply the

ship; and3. make the holds, refrigerating and

cooling chambers, and all other partsof the ship in which goods arecarried, fit and safe for theirreception, carriage, and preservation.

Q: When is a vessel considered seaworthyand/or cargoworthy?

A: A vessel is seaworthy if its hull, tackle andmachinery are in a state of good repair, if sheis sufficiently provided with fuel and ballast,and is manned by an efficient crew.

A vessel is cargoworthy if it is sufficientlystrong and equipped to carry the particularkind of cargo which she has contracted tocarry, and her cargo must be so loaded that itis safe for her to proceed on her voyage.(Santiago Lighterage Corp. v. CA, G.R. No.139629, June 21, 2004)

Q: What cases are covered under theCOGSA?

A: It applies only in case of loss or damage,and not to misdelivery or conversion of goods.(Ang v. American Steamship AgenCies, lnc.,G.R. No. L-22491, Jan. 27, 2967)

Also, the deterioration of goods due to delay intheir transportation constitutes "loss" or"damage" within the meaning of Sec. 3(6) ofCOGSA. (Mitsui O.S.K. Lines Ltd. v. Court ofAppeals, G.R. No. 119571, Mar. 11, 1998)

Q: What is the amount of the carrier'siability under the COGSA?

A:1. The liability limit is set at $500 per

package or customary freight unlessthe nature and value of such goods isdeclared by the shipper.

2, Shipper and carrier may agree onanother maximum amount, but notmore than amount of damage actuallysustained.

Note: When the packages are shipperf in acontainer supplied by carrier and the numberof such units is stated in the bill of lading, eachunit and not the container constitute the"package".


Pacu{taa de CDerecfio Civif

TRANSPORTATION LAWS: CARRIAGE OF GOODS BY SEA ACT

Q: What are the instances where there is noliability?

A:1. If the nature or value of goods was

knowingly and fraudulently misstatedby the shipper;

2. If damage resulted from thedangerous nature of the shipmentloaded without the consent of thecarrier;

3. If unseaworthy, which is not due tothe negligence of the carrier; or

4. If the deviation was to save life orproperty at sea.

Q: When should notice be filed in case ofdamage to goods under the COGSA?

A:1. If the damage is apparent - Notice

must be immediately given. Thenotice may either be in writing ororally.

2. If the damage is not apparent -Notice must be given within 3 daysafter delivery.

Q: What is the consequence if no noticeWas filed?

A: There is no consequence on the right tobring suit if no notice is filed unlike under theCode of Commerce. It only gives rise to apresumption that the goods are delivered inthe same condition as they are shipped.

There is also no consequence if thetransportation charges and expenses are paidunlike under the Code of Commerce.

IQ: When should suits for loss or damage ofcargo be brought?

,

A: The suit should be brought Within one yearfrom:

1.

2.

Delivery of the goods, in case ofdamage; orThe date when the goods shouldhave been delivered, in case of loss.

Q: To whom should such delivery be madeas basis of the computation of the one-yearperiod?

A: The one-year period is computed from thedelivery of goods to the arrastre operator andnot to the consignee.

296

Q: When is the one year period in theCOGSA interrupted?

A:1. When an action is filed in court; or2. When there's a contrary agreement

between the parties.

Q: Is Art. 1155 of the Civil Code providingthat the prescription of actions isinterrupted by the making of anextrajudicial written demand by the creditorapplicable also to actions brought underthe COGSA?

A: No, written claims does not toll the runningof the one-year prescriptive period under theCOGSA. (Dole Philippines, Inc. v. MaritimeCompany of the Philippines, G.R. No. L-61352, Feb. 27, 1987)

Q: Who are the persons who can givenotice to, and bring suit against thecarrier?

A:1. The shipper;2. The consignee; or3. Any legal holder of the bill of lading

like the indorsee, subrogee, or theinsurer of the goods. (Chua Kuy v.Everett Steamship Corporation, GR.No. L-5554, May 27, 1953)

Q: Does the one-year prescriptive periodwithin which to file a case against thecarrier also apply to a claim filed by aninsurer who stands as a- subrogee to theinsured?

A: Yes, it includes the insurer of goods. Also,whether the insurer files a third party complaintor maintains an independent action is of nomoment (Filipino Merchants Insurance Co.,Inc. v. Alejandro, G.R. No. L-54140, Oct. 14,1986).

Note: The ruling in the above-cited caseshould apply only to suits against the carrierfiled either by the shipper, the consignee or theinsurer, not to suits by the insured against theinsurer. The basis of the insurer's liability is theinsurance contract and such claim prescribesin 10 years, in accordance with Art. 1144 ofthe Civil Code. (Mayer Steel Pipe Corporationv. CA, GR. No. 124050, June 19, 1997)


Q: AA entered into a contract with BB thruCC to transport ladies' wear from Manila toFrance with transshipment at Taiwan.Somehow the goods were not loaded atTaiwan on time. Hence, when the goodsarrived in France, they arrived "off-season"and AA was paid only for one-half the valueby the. buyer. AA claimed damages fromthe shipping company and its agent. Thedefense of the BB and CC was prescription.

Considering that the ladies' wear suffered"loss of value," as claimed by AA, shouldthe prescriptive period be' one year underthe Carriage of Goods by Sea Act, or tenyears under the Civil Code? Explain briefly.

A: The applicable prescriptive period is tenyears under the Civil Code. The one-yearprescriptive period under the Carriage ofGoods by Sea Act applies in cases of loss ordamages to the cargo. The term "loss" asinterpreted by the Supreme Court in MitsuiO.S.K Lines Ltd. v. CA (G.R. No. 119571,Mar. 11, 1998), contemplates a situationwhere no delivery at all was made by thecarrier of the goods because the same hadperished or gone out of commerce,deteriorated or decayed while in transit.

In the present case, the shipment of ladies'wear was actually delivered. The "loss ofvalue" is not the total loss contemplated by theCarriage of Goods by Sea Act. (2004 BarQuestion)

Q: Does the arrastre operator have a legalstanding to file an action against the carrier

A:GR: No. He has nothing to do with thetransportation of the goods. The 1-yearperiod governs only transport of goodsthrough common carrier.

XPN: If he is sued as an alternativedefendant, then he can file an actionagainst the carrier. The action should beinstituted within the 1-year period.

Q: Clause 18 of the bill of lading providesthat the owner should not be liable for lossor damage of cargo unless written noticethereof was given to the carrier within 30days after receipt of the goods. However,Section 3 of the Carriage of Goods by SeaAct provides that even if a notice of loss ordamage is not given as required, "that factshall not affect or prejudic.e the right of theshipper to bring suit within one year afterthe delivery of the goods." Which of thesetwo provisions should prevail?

A: Clause 18 must of necessity yield to theprovisions of the Carriage of Goods by Sea'Act in view of the proviso contained in thesame Act which says: "Any clause, covenant,or agreement in a contract of carriage relievingthe carrier or the ship from liability for loss ordamage to or in connection with the goods xxxor lessening such liability otherwise than asprovided in this Act, shall be null and void andof no effect." (Sec. 3) This means that a carriercannot limit its liability in a manner contrary towhat is provided for in said Act, and so clause18 of the bill of lading must of necessity be nulland void. (E. E. Elser, Inc. v. CA, G.R. No. L-6517, Nov. 29, 1954)

Q: What is the prescriptive period in caseof misdelivery and conversion of go09s?

A: In case of misdelivery or conversi6b, theproper periods are: i

1. If there is a written contract - 10years (Art. 1144, Civil Code)

2. Oral contract - 6 years (Art. 1145)3. For quasi-delict - 4 years (Art. 1146)

Academics Corn m itteeCIJt1irper,wu: Abraham D. Gcnuin o IT

'Via:-Chair.!rJr Acudcttll'(c' Jeannie A. LuurcntinoVia:-Cbair./or Admin i'" j-:','1ltflw:: Aissa Celine [-I. Luna

r 'ice-Cbair lor LtylJtll & De.f{gll: Loise Rae G. Naval

Mercantile Law CommitteeJtliyi:d Head.' l-loly T. t\ mpaglle)'

A.f.fl. SIIh;i:d Hcail: Manilyn Rose S. Sotelo


Ain ..:en 1'\'1.C,lchoSocrates Benjic I. MarbilRon Chcrric S. Mendoza

Edison JJ.I11t:S I,'. Pag:l1ilau:ll1Maybcllinc M. Santiagn


Pacu(taa de De r e ch o Cioi] ·.~297

TRANSPORTATION LAWS: PUBLIC SERVICE ACT

PUBLIC SERVICE ACT(Commonwealth Act No. 146)

Q: What are the purposes of the PublicService Act?

A:1. Protect the public against

t unreasonable charges and poor,

I inefficient service;2. Protect and secure investments in

I public services; and3., Prevent ruinous competition.

iQ: What is a public service?

A: Every person that may own, operate,manage, control in the Philippines, forhire/compensation, with general/limitedclientele whether permanent, occasional oraccidental, and done for general businesspurposes, any common carrier, railroad, streetrailway, traction railway, subway motor vehicle,steamboat, or steamship line, ferries andwatercraft, shipyard, ice-plant, electric light,heat and power or any other public utility.

Q: What is a public utility?

A: A business or service engaged in regularlysupplying the public with some commodity orservice of public consequence sush aselectricity, gas, water, transportation,telephone or telegraph service.

Q: What is a Certificate of PublicConvenience (CPC)?

A: An authorization issued for the operation ofpublic services for which no franchise, eithermunicipal or legislative, is required by law,such as a common carrier.

Under the Public Service Law, a certificate ofpublic convenience can be sold by the holderthereof because it has considerable materialvalue and is considered a valuable asset(Raymundo v. Luneta Motor Co., G.R. No.39902, Nov. 29, 1933).

Q: What is a certificate of publicconvenience and necessity (CPCN)?

A: A certificate issued by the appropriategovernment agency for the operation of apublic service for which prior franchise isrequired by law.

Note: There is no more distinction between aCPC and a CPCN. Unless otherwise exempt,no public service shall operate without havingbeen issued a CPC or a CPCN.

298

Q: Antonio was granted a Certificate ofPublic Convenience (CPC) in 1986 tooperate a ferry between Mindoro .andBatangas using the motor vessel "MVLotus." He stopped operations in 1988 dueto unserviceability of the vessel. In 1989,Basilio was granted a CPC for the sameroute. After a few months, he discoveredthat Carlos was operating on his routeunder Antonio's CPC. Because Basilio fileda complaint for illegal operations with theMaritime Industry Authority, Antonio andCarlos jointly filed an appllcation for saleand transfer of Antonio's CPC andsubstitution of the vessel "MV Lotus" withanother owned by Carlos. Should Antonio'sand Carlos' joint application be approved?Give your reasons.

A: The joint application of Antonio and Carlosfor the sale and transfer of Antonio's CPC andsubstitution of the vessel MV Lotus withanother vessel owned by the transferee shouldnot be approved. The certificate of publicconvenience and MV Lotus are inseparable.The unserviceability of the vessel covered bythe certificate had likewise rendered ineffectivethe certificate itself, and the holder thereof maynot legally transfer the same to another.(Cohon v. CA, G.R. No. 82558, Aug 20, 1990)(1992 Bar Question)

Q: Does the CPC confer upon the holderany proprietary right or interest in the routecovered thereby?

A: No. (Luque v. Villegas, G.R. No. L-22545,Nov. 28, 1969). .

However, with respect to other persons andother public utilities, a certificate of publicconvenience as property, which represents theright and authority to operate its facilities forpublic service, cannot be taken or interferedwith without due process of law. Appropriateactions may be maintained in courts by theholder of the certificate against those whohave not been authorized to operate incompetition with the former and those whoinvade the rights which the former haspursuant to the authority granted by the PublicService Commission (A.L. AnimenTrensponetior. Co. v. Golingco, G.R. No.17151, Apr. 6, 1922)


Q: What are the requirements for the grantof certificate of public convenience?

A:1. Applicant must be a citizen of the

Philippines. If the applicant is aCorporation, 60% of its capital mustbe owned by Filipinos;

2. Appli cant mustnecessity;

prove public

3. Applicant must prove the operation ofproposed public service will promotepublic interest in a proper andsuitable manner; and

4. Applicant must have sufficientfinancial capability to undertakeproposed services and meetingresponsibilities incidental to itsoperation. (Kilusang Mayo Uno v,Garcia GR No. 108584, Oec. 22,1994)

Q: Cite instances where a certificate ofpublic convenience is not necessary?

A:1. Warehouses;2. Animal-drawn vehicles or banca

powered by oar or by sail; tug boats.and lighters;

3. Airships except as to fixing rates;4. Radio companies, except as to fixing

of rates;5. Ice plants;6. Public market; and7. Public utilities operated by the

national government or politicalsubdivision except as to rates.

Q: The Batong Bakal Corporation filed withthe Board of Energy an application for a .Certificate of Public Convenience for thepurpose of supplying electric power andlights to its factory and its employees livingwithin the compound. The application wasopposed by the Bulacan ElectricCorporation, contending that the BatongBakal Corporation has not secured afranchise to operate and maintain anelectric plant. Is the opposition'scontention correct?

A: No. A Certificate of Public Conveniencemay be granted to Batong Bakal Corporation,though not possessing a legislative franchise,if it meets all the other requirements. There isnothing in the law nor the Constitution, whichindicates that a legislative franchise isnecessary or required for an entity ,to operate

as supplier of electric power and light to itsfactory and its employees living within thecompound. (1998 Bar Question)

Q: What is the prior operator rule?

A: Provides existinq franchise operatorpreferential right within authorized territory aslong as said operator renders satisfactory andeconomical service.

This rule subordinates the prior applicant rulewhich gives first applicant priority only if thingsand circumstances are equal.

A prior operator must be given the opportunityto extend its transportation services before'permitting a new operator to operate in theterritory of said prior operator.

Q: What is the prior applicant rule?

A: Applies to situations wherein two applicantsare applying for a certificate of publicconvenience over a given territory. Where bothapplicants are similarly situated, the priorapplicant shall have the certificate over theother.

Q: What is the third operator rule?

A: Where two operators are more than servingthe public there is no reason to permit a thirdoperator to engage in competition with them.The fact that it is only one trip and of littleconsequence is not sufficient reason to grantthe application. (Yangco V. Esteban, GR No.38586, Aug. 18, 1933)

Q: What is the protection of investmentrule?

A: The law contemplates that the first licenseewill be protected in his investment and will notbe subjected to a ruinous competition.

So long as an operator under a prior licensecomplies with its terms and conditions and thereasonable rules and regulations for itsoperation, and meets the reasonable demandsof the public, it will be protected rather thandestroy its investment by the granting of thesecond license to another person for the samething over the same route of travel.

Note: The "prior operator" and "protection ofinvestment" rules cannot take precedence overthe convenience of the public. (Martires ErenoCo. v Public Service Commission, GR No. L-25962, Sept. 30, 1975)

U N I V E R S I TV 0 F SAN ToT 0 MAS

Pacu(taa de CDerecfio CiviC~,,~ 299

TRANSPORTATION LAWS: PUBLIC SERVICE ACT

Q: What are the grounds that oppositorsmay raise to the application for a certificateof public convenience?

A:1. The area has already a well-

established operator - prior operatorrule.

2. Interpose an objection stating that thegrant of the application would resultto a ruinous competition.

3. Attack the citizenship of the applicant(Sec. 11, Art. XII of the 1987Constitution prohibits the granting offranchise or certificate for theoperation of public utility in favor ofnon-Filipino citizens); or

4. The applicant does not have thenecessary financial capacity.

Q: When can the Public ServiceCommission (Board) exercise its power tosuspend or revoke certificate of publicconvenience? .

