UP Bar Reviewer 2013 - Mercantile Law

LETTERS OF CREDIT

Definition and Nature ............. 1 DEFINITION ................................................................. 2 PURPOSE .................................................................... 2 ESSENTIAL REQUISITES .............................................. 2 NATURE ...................................................................... 2 TYPES OF LETTERS OF CREDIT ................................... 2 AS TO THE TYPE OF THE MAIN CONTRACT ................................ 2 AS TO REVOCABILITY.......................................................... 2 AS TO THE OBLIGATION ASSUMED BY CORRESPONDENT BANK ...... 2

Parties to a Letter of Credit ... 2 RIGHTS AND OBLIGATIONS OF THE PARTIES ............. 2

Basic Principles of Letter of Credit ................... 3 DOCTRINE OF INDEPENDENCE ....................................3 FRAUD EXCEPTION PRINCIPLE ....................................3 DOCTRINE OF STRICT COMPLIANCE ............................3

TRUST RECEIPTS LAW

Concept of Trust Receipt Transaction ............................. 6 LOAN/SECURITY FEATURE ......................................... 6 OWNERSHIP OF THE GOODS, DOCUMENTS AND INSTRUMENTS UNDER A TRUST RECEIPT .......... 6

Rights of the Entruster .......... 6 VALIDITY OF THE SECURITY INTEREST AS AGAINST THE CREDITORS OF THE ENTRUSTEE/ INNOCENT PURCHASERS FOR VALUE ........................ 6

Obligation and Liability of the Entrustee ...................... 7 OBLIGATIONS OF THE ENTRUSTEE .............................. 7 LIABILITIES OF THE ENTRUSTEE .................................. 7

Remedies Available ................ 7

Warehousemans Lien ............ 7

NEGOTIABLE INTRUMENTS LAW

Definition ................................. 9

Forms and Interpretation ...... 9

REQUISITES OF NEGOTIABILITY .................................. 9 IN WRITING AND SIGNED BY THE MAKER OR DRAWER ................. 9 CONTAINING AN UNCONDITIONAL PROMISE TO PAY OR ORDER TO PAY ............................................................. 9 PAYABLE ON DEMAND OR AT A FIXED OR DETERMINABLE TIME ... 10 PAYABLE TO ORDER OR TO BEARER ....................................... 11 IF BILL OF EXCHANGE, DRAWEE MUST BE NAMED OR DESIGNATED WITH REASONABLE CERTAINTY ...................... 11

Kinds of Negotiable Instruments ............................12 PROMISSORY NOTE ....................................................12 KINDS OF PROMISSORY NOTES.............................................12 BILL OF EXCHANGE .....................................................12 KINDS OF BILLS OF EXCHANGE .............................................12

Completion and Delivery ...... 13 INSERTION OF DATE ................................................... 13 COMPLETION OF BLANKS........................................... 13 INCOMPLETE AND UNDELIVERED INSTRUMENTS ..... 13 COMPLETE AND UNDELIVERED INSTRUMENTS ......... 13 INCOMPLETE AND DELIVERED INSTRUMENTS .......... 13

Signature ................................ 13 SIGNING IN TRADE NAME ........................................... 13 SIGNATURE OF AGENT ............................................... 13 SIGNATURE PER PROCURATION ........................................... 13 LIABILITY ........................................................................ 13 INDORSEMENT BY MINOR OR CORPORATION .......... 14 FORGERY ................................................................... 14 PERSONS PRECLUDED FROM SETTING UP DEFENSE OF FORGERY . 14 RULES ON FORGERY ......................................................... 14 ACCEPTANCE AND PAYMENT UNDER MISTAKE ........................ 15 WHEN DRAWEE MAY RECOVER FROM DRAWED ....................... 15 WHEN DRAWEE MAY NOT RECOVER FROM HOLDER .................. 15 BETWEEN DRAWEE BANK AND COLLECTING BANK .................... 15

Consideration ....................... 16

Accommodation Party ......... 16 LIABILITY ................................................................... 16 ACCOMMODATION PARTY AS SURETY ...................... 16

Negotiation ........................... 16 NEGOTIATION DISTINGUISHED FROM ASSIGNMENT .................................................. 16 MODES OF NEGOTIATION .......................................... 16 BY DELIVERY .................................................................. 16 BY INDORSEMENT COMPLETED BY DELIVERY............................ 17

Rights of the Holder .............. 17 HOLDER IN DUE COURSE........................................... 18 WHO ARE HDCS ............................................................... 18 REQUISITES OF A HOLDER IN DUE COURSE ............................. 18 DEFENSES AGAINST THE HOLDER ............................ 19 PRESUMPTION IN FAVOR OF DUE COURSE HOLDING ................. 19