A: Under Sec. 19(a) of the Public Service Act,the Commission (Board) can suspend orrevoke a certificate of public convenienceWhen the operator fails to provide a servicethat is safe, proper or adequate, and refuses torender any service which can be reasonablydemanded and furnished. (1993 BarQuestion).

Q: Robert is a holder of a certificate ofpublic convenience to operate a taxicabservice in Manila and suburbs. Oneevening, one of his taxicab units wasboarded by three robbers as they escapedafter I staging a hold-up. Because of saidincident, the LTFRB revoked the certificateof public convenience of Robert on theground that said operator failed to rendersafe, proper and adequate service 'asrequired under Sec. 19(a) of the PublicService Act.

Was the revocation of the certificate ofpublic convenience of Robert justified?Explain.

A: No. A single hold-up incident which doesnot link Robert's taxicab cannot be construedthat he rendered a service that is unsafe,inadequate and improper. (Manzanal v.Ausejo, GR. No. L-31056, Aug 4, 1988)

300

Q: What must be considered in case ofsuspension of the certificate to satisfy therequirement of due process?

A:GR: Prior notice or hearing must be carriedout before suspension order is issued.

XPN: Notice and hearing may bedispensed if necessary to avoid serious orirreparable damage or inconvenience topublic or private interest. In which case,suspension not more than 30 days prior tohearing is allowed.

Q: What is the registered owner rule?

A: The registered owner of a certificate ofpublic convenience is liable to the public forthe injuries or damages suffered by thirdpersons caused by the operation of saidvehicle, even though the same had beentransferred to a third person.

Note: The registered owner is not allowed toescape responsibility by proving that a thirdperson is the actual and real owner.

Q: What is the so-called "kabit system"?

A: It is an arrangement whereby a person whohas been granted the certificate allows otherpersons who own motor vehicles to operateunder his license, sometimes for a fee orpercentage of the earnings. (2005 BarQuestion)

Although not outrightly penalized as a criminaloffense, the kabit system is invariablyrecognized as being contrary to public policyand therefore, void and inexistent under Art.1409 of the New Civil Code. It is afundamental principle that the court will not aideither party to enforce an illegal contract, butwill leave them both where it finds them. (LitaEnterprises, Inc. v. lAC, G.R. No. 64693, Apr.27, 1984)


Q: May the registered owner of the vehiclebe allowed to prove that there is already atransfer of ownership to another personunder the kabit system?

A: No. One of the primary factors consideredin. the granting of a certificate of publicconvenience for the business of publictransportation is the financial capacity of theholder of the license, so that liabilities arisingfrom accidents may be duly compensated. Thekabil system renders illusory such purposeand, worse, may still be availed of by thegrantee to escape civil liability caused by anegligent use of a vehicle owned by anotherand operated under his license.

If a registered owner is allowed to escapeliability by proving who the supposed owner ofthe vehicle is, it would be easy for him totransfer the subject vehicle to another whopossesses no property with which torespond financially for the damage done. (Limv. CA, G.R. No. 125817, Jan. 16,2002)

Q: What is the reason behind theproscription against the kabit system?

A: The thrust of the law in enjoining the kabitsystem is not so much as to penalize theparties but to identify the person upon whomresponsibility may be fixed in case of anaccident with the end view of protecting theriding public. The policy therefore loses itsforce if the public at large is not deceived,much less involved. (Lim v. CA, G.R. No.125817, Jan. 16, 2002)

Q: What is the so-called "boundarysystem"?

A: Under this system the driver is engaged todrive the owner/operator's unit and pays thelatter a fee commonly called boundary for theuse of the unit. Whatever he earned in excessof that amount is his income. (PaguioTransport Corp. v. NLRC, G.R. No. 119500,Aug. 28, 1998)

Q: What kind of relationship exists betweenthe owner of the vehicle and the driverunder a "boundary system" arrangement?

A: The relationship between jeepneyowners/operators on one hand and jeepneydrivers on the other under the boundarysystem is that of employer-employee and notof lessor-lessee. (Martinez v. NLRC, GR. No.117495, May 29, 1997)The features which characterize, the"boundary system" - namely, the fact that thedriver does not receive a fixed wage but gets

only the excess of the amount of farescollected by him over the amount he pays tothe jeep-owner, and that the gasolineconsumed by the jeep is for the account of thedriver - are not sufficient to withdraw, therelationship between them from that of theemployer and employee. (National LaborUnion v. Dinglasan, ·GR. No. L-14183, Nov. 4,1993)

Academics CommitteeC};airpenfllt: t\ braham D, Gcnuino 11

Via-Cbairfor r/aulellliu: Jeannie A. T.aurcntinof/i,,-C;'m'"jor Admill ,:- Fmanc«: Aissa Cd;nc H. Luna

r 'ia:-(}wirI()rl~!y(Jttl Ii";'" nl'.f~~Jl: Loise Rae (~. Naval

Mercantile Law COlTIIUineeJab/cd I-/,"d: ITnly T ;\mpaguc)'

A .•..•.I. Sub),,, 1-le"tI-Mauilyn Rose S. Sotelo

Members:Edwin l\Iarc T. Baldia

Airecn M. CachoSocrates Bcnjie 1. I\farbilRon Cherric S. Mcndoxa

Edison Jarl1l:s I,', Pagalihu:lll.~fa)"bcllinc M. Santiago

~~~~- .... , .

UN I V E R 5 I T V 0 F 5 ANT 0 To MAS

PaCU{taa de CJ)erecfio Civif ~.~ 301

TRANSPORTATION LAWS: WARSAW CONVENTION OF 1929

WARSAW CONVENTION OF 1929 Q: What documents are involved under theWarsaw Convention?

Q: When is this law applicable?

A: This Convention applies to all internationalcarriage of persons, luggage or goodsperformed by aircraft for reward. It appliesequally to gratuitous carriage by aircraftpertormed by an air transport undertaking.(Alt. t[1})

Q: What is an international transportation?I

A: Any carriage in which, according to thecontract made by the parties, the place ofdeparture and the place of destination,whether or not there be a break in the carriageor a transshipment, are situated either:

1. Within the territories of two HighContracting Parties; or

2. Within the territory of a single HighContracting Party, if there is anagreed stopping place within aterritory subject to the sovereignty,suzerainty, mandate or authority ofanother Power, even though thatPower is. not a party to theConvention. (Art. 1[2])

Note: A High Contracting Party is one of theoriginal parties to the convention.

Q: What is the effect if the transportationshall be performed by several successiveair carriers?

A: It shall be deemed as one undividedcarriage if it has been regarded by the partiesas a single operation, whether it had beenagreed upon under the form of a singlecontract or of a series of contracts, and it doesnot lose its international character merelybecause one contract or a series of contractsis to be performed entirely within the territoryof the same State (Art. 1[3J, as amended byThe Hague Protocol). This is also known asthe single operation rule.

Carriage to be performed by severalsuccessive carriers under one ticket, or undera ticket and any conjunction ticket issuedtherewith, is regarded as a single operation.(Art. 15, lATA-Recommended Practice)

A:1. Passenger ticket;2. Baggage check (identification card

attached to the baggage); and3. Airway bill or air consignment note

(counterpart of bill of lading).

Q: What is the role ofa passenger ticket,baggage check and airway bill?

A: It shall constitute prima facie evidence ofthe conclusion and conditions of the contractof carriage. (Art. 3[2J, as amended by TheHague Protocol).

Q: What is an airway bill or an airconsignment note?

A: A contract of carriage which is prima facieevidence of the:

1. Conditions of transportation;2. Receipt of goods; and3. Conclusion of contract. (Art. 11[1])

Q: Does an airway bill stand as evidence oftitle to goods?

A: No. Hence, the consignor has a right todemand the retum of the goods while in thecustody of the carrier, except, when the goodsare delivered to the consignee this right maybe exercised:

1. When the goods are still on board;2. Before delivery to the consignee if the

goods are already in the port ofdestination; and

3. Before reaching the port ofdestination. (Art. 12)

Q: What is the consequence of absence,irregularity or loss of passenger ticket,baggage check or airway bill?

A: Its does not affect the existence or thevalidity ofthe contract of carriage which shall,none the less, be subject to the rules of theConvention.

Nevertheless, if, with the consent of thecarrier, the passenger embarks without apassenger ticket t;)aving been delivered, thecarrier shall not be entitled to avail himself ofthe provisions of Article 22 on the limitation ofliability of the carrier. (Art. 3[2J, as amended byThe Hague Protocol)


Q: What are the liabilities of an air carrierunder the Warsaw Convention (WC)?

A:1. With respect to passengers - The

carrier shall be liable for damagessustained in the event of death orwounding of a passenger or any otherbodily injury suffered by a passenger,if the accident which caused thedamage so sustained took place onboard the aircraft or in the course ofany of the operations of embarking ordisembarking. (Art. 17)

2. With respect to goods - The carriershall be liable for damage sustainedin the event of the destruction or lossof, or of damage to, any checkedbaggage or any goods, if theoccurrence which caused thedamage so sustained took placeduring the transportation by air. (Art.18 [1])

Note: The transportation by air withinthe meaning of the precedingparagraph shall comprise the periodduring which the baggage or goodsare in the charge of the carrier,whether in an airport or on board anaircraft, or, in case of a landingoutside an airport, in any placewhatsoever. (Art. 18[2])

Theperiod of the transportation by airshall not extend to any transportationby land, by sea, or by river performedoutside an airport. If however, suchtransportation takes place in theperformance of a contract fortransportation by air, for the purposeof loading, delivery, or transshipment,any damage is presumed, subject toproof to the contrary, to have beenthe result of an event which tookplace during the transportation by air.(Art. 18[3])

3. In case of delay - The carrier is liablefor damage occasioned by delay inthe carriage by air of

passengers, luggage orgoods. (Art. 19)

Note: In the COGSA, the carrierincurs liability in case of loss ordamage of goods but not delay,whereas under the WarsawConvention, carrier is also liable fordelay.

Q: What are the limitations to the liability ofair carriers?

A:1. In the carriage of. persons - Two

hundred and fifty thousand (250,000)francs for each passenger.Nevertheless, by special contract, thecarrier and the passenger may agreeto a higher limit of liability.

2. In the carriage of registered baggageand of cargo - Two hundred and fifty(250) francs per kilogramme, unlessthe passenger or consignor hasmade, at the time when the packagewas handed over to the carrier, aspecial declaration of interest indelivery at destination and has paid asupplementary sum if the case sorequires.

Note: In the case of loss, damage ordelay of part of registered baggage orcargo, or of any object containedtherein, the weight to be taken intoconsideration in determining theamount to which the carrier's liabilityis limited shall be only the total weightof the package or packagesconcerned. Nevertheless, when theloss, damage or delay of a part of theregistered baggage or cargo, or of anobject contained therein, affects thevalue of other packages covered bythe same baggage check or the sameair waybill, the total weight of suchpackage or packages shall also betaken into consideration indetermining the limit of liability.

3. As regards objects of which thepassenger takes charge himself -Five thousand (5,000) francs perpassenger. (Art. 22)

Note: Carrier is not entitled to theforegoing limit if the damage iscaused, by willful rnlsconduct ordefault on its part (Art. 25)


Pacu{taa de !Derecfio CiviC ~i~303

TRANSPORTATION LAWS: WARSAW CONVENTION OF 1929

Q: When should the notice of complaint bemade?

A: In the case of damage, the person entitledto delivery must complain to the carrierforthwith after the discovery of the damage,and, at the latest, within:

1. Three (3) days from the date ofreceipt in the case of baggage;

2. Seven (7) days from the date of.receipt in the case of cargo; or

3. Fourteen (14) days from the date onwhich the baggage or cargo havebeen placed at his disposal, in caseof delay. (Art. 26)

Q: Where should the complaint beinstituted?

A: The complaint could be instituted only in theterritory of one of the High Contracting Parties,before:

1. The court of the domicile of thecarrier;

2. The court of its principal place ofbusiness;

3. The court where it has a place ofbusiness through which the contracthad been made; or

4. The court of the place of destination.I (Art. 28[1])

Note:llt is the passenger's ultimate destinationnot an agreed stopping place that determinesthe country where suit is determined by theterms of the contract of carriage.

I

Q: CPA purchased from NoA a round-tripticket in San Francisco, U.S.A. for his flightfrom San Francisco to Manila via Tokyoand back. No date was specified for hisreturn to San Francisco. Despite a previousconfirmation and re-confirmation, he wasinformed that he had no reservation for hisflight from Tokyo to Manila. He thereforehad to be wait-listed. CPA sued NOA fordamages in the RTC of Makati. NOA movedto dismiss the complaint on the ground oflack of jurisdiction contending that thecomplaint could be instituted only in theterritory of one of the High ContractingParties. CPA argued that Philippines hadjurisdiction because it is the place ofdestination. Decide.

A: The complaint should be dismissed. Theplace of destination is determined by the termsof the contract of carriage or, specifically in thiscase, the ticket between the passenger and

304

the carrier. CPA's ticket shows that hisultimate destination is San Francisco. Althoughthe date of the retum flight was left open, thecontract of carriage between the partiesindicates that NOA was bound to transportCPA to San Francisco from Manila. Manilashould therefore be considered merely anagreed stopping place and not the destination.

Q: When will one's right to damages beextinguished?

A: The right to damages shall be extinguishedif an action is not brought within two years,reckoned from the date of arrival at thedestination, or from the date on which theaircraft ought to have arrived, or from the dateon which the carriage stopped.

Note: Despite the express mandate that anaction for damages should be filed within 2years from the arrival at the place. ofdestination, such rule shall not be appliedwhere delaying tactics were employed byairline itself in a case where a passengerwishes to settle his complaint out-of-court butthe airline gave him the runaround, answeringthe passenger's letters but not giving in to hisdemands, hence, giving the passenger no timeto institute the complaint within thereglamentary period. (United Airlines v. Uy,G.R. No. 127768, Nov. 19, 1999)

Q: Is a stipulation relieving the carrier fromor limiting its liability valid?

A: Any provision tending to relieve the carrierof liability or to fix a lower limit than that whichis laid down in this Convention shall be nulland void but the nullity of such provision doesnot involve the nullity of the whole contract.(Art. 23[1])


Q: Marc purchased passenger tickets fromPAL with the ft. points of passage: Manila-Singapore-Jakarta-Singapore-Manila. Hewas made to understand by PAL that itsplane would take him from' Manila toSingapore,. while Singapore Airlines wouldtake them from Singapore to Jakarta. Marctook the PAL flight to Singapore. SingaporeAirlines rejected the ticket of Marc becauseit was not endorsed by PAL. Marc tried tocontact PAL's office but it was closed. Leftwith no recourse, Marc was in panic and ata loss where to go; and was subjected tohumiliation, embarrassment, mentalanguish, serious anxiety, fear and distress.Marc was forced to purchase tickets fromGaruda Airlines.

Upon arrival in Manila, he brought thematter to the attention of PAL andSingapore Airlines. However, both airlinesdisowned liability. PAL filed a Motion toDismiss on the ground that the complaintwas barred on the ground of prescription.PAL argued that the Warsaw Conventionprovides that any claim for damages inconnection with the internationaltransportation of persons is subject to theprescription period of two years. Since theComplaint was filed more than three yearsafter PAL received the demand, it wasalready barred by prescription. Decide.

A: A claim covered by the Warsaw Conventioncan no longer be recovered under local law, ifthe statute of limitations of two years hasalready lapsed. Nevertheless, this Court notesthat jurisprudence in the Philippines and theUnited States also recognizes that the WarsawConvention does not "exclusively regulate" therelationship between passenger and carrier onan international flight. The Court held thatdamage to the passenger's baggage iscovered by the Warsaw Convention whichprescribes in 2 years. On the other hand, thehumiliation Marc suffered at the hands.of theairline's employees was covered by theprovisions of the Civil Code on torts whichprescribes in 4 years. If the complaint merelyconsisted of claims incidental to the airlines'delay in transporting the passengers, it wouldhave been time-barred under Art. 29 of theWarsaw Convention. (Phil. Airlines Inc. v. Han.Adriana Sa villa, et. AI. and Simplicia Grine,557 SeRA' 66)

Academics CommitteeChuirper.wlI: Abraham D. Genuine 11

Vi.-e-C'!Jair./iw A'"(ldcmit:c ,Jeannie A. r ...aurcntinoVia-Cbair]or Admin ~- FilII""': Aissa Celine H. Llin,\

r 'i,r·OwirjiJl" Li)!IiJl/c' n,.'{~II:Loise Rae G. Naval

Mercantile Law CommitteeJJlblcd f{,,,d IIDly T ,'\mpaguey

/1.1.1'1. J,,/!/cd Hem/.- l'vEanilyn Rose S. Sotelo


Aircen M. CachoSocrates Benjie 1. l\farbilROil Chertie S. MeDeI""a

Edison J ames I'. PagalilauanMaybclline M. Santiago

".~~:~.~ ..


Pacu(taa de ([)erecfio Civi{"'-'-'-,, . 305

,';. INTELLECTUAL PROPERTY LAWS

INTELLECTUAL PROPERTY LA \'('S

Q: What are covered by intellectualproperty rights?

A:1. Copyright and Related Rights;2. Mark (trade, service and collective);3. Geographic indications;4. Industrial designs;5. Patents;6. Layout designs (Topographies) of

Integrated Circuits; and7. Protection of Undisclosed Information

(Sec. 4.1, Intellectual Property Code(IPC])

Q: What are the distinctions amongtrademark, patent and copyright?

A:

Any ible sign capableof distinguishing thegoods (trademark) or

services (service mark) ofan enterprise and shallinclude a stamped ormarked container of

Literaryand artistic workswhich are original

intellectual creations inthe literary and artistic

, domain protected fromthe moment of their

creation.

Q: What is a geographic indication?

A: An indication which identifies a good asoriginating in the territory, where a givenquality, reputation or other characteristic of thegood is essentially attributable to itsgeographical origin. (Art. 22, Trade-RelatedAspects of Intellectual Property Rights)

306

Q: What is a technology transferarrangement?

A: Contracts or arrangements involving thetransfer of systematic knowledge for themanufacture of a product, the application ofthe process, or rendering a service includingmanagement contracts, and transfer,assignment or licensing of all forms ofintellectual property rights, including licensinqof computer software except computersoftware developed for mass market. (Sec.4.2,IPC)

Q: What is undisclosed information?

A: It is an information which:1. Is a secret in the sense that it is not,

as a body or in precise configurationand assembly of components,generally known among, or readilyaccessible to persons within thecircles that normally deal with thekind of information in question.

2. Has commercial value because it is asecret

3. Has been subjected to reasonablesteps under the circumstances, bythe person lawfully in control of theinformation, to keep it a secret.(Article 39, TRIPS Agreement)

Q: What is the nature of undisclosedinformationltrade secret?

A: Those trade secrets are of a privilegednature. The protection of industrial propertyencourages investments in new ideas andinventions and stimulates creative efforts forthe satisfaction of human needs. It speeds uptransfer of technology and industrialization,and thereby bring about social and economicprogress. Verily, the protection of industrialsecrets is inextricably linked to theadvancement of our economy and fostershealthy competition in trade. (Air PhilippinesCorporation v. Pennswell, Inc., G.R. No.172835, Oec. 13, 2007)


Q: What is copyright?

A: A right over literary and artistic workswhich are original intellectual creations in theliterary and artistic domain protected from themoment of creation. (Sec. 171.1, fPC)

Q: What are thecopyrightability?

elements

A:1. Originality - Must have been created

by the author's own skill, labor, andjudgment without directly copying orevasively imitating the work ofanother. (Ching Kian Chuan v. CA,G.R. No. 130360, Aug. 15, 2001)

2. Expression - Must be embodied inamedium sufficiently permanent orstable to permit it to be perceived,reproduced or communicated for aperiod more than a transitoryduration.

: When does copyright vest?

A: orks are protected by the sole fact of theirzrea ion, irrespective of their mode or form ofexpresslon, as well as of their content, quality2'1d purpose.

: What is the scope of copyright?

1. Literary and Artistic WorksBOLD-MAN-GAS-PAP-CO

a. §ooks, pamphlets, articles andother writings;

b. Lectures, sermons, addresses,dissertations prepared for Qraldelivery, whether or not reducedin writing or other material form;

c. .hettersd. Qramatic, choreographic works;e. Musical compositions;f. Works of ~rt;g. Periodicals and Newspapers;h. Works relative to Qeography,

topography, architecture orscience;

i. Works of ~pplied art;j. Works of a §cientific or technical

character;k. ehotographic works;I. ~udiovisual works and

cinematographic works;m. eictorial illustrations and

advertisements;n. ~omputer programs; and

of

o. Qther literary, scholarly, scientificand artistic works. (Sec. 1i72.1,fPC) i

!

2. Derivative Works

a. Dramatizations, translations,adaptations, abridgements,arrangements, and otheralterations of literary or artisticworks;

b. Collections of literary, scholarly,or artistic works and compilationsof data and other materials whichare original by reason of theselection or coordination orarrangement of their contents.(Sec. 173)

Note: Derivative Works shall beprotected as new works, providedthat such new work shall not affectthe force of any subsisting copyrightupon the original works employed orany part thereof, or be construed toimply any right to such use of theoriginal works, or to secure or extendcopyright in such original works. (Sec.173.2, fPC)

Q: P&D was granted a copyright on thetechnical drawings of light boxes ;'IS

"advertising display units", SMI, however,manufactured similar or identical to thelight box illustrated in the technicaldrawings copyrighted by P&D for leasingout to different advertisers, Was this aninfringement of P&D's copyright over thetechnical drawings?

A: No, P&D's copyright protection extendedonly to the technical drawings and not to thelight box itself. The light box was not a literaryor artistic piece which could be copyrightedunder the copyright law. If SMI reprinted P&D'stechnical drawings for sale to the publicwithout license from P&D, then no doubt theywould have been guilty of copyrightinfringement. Only the expression of an idea isprotected by copyright, not the idea itself. Ifwhat P&D sought was exclusivity over the ligl1tboxes, it should have instead procured apatent over the light boxes itself. (Pear! andDean fnc. v. Shoe Mart fnc., GR No. 148222,Aug. 15, 2003) .

'II!


'Fa cul t a d. de (])erecfio Civ i] ~i~307

INTELLECTUAL PROPERTY LAWS: COPYRIGHT AND RELATED RIGHTS

Q: What is the difference betweencollection of work and collective work?

A:

f -COLLECTION OF COLLECTIVE WORKI WORK

It is not necessarythat there is an

agreement. Individualcontribution is

capable of copyrightrotection.

There is anagreement wherebythe authors bound

themselves not to beidentified with the

work.

Q: Juan Xavier wrote and published a storysimilar to an unpublished copyrightedstory of Manoling Santiago. It was,however, conclusively proven that JuanXavier was not aware that the story ofManoling Santiago was protected bycopyright. Manoling Santiago sued JuanXavier for infringement of copyright. IsJuan Xavier liable?

A: Yes. Juan Xavier is liable for infringement ofcopyright. It is not necessary that Juan Xavieris aware that the story of Manoling Santiagowas Iprotected by' copyright. The work ofManoling Santiago is protected from the timeof its treation. (1998 Bar Question)

I

Note! There will still be originality sufficient towarrant copyright protection if "the author,through his skill and effort, has contributed adistinguishable variation from the older works."In such a case, of course, only those partswhich are new are protected by the newcopyright. Hence, in such a case, there is nocase of infringement. Juan Xavier is no less an"author" because others have preceded him.

Q: What are the subjects not protected?

A:1. Idea, procedure, system, method or

operation, concept, principle,discovery or mere data as such;

2. News of the day and other items ofpress information;

3. Any official text of a legislative,administrative or legal nature, as wellas any official translation thereof;

4. Pleadings;5. Decisions of courts and tribunals -

this refers to original decisions andnot to annotated decisions such asthe SCRA or SCAD as these alreadyfall under the classification ofderivative works, hencecopyrightable;

6. Any work of the Government of thePhilippines

308 Iteam:I.!li.;

A: Yes, the format of a show is notcopyrightable. The copyright law enumeratesthe classes of work entitled to copyrightprotection. The format or mechanics of atelevision show is not included in the list ofprotected works. For this reason, theprotection afforded by the law cannot beextended to cover them. Copyright, in the strictsense of the term, is purely a statutory right. Itis a new or independent right granted by thestatute, and not simply a pre-existing rightregulated by the statute. Being a statutorygrant, the rights are only such as the statuteconfers, and may be obtained and enjoyedonly with respect to the subjects and by thepersons, and on terms and conditionsspecified in the statute. The copyright does notextend to the general concept or format of itsdating game show. (Joaquin v. Drilon, G.R.No. 108946, Jan. 28, 1999)

GR: Conditions imposed prior theapproval of the government agencyor office wherein the work is createdshall be necessary for exploitation ofsuch work for profit. Such agency oroffice, may, among other things,impose as condition the payment ofroyalties.

XPN: No prior approval or conditionsshall be required for the use of anypurpose of statutes, rules andregulations, and speeches, lectures,sermons, addresses, anddissertations, pronounced, read, orrendered in courts of justice, beforeadministration agencies, indeliberative assemblies and inmeetings of public character. (Section176, fPC)

7. TV programs, format of TV programs(Joaquin v. Dri/on, G.R. No. 108946,Jan. 28, 1999)

8. Systems of bookkeeping; and9. Statutes.

Q: BJ Productions, Inc. (BJPI) is theholder/grantee of a copyright of "Rhodaand Me", a dating game show aired from1970 to 1977. Subsequently, however, RPNaired the game show "It's a Date", whichwas produced by IXL Productions, Inc.(IXL). As such, an information for copyrightinfringement was filed against RPN. TheOOJ Secretary directed the prosecutor todismiss the case for lack of probablecause. Was the decision of the OOJSecretary correct?

UST GOLDENN OTES 2010

Q:Rural is a certified public utilityproviding telephone service to severalcommunities in Manila. It obtains data forthe directory from subscribers, who mustprovide their names and addresses toobtain telephone service. FeistPublications, Inc., is a publishing companythat specializes in area-wide telephonedirectories covering a much largergeographic range than directories such asRural's. Feist extracted the listings itneeded from Rurals's directory without itsconsent. Are directories copyrightable?

A: No, directories are not copyrightable andtherefore the use of them does not constituteinfringement. The Intellectual Property Codemandates originality as a prerequisite forcopyright protection. This requirementnecessitates independent creation plus amodicum of creativity. Since facts do not owetheir origin to an act of authorship, they are notoriginal, and thus are not copyrightable. Acompilation is not copyrightable per se, but iscopyrightable only if its facts have been"selected, coordinated, or arranged in such away that the resulting work as a wholeconstitutes an original work of authorship."Thus, the statute envisions that some. ways ofselecting, coordinating, and arranging data arenot sufficiently original to trigger copyrightprotection. Even a compilation that iscopyrightable receives only limited protection,for the copyright does not extend to factscontained in the compilation. (FeistPublications, Inc. v. Rural Telephone ServiceCo., 499 U.S. 340)

Q: Who owns copyright?

A:1. Author - Original literary and artistic

works. (Sec. 178.1, IPC)

2. Co-authors Works of jointauthorship; in the absence ofagreement, their rights shall begoverned by the rules on co-ownership.

Note: If work of joint authorshipconsists of parts that can be usedseparately, then the author of eachpart shall be the original owner of thecopyright in the part that he hascreated. (Sec. 178.2, IPC)

3. In the course of employment, thecopyright shall belong to:

a. The employee, if not a part of hisregular duties even if the

employee uses the time, facilitiesand materials of the employer.(Sec. 178.3, fPC)

b. The employer, if the work is theresult of the performance of hisregularly-assigned duties, unlessthere is an agreement, expressor implied, to the contrary. (ibid.)

4. The person who commissioned thework shall own the work but thecopyright thereto shall remain withthe creator - In cases of workpursuant to commission, unless thereis a written stipulation to the contrary.(Sec. 178.4, IPC) i

5. GR: Producer, the author of thescenario, the composer of the music,the film director, and the author of thework so adapted - audiovisual work.

XPN: The producers shall exercise.the copyright to an extent requiredfor the exhibition of the work in anymanner. (Sec. 178.5, IPC)

6. Writer - in respect of letters subject tothe provisions of Article 723, CivilCode. (Sec. 178.6, IPC)

7. GR: Publishers deemedrepresentatives of the author in caseof anonymous and pseudonymousworks.

XPN: When the contrary appears orwhere the pseudonym or adoptedname. leaves no doubt as to theauthor's identity; or author discloseshis identity.

8. In case of collective works -contributor is deemed to have waivedhis right unless he expressly reservesit. (Sec. 196, IPC)


Pacu(tari de (])ereclio Ci'ViC .~309


Q: Distinguish collective work from jointwork.

A:COLLECTIVE

JOINT WORKWORKElements remain Separate elementsunintegrated and merge into a unified

disparate. whole.Workicreated by 2or more persons at

the initiative andWork prepared by 2 orunder the direction

of ahother with more authors with the

the understanding intention that theircontributions bethat it will be

merged intodisclosed by thelatter under his own inseparable or

name and that of the independent parts of

contributions of the unitary whole.

natural persons willNOT be identifiedEach author shall Joint authors shall beenjoy copyright to co-owners. Co-

his own contribution ownership shall apply.The work will beattributed to the

person under whose Joint authors shall beinitiative and both entitled to the

direction it was acknowledgment ascreated unless the authors of the work.

contributor expresslyreserves his right.

Q: BR and CT are noted artists whosepaintings are highly prized by collectors.Dr. DL commissioned them to paint a muralat the main lobby of his new hospital forchildren. Both agreed to collaborate on theproject for a total fee of two million pesosto be equally divided between them. It wasalso agreed that Dr. DL had to provide allthe materials for the painting and pay forthe wages of technicians and laborersneeded for the work on the project.Assume that the project is completed andboth BR and CT are fully paid the amountof P2M as artists' fee by DL. Under the lawon intellectual property, who will own themural? Who will own the copyright in themural? Why? Explain.

A:' Under Sec. 178.4 of the IntellectualProperty Code, in case of commissioned work,the creator (in the absence of a ..writtenstipulation to the contrary) owns the copyright,but the work itself belongs to the person whocommissioned the creation. Accordingly, themural belongs to DL. However, BR and CTown the copyright, since there is no stipulationto the contrary. (1995 Bar Question)

Q: What is the principle of "automaticprotection"?

A: Works are protected by the sole fact of theircreation irrespective of their content, quality orpurpose. Such rights are conferred from themoment of creation.

Q: What is the tenn of protection ofcopyright?

A:

surviving co-creatorand for 50 years after

his death.50 years after thedate of thei r fi rst

publication; exceptwhere before theexpiration of said

period, the author'sidentity is revealed oris no longer in doubt,the 151 two mentionedrules shall apply; or if

unpublished, 50years from their

maki

25 years from thetime of the making.

50 years from date ofpublication and, if

unpublished, from thedate of making.

Lifetime of the authorand 50 years after.

213,


Q: What are the general limitations oncopyright?

A: The following acts shall not constituteinfringement of copyright:

1. Performance of a work, once it hasbeen lawfully made accessible to thepublic, if done privately and free ofcharge or for a charitable or religiousinstltution or society.

2. The making of quotations from apublished work if they are compatiblewith fair use and only to the extentjustified for the purpose.

3. Communication to the public by massmedia of articles on current political,social, economic, scientific orreligious topic, lectures, addressesand other works of the same nature

As part of reports of current events(e.g. music played or tunes on theoccasion of a sporting event and suchtunes were picked up during a newcoverage of the event).

5. For teaching purposes, provided thatthe source and of the name of theauthor, if appearing in the work, arementioned.

6. Recording made in educationalinstitutions of a work included in abroadcast for the use of sucheducational institutions, provided thatsuch recording must be deleted withina reasonable period after they werefirst broadcast.

7. The making of ephemeral recordingsby a broadcasting organization bymeans of its own facilities and for usein its own broadcast.

8. The use made of a work by or underthe direction or control of thegovernment, by the National Libraryor by educational, scientific orprofessional institutions where suchuse is in the public interest and iscompatible with fair use.

9. The public performance of a work, ina place where no admission fee ischarged.

10. Public display of the original or a copyof tile work not made by means of afilm, slide, television image or

otherwise on screen or by means ofany other device or process (e.g.Public display using posters mountedon walls and display boards).

11. Any use made of a work for thepurpose of any judicial proceedingsor for the giving of professionaladvice by a legal practitioner.

Q: What are the other limitations oncopyright?

A:1. The fair use of a copyrighted work for

criticism, comment, news reporting,teaching including multiple copies forclassroom use, scholarship, research,and similar purposes is not aninfringement of copyright. (Sec. 185,fPC)

Note: Decompilation, which, is thereproduction of the code andtranslation of the forms of thecomputer program to achieve theinter-operability of an independentlycreated computer program with otherprograms, may also constitute fairuse (e.g. the software program forWindows 7 will be disassembled by askilled programmer in order tounderstand much of the structure andoperation of the program).

2. Copyright in a work of architectureshall include the right to control theerection of any building whichreproduces the whole or a substantialpart of the work either in its originalform or in any form recognizablyderived from the original, provided,that the copyright in any such workshall not include the right to controlthe reconstruction or rehabilitation inthe same style as the original of abuilding to which that copyrightrelates. (Sec. 186, fPC)

3. The private reproduction of apublished work in a single copy,where the reproduction is made by anatural person exclusively forresearch and private study, shall bepermitted, without the authorization ofthe owner of copyright in the Work butshall not extend to the reproductionof:a. A work of architecture in the form

of, building or other construction;b. An entire book, or a substantial

part thereof, or of a musical work

UNIVERSITY OF SANTO TOMAS ~'-:"-'. 311Pacu(taa de CDerecfio Civif '.


in graphic form by reprographicmeans;

c. A compilation of data and othermaterials;

d. A computer program except asprovided in Section 189; and

e. Any work in cases wherereproduction would unreasonablyconflict with a normal exploitationof the work or would otherwiseunreasonably prejudice thelegitimate interests of the author.(Sec. 187, fPC)

4. Any library or archive whose activitiesare not for profit may, without theauthorization. of the author ofcopyright owner, make a single copyof the work by reprographicreproduction:a. Where the work by reason of its

fragile character or rarity cannotbe lent to user in its original form;

b. Where the works are isolatedarticles contained in compositeworks or brief portions of otherpublished works and thereproduction is necessary tosupply them, when this isconsidered expedient, to personsrequestinq their loan forpurposes of research or studyinstead of lending the volumes orbooklets which contain them; and

c. Where the making of such a copyis in order to preserve and, ifnecessary in the event that it islost, destroyed or renderedunusable, replace a copy, or toreplace, in the permanentcollection of another similarlibrary or archive, a copy whichhas been lost, destroyed orrendered unusable and copiesare not available with thepublisher.

But it shall not be permissible toproduce a volume of a workpublished in several volumes or toproduce missing tomes or pages ofmagazines or similar works, unlessthe volume, tome or part is out ofstock. (Sec. 188, fPC) .

5. The reproduction in one back-up copyor adaptation of a computer programshall be permitted, without theauthorization of the author of, or otherowner of copyright in, a computerprogram, by the lawful owner of that

312

computer program, provided, thecopy or adaptation is necessary for:a. The use of the computer program

in conjunction with a computerfor the purpose, and to theextent, for which the computerprogram has been obtained; and

b. Archival purposes, and, for thereplacement of the lawfullyowned copy of the computerprogram in the event that thelawfully obtained copy of thecomputer program is lost,destroyed or rendered unusable.(Sec. 187, fPC)

6. The importation of a copy of a workby an individual for his personalpurposes shall be permitted withoutthe authorization of the author of, orother owner of copyright in, the workunder the following circumstances:a. When copies of the work are not

available in the Philippines and:i. Not more than one copy at one

time is imported for strictlyindividual use only; or

ii. The importation is by authorityof and for the use of thePhilippine Government; or

iii. The importation, consisting ofnot more than three suchcopies or likenesses in anyone invoice, is not for sale butfor the use only of any

. religious, charitable, oreducational society orinstitution duly incorporated orregistered, or is for theencouragement of the finearts, or for any state school,college, university, or freepublic library in the Philippines.

b. When such copies form parts oflibraries and personal baggagebelonging to persons or familiesarriving from foreign countriesand are not intended for sale,provided, that such copies do notexceed three. (Sec. 190, fPC)


Q: What is the "Must carry rule"?

A: Must-carry rule is another limitation oncopyright. It obligates operators to carry thesignals of local channels within their respectivesystems. This is to give the people wideraccess to more sources of news, information,education, sports event and entertainmentprograms other than those provided for bymass media and afforded television programso attain a well informed, well-versed andculturally refined citizenry and enhance theirsocio-economic . growth. (ABS-CBN3roadcasting Corporation v. PhilippineAultimedia System, G.R. No. 175769-70, Jan.~9, 2009)

: What factors are to be considered Inetenrnining whether the use made of a

vork in any particular case is fair use?

1. The purpose and character of theuse, including whether such use is ofa commercial nature or is for non-profit educational purposes;

2. The nature of the copyrighted work;3. The amount and substantiality of the

portion used in relation to thecopyrighted work as a whole; and

4. The effect of the use upon thepotential market for or value of thecopyrighted work.

te: The fact that a work is unpublished shallnot by itself bar a finding of fair use if

~_ h finding is made upon consideration of all--c above factors.

: Ford contracted with H&R Publishing toubi ish his unwritten memoirs. The

agreement gave H&R the exclusive firstserial right to license prepublicationexcerpts. As the memoirs were nearing

ompletion, H&R, as the copyright holders,'egotiated a prepublication licensing

agreement with Time Magazine. Shortlybefore the Time article's scheduled release,an unauthorized source provided The

ation Magazine with the unpublished Fordmanuscript. An editor of The Nationproduced an article which consisted of

erbatim quotes of copyrighted expressionaken from the manuscript which were the

gist of the memoirs. As a result, Timerefused to pay H&R as agreed upon in theprepublication agreement. H&R brought anaction for infringement against Nation

agazine. Nation magazine contended thatthe article it published constitutes fair useand thus it cannot be held liable forinfringement. Is the contention correct?

A: No, the article does not constitute fair use.Taking into account the factors as especiallyrelevant in determining fair use, leads to theconclusion that the use in question here wasnot fair. First of all, the purpose or character ofthe use was commercial (to scoop acompetitor), meaning that The Nation's usewas not a good faith lise of fair use in simplyreporting news. Also, although the verbatimquotes in question were an insubstantialportion of the Ford manuscript, theyqualitatively embodied Mr. Ford's distinctiveexpression, and played a key role :in theinfringing article. And lastly, the effect: of theuse on the potential market for the value of thecopyrighted work was also great, because theNation's liberal lise of verbatim excerpts posedsubstantial potential for damage to themarketability of first serialization rights in thecopyrighted work. (Harper & Row v. NationEnterprises, 471 U.S. 539, 1985)

Q: What are published works?

A: Those works which, with the consent of theauthors, are made available to the public bywire or wireless means in such a way thatmembers of the public may access theseworks from a place and time individuallychosen by them: provided, that availability ofsuch copies has been such, as to satisfy thereasonable requirement of the public, havingregard to the nature of the work. (Sec. 171.7,fPC)

Q: What is the difference between publicperformance and communication to thepublic of a perfonrnance?

A:

PUBLIC COMMU~'PATlON~;"'~1PERFORMANCE TO THE PUBLIC.~F A' 1

. PERFORMANCE,. ,j

Performance at aplace or at places

where personsoutside the normal

circle of a familyand that family's

closest socialacquaintances areor can be present.

The transmission to thepublic, by any medium,

otherwise than bybroadcasting, of soundsof a performance or the

representations ofsounds fixed in a sound

recording.

The communication canbe accessed throuqh

wired or wirelessmeans at a time and

place convenient to theviewer (e.g. The

Pacquiao-Clottey Matchwatched viaYouTube)

It is performed at aspecific time andplace. (e.g. The

Pacquiao-ClotteyMatch in Dallas

Texas Stadium)

UNIVERSITY OF SANTO TOMAS ~'''','-) 313If'acu{taa de Der ecfio CiviC '.

INTELLECTUAL PROPERTY LAWS:. COPYRIGHT AND RELATED RIGHTS

Q: May atransferred/assigned?

copyright Q: What is infringement?

A: It may be assigned in whole or in part.Within the scope of the assignment, theassignee is entitled to all the rights andremedies which the assignor had with respectto the copyright. (Sec. 180.1, IPC)

Q: Is copyright similar with the materialobject?

A: No, the copyright is distinct from theproperty in the material object subject to it.Consequently, the transfer or assignment ofthe popyright shall not itself constitute atransfer of the material object. Nor shall atransfer or assignment of the sale copy or ofone :or several copies of the work implytransfer or assignment of the copyright. (Sec.181, fPC)

Q: What are the requisites for a transfer ofcopyright to take effect?

A:1. If inter vivos, must be in writing; and2. Filed in National Library upon

payment of prescribed fees. (Sec.182, fPC)

Q: Is filing of the assignment or license ofcopyright a mandatory requirement?

A: No, Section 182 uses the permissive Word"may" in reference to the filing of the deed ofassignment or transfer of copyright, this filingshould not be understood as mandatory forvalidity and enforceability. The filing is entirelyoptional for the parties and may be useful onlyfor evidentiary and notification purposes.(Vicente Amador, Intel/ectual PropertyFundamentals, 2007)

Q: What is the limitation regardingsubmission of a literary, photographic orartistic work to a newspaper, magazine orperiodical for publication?

A: Unless a greater right is expressly granted,such submission shall constitute only a licenseto make a single publication. (Sec. 180.3, IPC)

Note: If two or more persons jointly own acopyright or any part thereof, neither of theowners shall be entitled to grant licenseswithout the prior written consent of the otherowner or owners. (Ibid.) .

314

be

A: It is the doing by any person, without theconsent of the owner of the copyright, ofanything the sole right to do which is conferredby statute on the owner of the copyright. Theact of lifting from another's book substantialportions of discussions and examples and thefailure to acknowledge the same is aninfringement of copyright. (Habana et al., v.Robles et el., G.R. No. 131522, July 19, 1999)

Q: What does substantial reproductionmean?

A: It is not necessarily required that the entirecopyrighted work, or even a large portion of it,be copied. If so much is taken that the value ofthe original work is substantially diminished,there is an infringement of copyright and to aninjurious extent, the work is appropriated. It isno defense that the pirate did not knowwhether or not he was infringing any copyright;he at least knew that what he was copying wasnot his, and he copied at his peril. In cases ofinfringement, copying alone is not what isprohibited. The copying must produce an"injurious effect". (Habana v. Robles, G.R. No.131522, July 19, 1999)

Q: What is plagiarism?

A: It is the practice of claiming or implyingoriginal authorship of (or incorporating materialfrom) someone else's written or creative work,in whole or in part, into one's own withoutadequate acknowledgment.

Q: What is the difference betweencopyright infringement and plagiarism?

COPYRIGHT IINFRINGEMENT PLAGIARISM

The unauthorized useof copyrighted material

in a manner thatviolates one of thecopyright owner's

exclusive rights, suchas the right to

reproduce or performthe copyrighted work, or

to make derivativeworks that build upon it.

The use ofanother's

information,language, or

writing, when donewithout proper

acknowledgment ofthe original source.

Copyright infringementis a very broad term

that describes a varietyof acts. It may be

duplication of a work,rewriting a piece,

performing a writtenwork or doinq anythinq

Plagiarism isspecific as it refers

only to usingsomeone else's

work without properacknowledgement.


that is normallyconsidered to be theexclusive right of the

copyright holder.

There is no copyright Public documentscan be plagiarizedinfringement on pub-licso long as it is notdocuments.

acknowledged.

Q: What are the available remedies in caseof copyright infringement?

A:1. Injunction;2. Damages, including legal costs and

other expenses, as he may haveincurred due to the infringement aswell as the profits the infringer mayhave made due to such infringement;

3. Impounding during the pendency ofthe action sales invoices and otherdocuments evidencing sales;

4. Destruction without anycompensation all infringing copies;

5. Moral and exemplary damages (Sec.216.1); or

6. Seizure and impounding of anyarticle, which may serve as evidencein the court proceedings. (Sec. 216.2)

Q: What is an affidavit evidence?

A: An ~ffidavit made before the notary publicin actions for infringement, reciting the factsrequired to be stated under the IPC. (Sec.216.1)

Note: As a prima facie proof, the affidavitshifts the burden of proof to the defendant, toprove the ownership of the copyrighted work.

Q: What is the presumption of authorship?

A: The natural person whose name isindicated on a work in the usual manner as theauthor shall, in the absence of proof to thecontrary, presumed to be the author of thework. This is applicable even If the name IS apseudonym, where the pseudonym leaves nodoubt as to identity of the author. (Sec. 219.1,IPC)

The 'person or body corporate, whose nameappears on the audio-visual work in the usualmanner shall,in the absence of proof to thecontrary, be presumed to be the maker of saidwork. (Sec. 219.2, IPC)

Q: What are the rights of an author?

A:;

1. Economic rights - The right ito carryout, authorize or prevent the followingacts:

1. Reproduction of the work orsubstantial portion thereof;

2. Carry-out derivative work(dramatization, translation,adaptation, abridgement,arrangement or othertransformation of the work);

3. First distribution of the originaland each copy of the work bysale or other forms of transfer ofownership;

4. Rental right;5. Public display;6. Public performance;7. Other communications to the

public.

2. Moral rights - For reasons ofprofessionalism and propriety, theauthor has the right:a. To require that the authorship of

the works be attributed to him(attribution right);

b. To make any alterations of hiswork prior to, or to withhold itfrom publication;

c. Right to preserve integrity ofwork, object to any distortion,mutilation or other modificationwhich would be prejudicial to hishonor or reputation; and

d. To restrain the use of his namewith respect to any work not ofhis own creation or in a distortedversion of his work. (Sec. 193,IPC)

3. Droit de suite (Right to proceeds insubsequent transfers or follow uprights) - This is an inalienable ri.ght ofthe author or his heirs to receive tothe extent of 5% of the grossproceeds of the sale or lease of awork of painting or sculpture or of theoriginal manuscript of a writer orcomposer, subsequent to its firstdisposition by the author.

The following works are not covered:a. Prints;b. Etchings;c. Engravings;d. Works of applied art; ande. Similar works wherein the au h

primarily derives gain ro --"


Pacurtad de lJ)erecfzo Civi!~)....., -

J "'I

INTELLECTUAL PROPERTY LA \\IS: COPYRIGHT AND RELATED RIGHTS

proceeds of reproductions. (Sec.201,IPC)

Q: ABC is the owner of certain musicalcompositions among which are the songsentitled: "Dahil Sa lyo", "Sapagkat Ikaw AyAkin," "Sapagkat Kami Ay Tao Lamang"and "The Nearness Of You." Soda FountainRestaurant hired a combo withprofessional singers to play and singmusical compositions to entertain andamuse customers. They performed theabove-mentioned compositions without·any license or permission from ABC to playor sing the same. Accordingly, ABCdemanded from Soda Fountain payment ofthe necessary license fee for the playingand singing of aforesaid compositions butthe demand was ignored. ABC filed aninfringement case against Soda Fountain.Does the playing and singing of musicalcompositions inside an establishmentconstitute public performance for profit?A: Yes. The patrons of the Soda Fountain payonly for the food and drinks and apparently notfor listening to the music, but the musicprovided is for the purpose of entertaining andamusihg the customers in order to make theestablishment more attractive and desirable.For the playing and singing the musicalcompositions involved, the combo was paid asindependent contractors by Soda Fountain. Itis therefore obvious that the expenses entailedthereby are added to the overhead of therestaurant which are either eventuaJlychargedin the price of the food and drinks or to theoverall total of additional income produced bythe bigger volume of business which theentertainment was programmed to attract.Consequently, it is beyond question that theplaying and singing of the combo in defendant-appellee's restaurant constituted performancefor profit. (FILSCAP v. Tan, G.R., No. L-36402, Mar. 16, 1987)

Q: Malang Santos designed . forAmbassador Neri for his personalchristmas greetings for the year 1959 achristmas card depicting a Philippine ruralChristmas time scene. The followlnq yearMcCullough Printing Company, without theknowledge and authority of Santos,displayed the very design in its album ofChristmas cards and offered it for sale.Santos filed for copyright infringementcontending that the publication of hisdesign was limited as it was intended onlyfor Ambassador Neri's use, hence, it couldnot be used for public consumption. Isthere copyright infringement?

316

A: No. If there were a condition that the cardsare to be limitedly published, then AmbassadorNeri would be the aggrieved party, and notSantos. And even if there was such a limitedpublication or prohibition, the same was notshown on the face of the design. When thepurpose is a limited publication, but the effectis general publication, irrevocable rightsthereupon become vested in the public, inconsequence of which enforcement of therights under a copyright becomes impossible.(Malang v. McCullough Printing Company,G.R. No. L-19439, Oct. 31, 1964)

Q: Mayan author be compelled to performhis contract?

A: An author cannot be compelled to perform. his contract to create a work or for the

publication of his work already in existence.However, he may be held liable for damagesfor breach of such contract. (Sec. 195, IPC)

Q: What is the nature of moral rights?

A: These are personal rights independent fromthe economic rights. Being a personal right, itcan only be given to a natural person. Hence,even if he has licensed or assiqnad hiseconomic rights, he continues to enjoy theabove-mentioned moral rights. (VicenteAmador, Intellectual Property Fundamentals,2007)

Q: What is the term of moral rights?

A: It shall last during the lifetime of the authorand for fifty (50) years after his death and shallnot be assignable or subject to license. (Sec.198,IPC)

Note: The person/s to be charged with theposthumous enforcement of moral rights shallbe named in writing to be filed with theNational Library. In default of such person orpersons, such enforcement shall devolve uponeither the author's heirs, and in default of theheirs, the Director of the National Library.(Ibid.)

Q: What are the exceptions to moral rights?

A:1. Absent any special contract at the

time creator licenses/permits anotherto use his work, the following aredeemed not to contravene creator'smoral rights, provided they are donein accordance with reasonablecustomary standards or requisites ofthe medium:a. Editing;


b. Arranging;c. Adaptation;d. Dramatization;e. Mechanical and

reproductionelectric

2. Complete destruction ofunconditionally transferredcreators. (Sec. 197, IPC)

workby

Q: Can moral rights be waived?

A:GR: Moral rights can be waived in writing,expressly SQ stating such waiver.

XPN: Even in writing, waiver is not valid if:1. Use the name of the author, title of

his work, or his reputation withrespect to any version/adaptation ofhis work, which because ofalterations, substantially tend toinjure literary/artistic reputation ofanother author

2. Use name of author in a work that hedid not create

: What are the neighboring rights?

: These are the rights of performers,J'oducers of sound recording and

oadcasting organizations.

: What is the scope of a perfonner'siqhts ? .

. Performers shall enjoy the followingexclusive rights:

1. As regards their performances, theright of authorizing:a. The broadcasting and other

communication to the public of.their performance; and

b. The fixation of their unfixedperformance.

2. The right of authorizing the direct orindirect reproduction of theirperformances fixed in soundrecordings, in any manner or form;

3. The right of authorizing the first publicdistribution of the original and copiesof their performance fixed in thesound recording through sale orrental or other forms of transfer ofownership;

4. The right of authorizing thecommercial rental to the public of the

original and copies of theirperformances fixed in soundrecordings, even after distribution ofthem by, or pursuant to theauthorization by the performer; and

5. The right of authorizing the makingavailable to the public of theirperformances fixed in soundrecordings, by wire or wirelessmeans, in such a way that membersof the public may access them from aplace and time individually chosen bythem. (Sec. 203, IPC)

Q: What are the moral rights ofperfonners?

A: The performer, shall, as regards his liveaural performances or performances fixed insound recordings, have the right to claim to beidentified as the performer of hisperformances, except where the omission isdictated by the manner of the use of theperformance, and to object to any distortion,mutilation or other modification of hisperformances that would be prejudicial to hisreputation.

Q: When are performer's rights lost?

A: Once a performer has authorizedbroadcasting or fixation of his performance.(Sec 205, IPC)

Note: Fair use and limitations to copyrightsshall apply mutatis mutandis to performers.(Ibid.)

Q: When are performersadditional remunerationperfonnance? .

entitled toon their

A: The performer shall be entitled to anadditional remuneration equivalent to at least5% of the original compensation he receivedfor the first communication or broadcast inevery communication to the public orbroadcast of a performance subsequent to thefirst communication or broadcast, . unlessotherwise provided in the contract. (Sec. 206,fPC)

U N I V E R 5 I T Y 0 F 5 ANT 0 TOM A 5 ~;;'.'v..·• 317Pacu{tad de' (j)erecfio Civi] V


Q: What is the scope of the rights ofproducers on sound recordings?

A: Producers of sound recordings shall enjoythe following exclusive rights:

1. The right to authorize the direct orindirect reproduction of their soundrecordings, in any manner or form;the placing of these reproductions inthe market and the right of rental orlending; .

2. The right to authorize the first publicdistribution of the original and copiesof their sound recordings through saleor rental or other forms of transferringownership; and

3. The right to authorize the commercialrental to the public of the original andcopies of their sound recordings,even after distribution by them by orpursuant to authorization by theproducer. (Sec. 208, fPC)

Note: Fair use and limitations to copyrightsshall apply mutatis mutandis to performers.(Sec. 210, fPC)

Q: What is the scope of the rights ofbroadcasting organizations?

A: Broadcasting organizations shall enjoy theexclusive right to carry out, authorize orprevent any of the following acts:

1.'11 The rebroadcastingbroadcasts;

2., The recording in any manner,I including the making of films or theI use of video tape, of their broadcasts

for the purpose of communication tothe public of television broadcasts ofthe same; and

3. The use of such records for freshtransmissions or for fresh recording.(Sec. 211, fPC)

of

Q: When are neighboring rights notapplicable?

A:1. Exclusive use of a natural person for

own personal purposes.2. Short excerpts for reporting current

events3. Sole use for the purpose of teaching

or for scientific research4. Fair use of the broadcast

318

their

Q: What are the term of protection given toperfonners, producers and broadcastingorganizations?

A:1. For performances not incorporated in

recordings, 50 years from the end ofthe year in which the performancetook place; and

2. For sound or image and soundrecordings and for performancesincorporated therein, 50 years fromthe end of the year in which therecording took place.

3. In case of broadcasts, the term shallbe 20 years from the date thebroadcast took place. The extendedterm shall be applied only to oldworks with subsistinq protectionunder the prior law. (Sec. 215, fPC)

Q: To whom are the rights granted tocopyrightable works applicable (points ofattachment)?

A:1. For literary and artistic works and

derivative worksa. Works of authors who are

nationals of, or have theirhabitual residence in, thePhilippines;

b. Audio-visual works the producerof which has his headquarters orhabitual residence in thePhilippines;

c. Works of architecture erected inthe Philippines or other artisticworks incorporated in a bUildingor other structure located in thePhilippines;

d. Works first published in thePhilippines; and

e. Works first published in anothercountry but also published in thePhilippines within thirty days,irrespective of the nationality orresidence of the authors. (Sec.221, fPC)

. 2. For petiomersa. Performers who are nationals of

the Philippines;b. Performers Who are not nationals

of the Philippines but whoseperformances:i. Take place in the

Philippines; orii. Are incorporated in sound

recordings that are protectedunder IPC; or


iii. Which has not been fixed insound recording but arecarried by broadcastqualifying for protectionunder IPC. (Sec. 222, fPC)

3. Of sound recordingsa. Sound recordings the producers

of which are nationals of thePhilippines; and .

b. Sound recordings that were firstpublished in the Philippines.(Sec. 223, fPC)

4. For broadcasta. Broadcasts of broadcasting

organizations the headquartersof which are situated in thePhilippines; and

b. Broadcasts transmitted fromtransmitters situated in thePhilippines. (Sec. 224, fPC)

Note: The provisions of IPC shall" alsoapply to works, performers, producers ofsound recordings and broadcastingorganizatins that are to be protected byvirtue of and in accordance with anyinternational convention or otherinternational agreement to which thePhilippines is a party. (Sec. 221.2 and224.2, JPC)

•.. -- .)<.~. ~ ..•

Academics Cornm itteeCbairpc!)"(m: Abraham D. C;enuino IT

!/i(c--C,'huirj(JI- At"llllemit:f: Jeannie A. LaurcntinoVite-C}wlijllr Admin i~ Finan«: Aissa Celine H. Luna

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Mercantile Law CommitteeSub/ed Haul: Holy T. 1\ mpague)'

."'I.ul. SlIbJ,d i-lead· tVboili·o Rose S. Sotelo


Airccn 1\'1.CachoSocrates Benjie 1. MarbilRon Cherric S. Mendoza

Edison James 1'. Pagalilauanl\bybclline M. Santiago


Pacu(tad de Der ec lio Ci-ui]

INTELLECTUAL PROPERTY LA \XIS:TRADEMARl<:S

I iiiile'1ll§JM!"1;13Q: What is a trademark and how does itdiffer from a trade name?

IA: Any visible sign capable of distinguishingthe goods (trademark) or services (servicemark) of an enterprise. A trade name is aname or designation identifying ordistinguishing an enterprise.

I TRADEMARK ' TRADE NAMEA natural or artificial

Goods or services person who doesoffered by a proprietor business and

or enterprise are produces ordesignated by performs the goods

trademark (goods) or or servicesservice marks designated by

(services). trademark or servicemark.

Refers to the goods. Refers to businessand its goodwill.

Acquired only by Need not bereqistration. registered.

Q: What is a collective mark?

A: A "collective mark" or collective trade-name" is a mark or trade-name used by themembers of a cooperative, an association orother collective group or organization. (Sec.40, R.A. 166)

Q: What are the functions of trademark?

A:1. To point out distinctly the origin or

ownership of the articles to which it isaffixed. .

2. To secure to him who has beeninstrumental in bringing into market asuperior article or merchandise thefruit of his industry and skill; and

3. To prevent fraud and imposition.(Etepha v. Director of Patents, G.R.No. L-20635, Mar. 31, 1966)

Q: 5 Development Corporation suedShangrila Corporation for using the "5"logo and the tradename "Shanqrlla", Theformer claims that it was the first toregist~r the logo and the trade name in thePhilippines and that it had been using thesame in its restaurant business. ShangrilaCorporation counters that it is an affiliate ofan international organization which hasbeen using such logo and tradename"Shangrila" for over 20 years. However,Shangrila Corporation registered the

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tradename and logo in the Philippines onlyafter the suit was filed.

Which of the two corporations has a betterright to use the logo and the tradename?Explain.

A: S Development Corporation has a betterright to use the logo and tradename, since itwas the first to register the logo andtradenarns.

Alternative Answer:S Development Corporation has a better rightto use the logo and tradename, because itscertificate of registration upon which theinfringement case is based remains valid andsubsistinq for as long as it has not beencancelled. (Shangrila International HotelManagement v. CA, G.R. No. 111580, June21, 2001) (2005 Bar Question)

Q: How does the international affiliation ofShangrila Corporation affect the outcomeof the dispute? Explain.

A: Since Shangrila Corporation is not theowner of the logo and tradename but is merelyan affiliate of the international organizationwhich has been using them it is not tile ownerand does not have the rights of an owner.(Sec. 147, IPC)

Alternative Answer:The international affiliation of ShangrilaCorporation shall have no effect on theoutcome of the dispute. Section 8 of the ParisConvention provides that 'there is noautomatic protection afforded an entity whosetradename is alleged to be infringed throughthe use of that name as a trademark by a localentity." (Kabushi Kaisha Isetan v. lAC, G.R.No. 75420, Nov. 15, 1991) (2005 BarQuestion)

Q: What are the salient features of the Parisconvention of trademarks?

A:1. National Treatment Principle - foreign

nationals are to be given the' sametreatment in each of the membercountries as that country makesavailable in its own citizens.

2. Right of Priority - any person whohas duly filed registration fortrademark shall enjoy a right ofpriority of 6 months (Rule 203,Trademark Rules)

3. Protection against Unfair Competition


4. Protection of Tradenames - protectedin all countries without obligation offiling or registration.

5. Protection of Well-Known Marks

Q: How are marks acquired?

A: The rights in a mark shall be acquiredthrough registration made validly inaccordance with the provisions of the IPC.(Sec. 122, IPC) .

Q: What marks may be registered?

A: Any word, name, symbol, emblem, device,figure, sign, phrase, or any combinationthereof except those enumerated underSection 123, IPC.

Q: What are the requirements for a mark tobe registered?

A:1. A visible sign (not sounds or scents);

and2. Capable of distinguishing one's

goods and services from another.

Q: What marks may not be registered?

A:1. Consists of immoral, deceptive or

scandalous matter or falsely suggesta connection with persons,institutions, beliefs, or nationalsymbols;

2. Consists of the flag or coat of arms orother insignia of the Philippines orany of its political subdivisions, or ofany foreign nation;

3. Consists of a name, portrait orsignature identifying a particular livingindividual except by his writtenconsent, or the name, signature, orportrait of a deceased President ofthe Philippines, during the life of hiswidow except by written consent ofthe widow;

4. Identical with a registered markbelonging to a different proprietor or amark with an earlier filing or prioritydate, in respect of:a. The same goods or services, orb. Closely related goods or

services, orc. If it nearly resembles such a

mark as to be likely to deceive orcause confusion;

5. Is identical with an internationallywell-known mark, whether or not it isregistered here, used for identical orsimilar goods or services;

6. Is identical with an internationallywell-known mark which is registeredin the Philippines with respect to non-similar goods or services. Provided,that the interests of the owner of theregistered mark are likely to bedamaged by such use;

7. Is likely to mislead the public as to thenature, quality, characteristics orgeographical origin of the goods orservices;

8. Consists exclusively of signs that aregeneric for the goods or services thatthey seek to identify;

9. Consists exclusively of signs thathave become customary or usual todesignate the goods or services ineveryday language and establishedtrade practice; I

10. Consists exclusively that may servein trade to designate the kind, quality,quantity, intended purpose, value,geographical origin, time orproduction of the goods or renderingof the services, or othercharacteristics of the goods orservices;

11. Consists of shapes that may benecessitated by technical factors orby the nature of the goodsthemselves or factors that affect theirintrinsic value;

12. Consists of color alone, unlessdefined by a given form; or

13. Is contrary to public order or morality.(Sec. 123)

Q: What constitutes an internationally well-known mark?

A:1. Considered by the competent

authority of the Philippines to be"well-known" international and in thePhilippines as the mark of a personother than the applicant or registrant;

2. Need not be used or registered in thePhilippines;


Pacu[taa de (])erecho Civii ~i·321

INTELLECTUAL PROPERTY LAWS: TRADEMARKS

Need not be known by the public atlarge but only by relevant sector ofthe public.

3.

IQ: What does the law provide asinternationally-well known marks?

regards

A:GR: Prohibition on subsequent registrationdoes not include services and goods ofdifferent nature or kind.

XPN:1 . If the internationally well-known mark

is not registered in the Philippines,the application for registration of asubsequent or similar mark can berejected only if the goods or servicesspecified in the application are similarto those of the internationally well-known mark;

2. If the internationally well-known markis registered in the Philippines, theapplication for registration of asubsequent or similar mark can berefused even if the goods or servicesspecified in .the application are notidentical or similar to those of theinternationally well-known mark.

Q: Is there an infringement of trademarkwhen two similar goods use the samewords, "PALE PILSEN"?

A: No, because "pale pilsen" are genericwords descriptive of the color ·(pale) and of atype of beer (pilsen), which is a light bohemianbeer with strong hops flavor that originated inthe City of Pilsen in Czechoslovakia. Pilsen isa primarily geographically descriptive word,hence, non-registrable and not appropriable byany beer manufacturer (Asia Brewery, Inc. v.CA, G.R. No. 103543, July 5, 1993).

Q: Who may file an opposition to trademarkregistration and on what ground?

A: Any person who believes that he would bedamaged by the registration of a mark may,upon payment of the required fee and withinthirty (30) days after the publication referred toin Subsection 133.2, file with the Office anopposition to the application. (Sec. 134, IPC)

Q: Laberge, Inc., manufactures andmarkets after-shave lotion, shaving cream,deodorant, talcum powder and toilet soap,using! the trademark "PRUT", which isregist'ered with the Phil. Patent Office.Laberge does not manufacture briefs andunderwear and these items are not

322

specified in the certificate of registration.JG who manufactures briefs andunderwear, wants to know whether, underour laws, he can use and register thetrademark "PRUTE" for his merchandise.What is your advice?

A: Yes, he can use and register the trademark"PRUTE" for his merchandise. The trademarkregistered in the name of Laberge Inc. coversonly after-shave lotion, shaving cream,deodorant, talcum powder and toilet soap. Itdoes not cover briefs and underwear. The limitof the trademark is stated in the certificateissued to Laberge Inc. It does not includebriefs and underwear which are differentproducts protected by Laberge's trademark.JG can register the trademark "PRUTE" to

. cover its briefs and underwear (Faberge Inc. v.lAC, G.R. No. 71189, Nov. 4, 1992) (1994 BarQuestion)

Q: The NBI found that SG Incorporated isengaged in the reproduction anddistribution of counterfeit "playstationgames" and thus applied with the ManilaRTC warrants to search respondent'spremises in Cavite. RTC granted suchwarrants and thus, the NBI served thesearch warrants on the subject premises.SG Incorporated questioned the validity ofthe warrants due to wrong venue since theRTC of Manila had no jurisdiction to issue asearch warrant enforceable in Cavite. Is thecontention of SG Incorporated correct?

A: No, unfair competition is a transitory orcontinuing offense under Section 168 ofRepublic Act No. 8293. As such, petitionermay apply for a search warrant in any courtwhere any element of the alleged offense wascommitted, including any of the courts withinMetro Manila and may be validly enforced inCavite. (Sony Computer Entertainment Inc. v.Supergreen Inc. G.R. No. 161823, Mar. 22,2007)

Q: What is trademark infringement?

A: The use without consent of the trademarkowner of any a) reproduction, b) counterfeit, c)copy or d) colorable imitation of any registeredmark or tradename in connection with the sale,offering for sale, or advertising of any goods,business or services on or in connection withwhich such use is likely to cause confusion ormistake or to deceive purchasers or others asto the source or origin of such goods orservices, or identity of such business; orreproduce, counterfeit, copy or colorablyimitate any such mark or tradename and applysuch reproduction, counterfeit, copy or


colorable limitation to labels, signs, prints,packages, wrappers, receptacles oradvertisements intended to be used upon or inconnection with such goods, business orservices (Esso Standard Eastern v. CA, G.R.No. L-29971, Aug. 31, 1982)

Q: How can the ownership of a trademarkbe acquired?

A:1. Marks are acquired solely through

registration. (Sec. 122, IPC)

Note: Actual prior use in commercein the Philippines has been abolishedas a condition for the registration of atrademark.

2. Trade names or business names areacquired through adoption and use.Registration is not required. (Sec.165,IPC)

Q: What is the duration of a certificate ofrademark registration?

A: 10 years, reneweble for a period of anothero years. Each request for renewal must be

made within 6 months before or after theexpiration of the registration.

Q: What are the rights of a registered markowner?

A:1. Protection against reproduction, or

imitation or unauthorized use of themark (infringement of mark);

2. To stop entry of importedmerchandise into the countrycontaining a mark identical or similarto the registered mark; and

3. To transfer or license out the mark.

Q: What is the doctrine of secondarymeaning?

A: This doctrine is to the effect that a word orphrase originally incapable of exclusiveappropriation with reference to an article onthe market, because it is geographical orotherwise descriptive, may nevertheless beused exclusively by one producer withreference to his article so long as in that tradeand to that branch of the purchasing public,the word or phrase has come to mean that thearticle was his product. (G. and C. MerriamCo. v. Saalfield, 198 F. 369, 373, cited in Angv. Teodoro, G.R. No. L-48226, Dec. 14, 1942)

Q: What is colorable imitation?

A: Such a close or ingenious imitation as to becalculated to deceive ordinary persons, orsuch a resemblance to the original as todeceive an ordinary purchaser giving suchattention as a purchaser usually gives, as tocause him to purchase the one supposing it tobe the other. (Societe des Produits Nestle,S.A. v. CA, G.R. No. 112012, Apr. 4, 2001)

Q: What are the tests in determiningwhether there is a trademark infringement?

A:1. Dominancy test - Focuses (In the

similarity of the prevalent features ofthe competing marks. If thecompeting trademark contains themain or essential or dominantfeatures of another, and confusion islikely to result, infringement takesplace. (Asia Brewery v. CA, G.R. No.103543, 5 July 1993)

2. Totality or holistic test - Confusingsimilarity is to be determined on thebasis of visual, aural, connotativecomparisons and overall impressionsengendered by the marks incontroversy as they are encounteredin the marketplace.

Note: The dominancy test only relies on visualcomparisons between two trademarkswhereas the totality or holistic test relies notonly on the visual but also on the aural andconnotative comparisons and overallimpressions between the two trademarks.(Societe Des Produits Nestl, S.A. v. CA, G.R.No. 112012, Apr. 4, 2001)

Q: N Corporation manufactures rubbershoes under the trademark "Jordann"which hit the Philippine market'in 1985, andregistered its trademark with the Bureau ofPatents, Trademarks and Technology in1990. PK Company also manufacturesrubber shoes with the trademark"Javorski" which it registered with BPTTTin 1978. In 1992, PK Co adopted and copiedthe design of N Corporation's "Jordann"rubber shoes, both as to shape and color,but retained the trademark "Javorski" onits products. May PK Company be heldliable to N Co? Explain.

A: PK Co may be liable for unfairly competingagainst N Co. By copying the design, shapeand color of N Corporation's "Jordann" rubbershoes and using the same in its rubber shoestrademarked "Javorski," PK is obviously trying

UN I V E R 5 I T V 0 F SAN ToT 0 MAS f~-'. 323Pacu{taa de Der ec ho ·Ci'f.'i{ ·V·

INTELLECTUAL PROPERTY LA \XIs: TRADEMARIZS

to pass off its shoes for those of N. It is of nomoment that the trademark "Javorski" wasregistered ahead of the trademark "Jordann."Priority in registration is not material in anaction for unfair competition as distinguishedfrom an action for infringement of trademark.The basis of an action for unfair competition isconfusing and misleading similarity in generalappearance, not similarity of trademarks.(Converse Rubber Co. v. Jacinto Rubber & .Plastics Co., G.R. Nos. 27425, 30505, Apr. 28,1980) (1996 Bar Question)

II

Q: W,hat is the so-called "related goodsprinciple"?

iA: Goods are related when they; 1) belong tothe same class or have the same descriptivepropehies; 2) when they possess the samephysical attributes or essential characteristicswith reference to their form, composition,texture or quality.

Q: What is the rule of idem sonans?

A: Two names are said to be "idem son antes"if the attentive ear finds difficulty indistinguishing them when pronounced. (Martinv. State, 541 S. W. 2d 605)

Note: Similarity of sound is sufficient to rulethat the two marks are confusingly similarwhen applied to merchandise of the samedescriptive properties. (Marvex Commercial v.Director of Patent, G.R. No. L-19297, Dec.22, 1966)Q: What are the elements to be establishedin trademark infringement?

A:1. The validity of the mark;2. The plaintiff's ownership of the mark;

and3. The use of the mark or its colorable

imitation by the alleged infringerresults in "likelihood of confusion."(McDonald's Corporation v. L.C. BigMak Burger, lnc., et al., G.R. No.143993, Aug 18,2004)

Q: What are the types of confusion thatarise from the use of similar or colorableimitation marks?

A:1. Confusion of goods (product

confusion); and2. Confusion of business (source or

origin confusion). (McDonald'sCorporation v. L.C. Big Mak Burger,inc., et a/., G.R. No. 143993, Aug.18,2004) ,

324 team:'

Note: While there is confusion of goods whenthe products are competing,

confusion of business exists when theproducts are non-competing but relatedenough to produce confusion of affiliation.

Q: What is. meant' by non-competinggoods?

A: Those which, though they are not in actualcompetition, are so related to each other that itmight reasonably be assumed that theyoriginate from one manufacturer.

Non-competing goods may also be thosewhich, being entirely unrelated,could not reasonably be assumed to have acommon source. In the case of related goods,

. confusion of business could arise out of theuse of similar marks; in the latter_case of non-related goods, it could not. The vast majorityof courts today follow the modern theory orconcept of "related goods" which the court haslikewise adopted and uniformly recognized andapplied. (Esso Standard Eastern, Inc. v. CA,G.R. No. L-29971, Aug. 31, 1982)

Q: Is there infringement even if the goodsare non-competing?

A:.GR: No.

XPN: If it prevents the natural expansion ofhis business and, second, by having hisbusiness reputation confused with and putat the mercy of the second user. (Ang v.Teodoro, G.R. No. L-48226, Dec. 14, 1942)

Q: What are the remedies of the owner ofthe trademark against infringers?

A:1. Civil - both civil and criminal actions

may be filed with the Regiohal TrialCourts. The owner of the registeredmark may ask the court to issue apreliminary injunction to quicklyprevent infringer from causingdamage to his business.Furthermore, the court will requireinfringer to pay damages to the ownerof the mark provided defendant isshown to have had notice of theregistration of the mark (which ispresumed if a letter R within a circleis appended) and stop himpermanently from using the mark.

2. Criminal - Elements of the crime oftrademark infringement:


a. Deceitful act of giving one'sgoods the general appearance ofgoods of another manufactureror dealer;

b. Deceptive similarity either in thegoods themselves, in the tradedress, in the word or devices, orin any other feature ofappearance;

c. Offender offers to sell or sells thegoods, or gives others theopportunity to do the same; and

d. Actual intent to deceive thepublic or defraud the competitor

3. Administrative - This remedy is thesame as in patent infringementcases. If the amount of damagesclaimed is not less than P200,OOO.OO,the registrant may choose to seekredress against the infringer by filingan administrative action against theinfringer with the Bureau of LegalAffairs.

Q: What court has jurisdiction overviolations of intellectual property rights?

A: It is properly lodged with the Regional TrialCourt even if the penalty therefore isimprisonment of less than six years, or from 2to 5 years and a fine ranging from P50,OOOtoP200,OOO.

Note: R.A. 8293 and R.A. 166 are special lawsconferring jurisdiction over violations ofintellectual property rights to the Regional TrialCourt. They should therefore prevail over R.A.No. 7691, which is a general law. (Samson v.oaway, GR. No. 160054-55, July 21, 2004)

Q: What are the limitations on the actionsfor infringement?

A:1. Right of prior user - registered mark

shall be without affect against anyperson who, in good faith, beforefiling or priority date, was using themark for purposes of his business.(Sec 159.1, IPC)

2. Relief against printer - injunctionagainst future printing against aninnocent infringer who is engagedsolely in the business of printing themark. (Sec. 159.2, IPC)

3. Relief against newspaper - injunctionagainst the presentation ofadvertising matter in future issues ofthe newspaper', magazine or inelectronic communications in casethe infringement complained of iscontained in or is part of paidadvertisement in such materials.(Sec. 159.3, IPC)

111~1t31;:«.ll1Jlil§iiii[·m

Q: What distinguishes infringement oftrademark from unfair competition?

INFRINGEMENT OF UNFAIR: Of', ITRADEMARK COMPETITION '..

Unauthorized use of a The passing off of

trademark.one's goods as those

of another.Fraudulent intent is Fraudulent intent is

unnecessary, essential.

Prior registration of Registration is notnecessary. (Delthe trademark is a Monte Corp. v, CA,prerequisite to the G.R. No. 78325, Jan.

action. 23, 1990)

Q: What is the right protected under unfaircompetition?

A: A person who has identified in the mind ofthe public the goods he manufactures or dealsin, his business or services from those ofothers, whether or not' a registered mark isemployed, has a property right in the goodwillof the said goods, business or services soidentified, which will be protected in the samemanner as other property rights. (Sec. 168.1,IPC)

Q: Who are guilty of unfair competition?

A:1, Any person, who is selling hls.qoods

and gives them the generalappearance of goods of anothermanufacturer or dealer, either as tothe goods themselves or in thewrapping of the packages in whichthey are contained, or the devices orwords thereon, or in any other featureof their appearance, which would belikely to influence purchasers tobelieve that the goods offered arethose of a manufacturer or dealer,other than the actual manufacturer ordealer, or who otherwise clothes thegoods with such appearance as shalldeceive the public and defraudanother or his legitimate trade, or any

U N r VE R 5 I T Y 0 F 5 ANT 0 TOM A 5 ~'~. ~ 325'Facu(taa de (})ereclio CiviC '.

INTELLECTUAL PROPERTY LAWS: TRADEMARKS

subsequent vendor of such goods orany agent of any vendor engaged inselling such goods with a likepurpose;

2. Any person who by any artifice, ordevice, or who employs any othermeans calculated to induce the falsebelief that such person is offering theservices of another who has identifiedsuch services in the mind of thepublic; or

3. Any person who shall make any falsestatement in the course of trade orwho shall commit any other actcontrary to good faith of a naturecalculated to discredit the goods,business or services of another. (Sec.168.3)

Q: Is the law on unfair competition broaderthan the law on trademark?

A: Yes. For the latter (trademark infringement)is more limited but it recognizes a moreexclusive right derived from the trademarkadoption and registration by the person whosegoods or business is first associated with it.Hence, even if one fails to establish hisexclusive property right to a trademark, hemay still obtain relief on the ground of hiscompetitor's unfairness or fraud. Conductconstitutes unfair competition if the effect is topass off on the public the goods of one man asthe goods of another. (Mighty Corporation v. E.& J. Gallo Winery, G.R. No. 154342, July 14,2004) I

,

Q: W~at are the elements of an action forunfair' competition?

A:1. Confusing similarity in the general

appearance of the goods; and

Note: The confusing similarity mayormay not result from similarity in themarks, but may result from otherexternal factors in the packaging orpresentation of the goods.

2. Intent to deceive the public anddefraud a competitor.

Note: The intent to deceive anddefraud may be inferred from thesimilarity in appearance of thegoods as offered for sale to thepublic. Actual fraudulent intent neednot be shown. (McDonald'sCorporation v. L.C. Big Mak Burger,

326

lnc., et al., G.R. No. 143993, Aug, 18,2004)

Q: Can trademark registration becancelled?

A: Yes, by any person who believes that hewill be damaged by the registration of themark:

1. Within 5 years, from the date of theregistration of the mark; or

2. At any time;a. if the registered mark becomes

the generic name for the goodsor services, or a portion thereof,for which it is registered;

b. if the mark has been abandoned;c. if its registration was obtained

fraudulently or contrary to theprovisions of the IPC;

d. if the registered mark is beingused by, or with the permissionof, the registrant so as tomisrepresent the source of ·thegoods or services on or inconnection with which the markis used;

e. non-use of the mark within thePhilippines, without legitimatereason, for an uninterruptedperiod of 3 years.

Q: When is non-use excused?

A:1. If caused by circumstances arising

independently of the will of the owner,Lack of funds is not an excuse.

2. A use which does not alter its.distinctive character though the use isdifferent from the form in which it isregistered.

3. Use of mark in connection with one ormore of the goods/services belongingto the class in which the mark isregistered.

4. The use of a mark by a companyrelated to the applicant/registrant.

5. The use of a mark by a personcontrolled by the registrant. (Section152,IPC)


Q: What is a patent?

A: A statutory grant which confers to aninventor or his legal successor, in return for thedisclosure of the invention to the public, theright for a limited period of time to excludeothers from making, using, selling or importingthe invention within the territory of the countrythat grants the patent.

Q: What are the patentable inventions?

A: Any technical solution of a problem in anyfield of human activity which is new, involvesan inventive step and is industrially applicable.It may be, or may relate to, a product, orprocess, or an improvement of any of theforegoing. (Sec. 21)

Q: What are the conditions forpatentability?

A: NIA1. !:lovelty - An invention shall not be

considered new if it forms part of aprior art. (Sec. 23, IPC)

2. Involves an inventive step - if, havingregard to prior art, it is not obvious toa person skilled in the art at the timeof the filing date or priority date of theapplication claiming the invention.

3. Industrially &Jplicable - An inventionthat can be produced and used in anyindustry, shall be industriallyapplicable (Sec. 27, IPC).

Q: What is prior art?

A:1. Everything which has been made

available to the public anywhere in'the world, before the filing date or thepriority date of the applicationclaiming the invention

2. The whole contents of a publishedapplication, filed or effective in thePhilippines, with a filing or prioritydate that is earlier than the filing orpriority date of the application.Provided, that the application whichhas validly claimed the filing date ofan earlier application under Section31 of the IPC, there shall be a priorart with effect as of the filing date ofsuch earlier application: Providedfurther, that the applicant or theinventor identified in both applications

are not one and the same.(Sec. 24, IPC)

Q: What is meant by "made available to thepublic" and what are its effects?

i

A: To be "made available to the public" fneansat least one member of the public has beenable to access knowledge of the inventionwithout any restriction on passing thatknowledge on to others.

GR: When a work has already been madeavailable to the public, it shall be non-patentable for absence of novelty.

XPN: Non-prejudicial disclosure - thedisclosure of information contained in theapplication during the 12-month periodbefore the filing date or the priority date ofthe application if such disclosure was madeby:

1. The inventor;

2. A patent office and the informationwas contained:a. In another application filed by the

inventor and should have nothave been disclosed by theoffice, or

b. In an application filed without theknowledge or consent of theinventor by a third party whichobtained the information directlyor indirectly from the inventor;

3. A third party which obtained theinformation directly or indirectly fromthe inventor. (Sec. 25, IPC)

Q: Who has the burden of proving want ofnovelty of an invention?

A: The burden of proving want of novelty is onhim who avers it and the burden is a heavyone which is met only by clear and satisfactoryproof which overcomes every reasonabledoubt. (Manzano v. CA, G.R. No. 113388.Sept. 5, 1997)


Fa cul t a d' de (j)erecno Civit ~i~327

INTELLECTUAL PROPERTY LA \\IS: PATENTS

Q: Where the defendant has shown that thepatent of the plaintiff is invalid for want ofnovelty, will a preliminary injunction issue?

A: For the patentee to be entitled to protection,the invention must be new to the world.Accordingly, public use of the invention formore than one year before the date ofapplication for patent will be fatal to the validityof the patent issued. If the defendant hasshown that the patent of the plaintiff for powderpuff is invalid for want of novelty, the plaintiff isnot entitled to injunctive relief. (Maguan v, CA,G.R. No. L-4510, Nov. 28, 1986)

Q: What is inventive step?

A:GR: An invention involves an inventive stepif, having regard to prior art, it is notobvious to a person skilled in the art at thetim'e of the filing date or priority date of theapplication claiming the invention. (Sec. 26,IPC)

II

xpN: In the case of drugs and medicines,there is no inventive step if the inventionresults from. the mere discovery of a newform or new property of a known substancewhich does not result in the enhancementof the known efficacy of that substance.(Sec. 26.2, as amended by R.A. 9502)

Q: What is the test of: non-obviousness?

A: If any person possessing ordinary skill inthe art was able to draw the inferences and heconstructs that the supposed inventor drewfrom prior art, then the latter did not reallyinvent. .

Q: Who is considered a person of ordinaryskill?

A: A person who is presumed to be anordinary practitioner aware of what wascommon general knowledge in the art at therelevant date. He is presumed to haveknowledge of all references that are sufficientlyrelated to one another and to the pertinent artand to have knowledge of all arts reasonablypertinent to the particular problems with whichthe inventor was involved. He is presumed tohave had at his disposal the normal meansand capacity for routine work andexperimentation. (Rules and Regulations onInventions, Rule 207)

328

Q: What are other forms of patentableinventions?

A:a. Industrial design Any

composition of lines orcolors or any three-dimensional form, whetheror not associated with linesor colors. Provided thatsuch composition or formgives a special appearanceto and can serve as patternfor an industrial product orhandicraft. (Sec. 112, IPC)

Generally speaking, an industrialdesign is the ornamental or aestheticaspect ofa useful article. (VicenteAmador, Intellectual PropertyFundamentals, 2007)

b. Integrated circuit Aproduct, in its final form, oran intermediate form, inwhich the elements, at leastone of which is an activeelements and some of all ofthe interconnections areintegrally formed in and oron a piece of material, andin which is intended toperform an electronicfunction.

c. Layout design/topography -The three dimensionaldisposition, howeverexpressed, of the elements,at least one of which is anactive element, and of someor all of the interconnectionsof an integrated circuit, orsuch a three-dimensionaldisposition prepared for anintegrated circuit intendedfor manufacture.Registration is valid for 10years without renewalcounted from date ofcommencement ofprotection.

d. Utility model- A name givento inventions in themechanical field


Q: When does an invention qualify as autility model?

Q: Who is entitled to a patent?

A: If it is new and industrially applicable. Amodel of implement or tools of any industrialproduct even if not possessed of the quality ofinvention but which is of practical utility. (Sec.109.1, IPC)

Q: What is the term of a utility model?

A: 7 years from date of filing of the application.(Sec. 109.3, IPC)

Q: What are not patentable?

A: PAD-SCAD1. Qiscoveries, scientific theories and

mathematical methods;

2. In the case of Qrugs and medicines,mere discovery of a new form or newproperty of a known substance whichdoes not result in the enhancement ofthe efficacy of that substance.

3. ~chemes, rules and methods ofperforming mental acts, playinggames or doing business, andprograms for computers;

4. Methods for treatment of the humanor ~nimal body;

5. elant varieties or animal breeds oressentially biological process for theproduction of plants or animals. Thisprovision shall not apply to micro-organisms and non-biological andmicrobiological processes.

6. ~esthetic creations; and

7. Anything which is ~ontrary to publicorder or morality. (Sec. 22, IPC asamended by R.A. 9502)

Q: Are computer programs patentable?

A:GR: Computer programs are notpatentable but are copyrightable.

XPN: They can be patentable if they arepart of a process (e.g. business processwith a step involving the use of a computerprogram).

A:1. Inventor, his heirs, or assigns.

2. Joint invention - Jointly by theinventors. (Sec. 28, IPC)

3. 2 or more persons inventedseparately and independently of eachother - To the person who filed anapplication;

4. 2 or more applications are filed - theapplicant who has the earliest filingdate or, the ear/iest priority date. Firstto file rule. (Sec. 29, IPC)

5. Inventions created pursuant to acommission Person whocommissions the work, unlessotherwise provided in the contract.(Sec. 30.1, IPC)

6. Employee made the invention in thecourse of his employment contract:a. The employee, if the inventive

activity is not a part of his regularduties even if the employee usesthe time, facilities and materialsof the employer.

b. The employer, if the. invention isthe result of the performance ofhis regularly-assigned duties,unless there is anagreement, express or implied,to the contrary. (Sec. 30.2, IPC)

Q: Cheche invented a device that canconvert rainwater into automobile fuel. Sheasked Macon, a lawyer, to assist in gettingher invention patented. Macon suggestedthat they form a corporation with otherfriends and have the corporation apply forthe patent, 80% of the shares of stockthereof to be subscribed by Cheche and 5%by Macon. The corporation was formed andthe patent application was filed. However,Cheche died 3 months later of a heartattack. Franco, the estranged husband ofCheche, contested the application of thecorporation and filed his own patentapplication as the sole surviving heir ofCheche. Decide the issue with reasons.

A: The estranged husband of Cheche cannotsuccessfully contest the application. The rightover inventions accrue from the moment ofcreation and as a right it can lawfully be .assigned. Once the title thereto is vested in thetransferee, the latter has the right to apply forits registration. The estranged husband ofCheche, if not disqualified to inherit, merely

UN I V E R 5 I T Y 0 F 5 ANT 0 TOM A 5 ~""t ..• ; 329'Facu(taa de <Derecfio Civil 'W'

INTELLECTUAL PROPERTY LAWS: PATENTS

interest of Cheche. Q: What is unity of invention?would I succeed to the(1990 IBar Question)

Q: Who may apply for a patent?

A: Any person who is a national or who isdomiciled or has a real and effective industrialestablishment in a country which is a party toany convention, treaty or agreement relating tointellectual property rights or the repression ofunfair competition, to which the Philippines isalso a party, or extends reciprocal rights tonationals .of the Philippines by law, shall beentitled to benefits to the extent necessary togive effect to any provlslon of such convention,treaty or reciprocal law, in addition to the rightsto which any owner of an intellectual propertyright is otherwise entitled by the IntellectualProperty Code (Sec. 3, IPC)

Q: What are the steps in the registration ofa patent?

A: The procedure "for the grant of patent maybe summarized as follows:

1. Filing of the application2. Accordance of the filing date3. Formality examination4. Classification and Search5. Publication of application6. Substantive examination7. Grant of Patent8. Publication upon grant9. Issuance of certificate (Sa/ao,

Essentials of Intellectual PropertyLaw: a Guidebook on Republic ActNo. 8293 and Related Laws., 2008)

Q: How is disclosure made?

A: The application shall disclose the inventionin a manner sufficiently clear and complete forit to be carried out by a person skilled in theart.

Q: What is a claim?

A: Defines the matter for which protection issought. Each claim shall be clear and concise,and shall be supported by the description.

Q: Whlat is an abstract?

A: A concise summary of the disclosure of theinvention as contained in the description,claimsl and merely serves as technicalinformation.

330 Iteam:hSlI.im

A: The application shall relate to one inventiononly or to a group of inventions forming asingle general inventive concept. (Sec. 38.1) Ifseveral independent inventions which do notform a single general inventive concept areclaimed in one application, the applicationmust be restricted to a single invention. (Sec.38.2,IPC)Q: What is the concept of divisionalapplications?

A: Divisional applications come into play whentwo or more inventions are claimed in a singleapplication but are of such a nature that asingle patent may not be issued for them. Theapplicant, is thus required to "divide", that is, to

·Iimit the claims to whichever invention he mayelect, whereas those inventions not electedmay be made the subject of separateapplications which are called "divisionalapplications" (Smith-Kline Beckman Corp. v.CA, GR No. 126627, Aug. 14,2003)

Q: What is priority date?

A: An application for patent filed by anyperson who has previously applied for thesame invention in another country which bytreaty, convention, or law affords similarprivileges to Filipino citizens, shall beconsidered as filed as of the date of filing theforeign application. (Sec. 31, IPC)

Q: What are the conditions ln availing ofpriority date?

A:1. The local application expressly claims

priority;

2. It is filed within 12 months from thedate the earliest foreign applicationwas filed; and

3. A certified copy of the foreignapplication together with an Englishtranslation is filed within 6 monthsfrom the date of filing in thePhilippines. (Sec. 31, IPC)

Q: Leonard and Marvin applied for LettersPatent claiming the right of priority grantedto foreign applicants. Receipt ofpetitioners' application was acknowledgedby respondent Director on March 6, 1954.Their Application for Letters Patent in theUS for the same invention indicated thatthe application in the US was filed onMarch 16, 1953. They were advised that the"Specification" they had submitted was


"incomplete" and that responsive actionshould be filed with them four months fromdate of mailing, which was August'5, 1959.On July 3, 1962, petitioners submitted twocomplete copies of the Specification.Director of patents held that petitioners'application may not be treated as filed. Isthe director correct?

A: Yes, it is imperative that the application becomplete in order that it may be accepted. It isessential to the validity of Letters Patent thathe specifications be full, definite, and specific.

The purpose of requiring a definite andaccurate description of the process is toapprise the public of what the patentee claimsas his invention, to inform the Courts as to.' hat they are called upon to construe, and toconvey to competing manufacturers and

ealers information of exactly what they areoound to avoid. To be entitled to the filing date

. the patent application, an inventioncisclosed in a previously filed application must

~ described within the instant application insuch a manner as to enable one skilled in the2 l to use the same for a legally adequate_jlity. (Boothe v. Director of Patents, G.R. No.--24919, Jan. 28, 1980)

: What are the rights conferred by apatent application after the firstpublication?

: The applicant shall have all the rights of aatentes against any person who, without his

2' horization, exercised any of the rightsnferred under Section 71 in relation to the

'1 ention claimed in the published patentaoplicatlon, as if a patent had been granted for:"'1ai invention, provided that the said personad:

1.

2.

Actual knowledge that the inventionthat he was using was the subjectmatter of a published application; orReceived written notice that theinvention was the subject matter of apublished application being identifiedin the said notice by its serial number

Note: That the action may not be filed untila er the grant of a patent on the publishedapplication and within four (4) years from thecommission of the acts complained of (Sec.46,IPC).

Q: When shall the patent take effect?

A: A patent shall take effect on the date of thepublication of the grant of the patent in the IPOGazette. (Sec. 50.3, IPC)

Q: What is the duration of a patent, utilitymodel and industrial deslqn?

A:1. Patent - 20 years from. date of filing

of application without renewal. (Sec.54,IPC)

2. Utifity Model - 7 years from the filingdate of the application withoutrenewal. (Sec. 109.3, fPC)

3. Industrial Design - 5 years from thefiling date of the application,renewable for not more than two (2)consecutive periods of five (5) yearseach. (Sec, 118.2, fPC)

Q: What are the' grounds for thecancellation of patents?

A: NOel1. The invention is ~ot new or

patentable;2. The patent does not Qisclose the

invention in a manner sufficientlyclear and complete for it to be carriedout by any person skilled in the art; or

3. .Qontrary to public order ormorality.(Sec. 61.1, IPC) !

4. Patent is found invalid in an action forinfringement (Sec. 82, IPC)

Q: What if the ground/s for. cancellationrelate to some of the claims or parts of theclaim only?

A: Cancellation may be effected to suchextent only. (Sec. 61.2, fPC)

Q: What are the grounds for cancellation ofa utility model?

A:1. The invention does not qualify for

registration as a utility model;2. That the description and the claims

do not comply with the prescribedrequi rements;

3. Any drawing which is necessary forthe understanding of the inventionhas not been furnished;

4. That the owner of the utility modelregistration is not the inventor or hissuccessor in title. (Sec. 109.4, IPC)

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Pacu[taa de Der ec Iio Civ i] .•. 331

INTELLECTUAL PROPERTY LAWS: PATENTSi

Q: Whkt are the grounds for cancellation ofan industrial design?

IA:

1. The subject matter of the industrialdesign is not registrable;

2. The subject matter is not new; or3. The subject matter of the industrial

design extends beyond the content ofthe application as originally filed (Sec.120IPC).

Q: What are the rights conferred by apatent?

A:1. Subject matter is a product - Right to

restrain, prohibit and prevent anyunauthorized person or entity frommaking, using, offering for sale,selling or importing the product.

2. Subject matter is a process - Right torestrain prohibit and prevent anyunauthorized person or entity frommanufacturing, dealing in, using,offering for sale, selling or importingany product obtained directly orindirectly from such process (Sec. 71,IPC).

3. Right to assign the patent, to transferby succession, and to ·concludelicensing contracts (Sec. 71.2, IPG).

Q: What are the exceptions to the rightsconferred by a patent?

A:1. In general

a. GR: If put on the market in thePhilippines by the owner of theproduct, or with his expressconsent.

XPN: Drugs and medicines -introduced in the Philippines oranywhere else in the world bythe patent owner, or by any partyauthorized to use the invention(Sec. 72.1, as amended by R.A.9502)

b. Where the act is done privatelyand on a non-commercial scaleor for a non-commercial purpose(Sec. 72.2, IPC);

c. Exclusively for experimental useof the invention for scientificpurposes or educational

332

purposes (experimental useprovision) (Sec. 72.3, IPC);

d. In the case .of drugs andmedicines, where the actincludes testing, using, making orselling the invention includingany data related thereto, solelyfor purposes reasonably relatedto the development andsubmission of information andissuance of approvals bygovernment regulatory agenciesrequired under any law of thePhilippines or of another countrythat regulates the manufacture,construction, use or sale of anyproduct (bolar provision) (Sec.72.4, IPC);

e. Where the act consists of thepreparation for individual cases,in a pharmacy or by a medicalprofessional, of a medicine inaccordance with a medicalprescription (Sec. 72.5, IPC).

f. Where the invention is used inany ship, vessel, aircraft, or landvehicle of any other countryenteri ng the territory of thePhilippines temporarily oraccidentally (Sec. 72.5, IPC).

2. Prior user - Person other than theapplicant, who in good faith, startedusing the invention in the Philippines,or undertaken serious preparations touse the same, before the filing date orpriority date of the application shallhave the right to continue the usethereof, but this right shall only betransferred or assigned further withhis enterprise or business (Sec. 73,IPC)

3. Use by Government - A governmentagency or third person authorized bythe government may exploit inventioneven without agreement of a patentowner where:

a. Public interest requires;b. The manner of exploitation by

owner of patent is anti-competitive (Sec. 74, fPC).

4. Reverse reciprocity of foreign law -Any condition, restriction, limitation,diminution, requirement, penalty orany similar burden imposed by thelaw of a foreign country on a


Philippine national seeking protectionof intellectual property rights in thatcountry, shall reciprocally beenforceable upon nationals of saidcountry, within Philippine jurisdiction(Sec. 231, IPC).

Q: Who is a parallel importer?

A: One which imports, distributes, and sellsgenuine products in the market, independentlyof an exclusive distributorship or agencyagreement with the manufacturer. Such acts of"underground sales and marketing" of genuinegoods, undermines the property rights andgoodwill of the rightful exclusive distributor.Such goodwill is protected by the law on unfaircompetition. (Solid Triangle v. Sheriff, G.R. No.144309, Nov. 23, 2001)

Q: What is the doctrine of exhaustion?

A: Also known as the doctrine of first sale, itprovides that the patent holder has control ofthe first sale of his invention. He has theopportunity to receive the full consideration forhis invention from his sale. Hence, heexhausts his rights in the future control of hisinvention.

It espouses that the patentee who has alreadysold his invention and has received all theroyalty and consideration for the same will bedeemed to have released the invention fromhis monopoly. The invention thus becomesopen to the use of the purchaser withoutfurther restriction. (Adams v. Burke, 84 U.S.17, 1873)

Q: How does the doctrine apply inPhilippine jurisdiction?

A:GR: Exhausted by first sale in the.Philippines (Domestic exhaustion).

XPN: R.A. 9502 on drugs and medicines:first sale in any jurisdiction exhausts(Intemational exhaustion).

Q: What are the different kinds of.exhaustion?

A:1. International exhaustion - allows any

party to import into the nationalterritory a patented product from anyother country in which the productwas placed on the market by thepatent holder or any authorized party.

2. Regional exhaustion - allows thepossibility of importing into thenational territory a patented productoriginating from any other member'state of a regional trade agreement.

3. National exhaustion - limits thecirculation of products covered bypatent in one country to only thoseput on the market by the patentowner or its authorized agents in thatsame country. In this case, there canbe no parallel importation.

4. Modified exhaustion - all respectidentical to the Internationalexhaustion except for the allowanceof the restriction of the extent ofexhaustion through explicitcontractual terms. (Carlos Correa,."Internationalization of the PatentSystem and' New Technologies".International Law Journal, Vol. 20.No.3,2002)

Q: What constitutes infringement ofpatent?

A:1. Making, using, offering for sale,

selling or importing a patentedproduct or

2. A product obtained directly orindirectly from a patented process; or

3. Use of a patented process withoutauthorization of the owner of thepatent (Sec. 76, IPC)

Q: What are the tests .ln patentinfringement?

A:1. Literal infringement test - Resort

must be had, in the first instance, towords of the claim. If the accusedmatter clearly falls within the claim,infringement is committed.

Minor modifications are sufficient toput the item beyond literalinfringement. (Godines v. CA, G.R.No. L-97343, Sept. 13, 1993)

2. Doctrine of equivalents - There isinfringement where a deviceappropriates a prior invention byincorporating its innovative conceptand, although with some modificationand change, performs substantiallythe same function in substantially the

UNIVERSiTY OF SANTO TOMAS \:,~ 333Pacu{taa de C])erecno CiviC 'y.

I, II INTELLECTUAL PROPERTY LAWS: PATENTS

same way to achieve substantially thesame result. (Ibid.)

3. Economic interest test - when theprocess-discoverer's economicinterest are compromised, i.e., whenothers can import the products thatresult from the process, such an actis said to be prohibited.

Q: Does the use of a patented processby a third person constitute an

infringement when the alleged infringer hassubstituted, in lieu of some unessentialpart of the patented process, a well-knownmechanical equivalent." .

A: Yes, under the doctrine of mechanicalequivalents, the patentee is protected fromcolorable invasions of his patent under theguise of substitution of some part of hisinvention by some' well known mechanicalequivalent. It is an infringement of the patent, ifthe substitute performs the same function andwas well known at the date of the patent as aproper substitute for the omitted ingredient.(Gsell v. Yap-Jue, G.R. No. L-4720, Jan. 19,1909)

Q: What is meant by "equivalent device"?

A: It is such as a mechanic of ordinary skill inconstruction of similar machinery, having theforms, specifications and machine before him,could substitute in the place of the mechanism'described without the exercise of the inventivefaculty.

Q: What is the "doctrine of file wrapperestoppel"?

A: This doctrine balances the doctrine ofequivalents. Patentee is precluded fromclaiming as part of patented product that whichhe had to excise or modify in order to avoidpatent office rejection, and he may omit anyadditions that he was compelled to add bypatent office regulations.

Q: W\1at is the "doctrine of contributoryinfringement"?

iA: Aside from the infringer, anyone whoactively induces the infringement of a patent orprovides the infringer with a component of apatented product or of a product producedbecause of a patented process knowing it tobe especially adapted for infringing thepatented invention and not suitable forsubstantial non-lntrinqinq use is liable jointlyand severally with the infringer as acontributory infringer. It must be proven that

the product can only be used for infringementpurposes. If it can be used for legitimatepurposes, the action shall not prosper.

Q: What are the remedies of the owner ofthe patent against infringers?

A:1. Civil action for infringement - The

owner may bring a civil action withthe appropriate Regional Trial Courtto recover from infringer the damagessustained by the former, plusattorney's fees and other litigationexpenses, and to secure an injunctionfor the protection of his rights.

2. Criminal action for infringement - Ifthe infringement is repeated, theinfringer shall be criminally liable andupon conviction, shall sufferimprisonment of not less than six (6)months but not more than three (3)years and/or a fine not less thanPi 00,000.00 but not more thanP300,OOO.00

3. . Administrative remedy - Where theamount of damages claimed is notless than P200,OOO.00, the patenteemay choose to file an .admlnistrativeaction against the infringer with theBureau of Legal Affairs (BLA). TheBLA can issue injunctions, directinfringer to pay patentee damages,but unlike regular courts, the BLAmay not issue search and seizurewarrants or warrants of arrest.

Q: What are the limitations to thecivil/criminal action?

A:1. No damages can be recovered for

acts of infringement committed more'than four (4) years before the filing ofthe action for infringement. (Sec. 79,IPC)

2. The criminal action prescribes inthree (3) years from the commissionof the crime. (Sec. 84, IPC)

UST GOLD:EN NOTES 2010

Q: Who can file an action for infringement? Q: What is voluntary licensing?

A:1. The patentee or his successors-in-

interest may file an action forinfringement. (Creser PrecisionSystems, Inc. v. CA, GR. No.118708, Feb. 2, 1998)

2. Any foreign national or juridical entitywho meets the requirements of Sec.3 and not engaged in business in thePhilippines, to which a patent hasbeen granted or assigned, whether ornot it is licensed to do business in thePhilippines. (Sec. 77, IPC)

Q: What are the remedies of persons nothaving the right to a patent?

A: If a person other than the applicant isdeclared by final court order or decision ashaving the right to a patent, he may within 3months after such decision has become final:

1. prosecute the application as his own2. file a new patent application3. request the application to be refused;

or4. seek cancellation of the patent.

Q: What are the defenses in an action forinfringement?

A:1. Invalidity of the patent; (Sec. 81, IPC);2. Any of the grounds for cancellation of

patents:a. That what is claimed as the

invention is not new orpatentable

b. That the patent does not disclosethe invention in a mannersufficiently clear and completefor it to be carried out by any.person skilled in the art; or

c. That the patent is contrary topublic order or morality. (Sec.61,IPC)

Q: What are the modes of obtaining licenseto exploit?

A:1. Voluntary licensing (Sec. 85, IPC)

and2. Compulsory licensing (Sec. 93, IPC)

A: The grant by the patent owner to a thirdperson of the right to exploit a patentedinvention.

Q: What are the rights of a licensor involuntary licensing?

A: In the absence of any provision to thecontrary in the technology transferarrangement, the grant of a license shall notprevent the licensor from granting furtherlicenses to third person nor from exploiting thesubject matter of the technology transferarrangement himself (Sec. 89, IPC).

Q: Who can grant a compulsory license?

A: The Director of Legal Affairs may grant alicense to exploit a patented invention, evenwithout the agreement of the patent owner, infavor of any person who has shown hiscapability to exploit the invention (Sec. 93,IPC).

R.A. 9502 (Universally Accessible Cheaperand Quality Medicines Act of 2008) howeveramended Sec. 93 so that it is the DirectorGeneral of the IPO who may grant a license toexploit patented invention under the groundsenumerated therein. Clarification either bylegislation of judicial interpretation as to whohas jurisdiction should be made to avoidconfusion. (Ernesto C. Salao, Essential ofIntellectual Property Law: a Guidebook onRepublic Act No. 8293 .and Related Laws,2008) IQ: What are the grounds for compulsorylicensing and the period for filing apetition?

A:1. National emergency;

2. Where the public interest, at any timeafter the grant of the patent;

3. Where a judicial or administrativebody has determined that the mannerof exploitation by the owner of thepatent or his licensee is anti-competitive at any time after the grantof the patent;

4. In case of public non-commercial useof the patent by the patentee, withoutsatisfactory reason at any time afterthe grant of the patent;

5. If the patented invention is not beingworked in the Philippines on a

UNIVERSITY OF SANTO TOMAS ~.""T·~335'Facu{taa de Derec Iio Ciui] ...,

INTELLECTUAL PROPERTY LAWS: PATENTS

commercial scale, although capableof being worked, without satisfactoryreason after the expiration of 4 yearsfrom the date of filing of theapplication or 3 years from the date ofthe patent whichever is later. (Sec. 93in relation to Sec. 94)

6. Where the demand for patenteddrugs and medicines is not being metto an adequate extent and onreasonable terms, as determined by

.the Secretary of the Department ofHealth (Sec. 10, R.A. 9502)

Q: Grounds for cancellation of thecompulsory license?

A:1. Ground for the grant of the

compulsory license no longer existsand is unlikely to recur;

2. Licensee has neither begun to supplythe domestic market nor madeserious preparation therefore;

3. Licensee has not complied with theprescribed terms of the license.

Q: Cezar works in a car manufacturingcompany owned by Joab. Cezar is quiteinnovative and loves to tinker with things.With the materials and parts of the car, hewas able to invent a gas-saving device thatwill enable cars to consume less gas.Francis, a co-worker, saw how Cezarcreated the device and likewise, came upwith a similar gadget, also using scrapmaterials and spare parts of the company .

. Thereafter, Francis filed an application forregistration of his device with the Bureauof Patents. Eighteen months later, Cezarfiled his application for the registration ofhis device with the Bureau of Patents.Is the gas-saving device patentable?Explai,n.

A: Yes because it is new, it involves aninventive step and it is industrially applicable.

Q: Assuming that it is patentable, who isentitled to the patent? What, if any, is theremedy of the losing party?

A: Francis is entitled to the patent, because hehad the earlier filing date. The remedy ofCezar is to file a petition in court for thecancellation of the patent of Francis on theground that he is the true and actual inventor,and ask for his substitution as patentee. (2005Bar Question)

336

Q: Supposing Albert Einstein were alivetoday and he filed with the IntellectualProperty Office (IPO) an application forpatent for his theory of relativity expressedin the formula E=mc2. The IPO disapprovedEinstein's application on the ground thathis theory of relativity is not patentable. Isthe IPO's action correct?

A: Yes, the IPO's action is correct. Section 22of the Intellectual Property Law expresslystates that discoveries, scientific theories andmathematical methods are among thosematters which are not patentable. (2006 BarQuestion)

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