HOLDER NOT IN DUE COURSE .............................................. 19

Liabilities of Parties .............. 19 PARTIES PRIMARILY LIABLE ..................................... 20 MAKER ......................................................................... 20 ACCEPTOR .................................................................... 20 PARTIES SECONDARILY LIABLE ................................ 20 DRAWER ...................................................................... 20 INDORSERS ................................................................... 20 WARRANTIES ............................................................ 20

Presentment for Payment ... 21 NECESSITY OF PRESENTMENT FOR PAYMENT .......... 21 PARTIES TO WHOM PRESENTMENT FOR PAYMENT SHOULD BE MADE ...................................................... 21 DISPENSATION WITH PRESENTMENT FOR PAYMENT ........................................................... 21 DISHONOR BY NON-PAYMENT .................................. 21

Notice of Dishonor ................ 21 PARTIES TO BE NOTIFIED ..........................................22 PARTIES WHO MAY GIVE NOTICE OF DISHONOR .......22 EFFECT OF NOTICE .....................................................22 FORM OF NOTICE .......................................................22 WAIVER ......................................................................22 DISPENSATION WITH NOTICE ....................................22 EFFECT OF FAILURE TO GIVE NOTICE ........................22

Discharge of Negotiable Instrument ........ 22 DISCHARGE OF NEGOTIABLE INSTRUMENT .............. 23 BY PAYMENT IN DUE COURSE .............................................. 23 BY INTERNATIONAL CANCELLATION ...................................... 23 BY OTHER ACTS THAT DISCHARGE A SIMPLE CONTRACT FOR PAYMENT OF MONEY ................................................... 23 BY REACQUISITION OF PRINCIPAL DEBTOR IN HIS OWN RIGHT ...... 23 BY MATERIAL ALTERATION ................................................. 23 DISCHARGE OF PARTIES SECONDARILY LIABLE ........ 23 GROUNDS UNDER SEC. 120 ................................................. 23 OTHER GROUNDS............................................................. 23 RIGHT OF PARTY WHO DISCHARGED INSTRUMENT .. 23 RENUNCIATION BY HOLDER ...................................... 23

Material Alteration .............. 24 CONCEPT................................................................... 24 EFFECT OF MATERIAL ALTERATION ......................... 24

Acceptance .......................... 24 DEFINITION ............................................................... 24 MANNER ................................................................... 24 EXPRESS ACCEPTANCE ..................................................... 24 IMPLIED ACCEPTANCE ...................................................... 24 TIME FOR ACCEPTANCE ............................................ 24 RULES GOVERNING ACCEPTANCE ............................ 24

Presentment for Acceptance ......................25 TIME/PLACE/MANNER OF PRESENTMENT ............... 25 WHEN MADE .................................................................. 25 HOW MADE .................................................................... 25 EFFECT OF FAILURE TO MAKE PRESENTMENT ......... 25 DISHONOR BY NON-ACCEPTANCE ............................ 25

Promissory Notes ................ 26

Checks .................................. 26 DEFINITION ............................................................... 26 KINDS ........................................................................ 26 PRESENTMENT FOR PAYMENT ................................. 26 TIME ............................................................................ 26 EFFECT OF DELAY ............................................................ 26

INSURANCE CODE

Concept of Insurance ...........29 CONTRACT OF INSURACE .......................................... 29 INSURANCE ................................................................... 29 DEFINITION .................................................................... 29 PRE-NEED PLANS ............................................................ 29 DOING OR TRANSACTING AN INSURANCE BUSINESS ........................................ 29

Elements of the Contract ....29

Characteristics/Nature of Insurance Contracts ........ 30

Classes ................................. 30 MARINE ...................................................................... 31 TWO MAJOR DIVISIONS ...................................................... 31 BOTTOMRY V. RESPONDENTIA ............................................. 31 RISKS THAT MAY BE INSURED AGAINST .................................. 31 PERILS OF THE SEA V. PERILS OF THE SHIP .............................. 31 LIABILITY OF MARINE INSURER ............................................ 31 ABANDONMENT ............................................................... 31 FIRE ........................................................................... 32 RISKS IN FIRE INSURANCE ................................................. 32 MEASURE OF INDEMNITY ................................................... 32 SURETYSHIP .............................................................. 32 DEFINITION .................................................................... 32 WHEN CONSIDERED AS INSURANCE...................................... 32 BOND NECESSARY TO SECURE PERFORMANCE OF OBLIGATION .... 32 LIFE ............................................................................ 32 TYPES OF LIFE INSURANCE ................................................. 32

VARIOUS LIFE INSURANCE PLANS ......................................... 33 RISKS IN LIFE INSURANCE .................................................. 33 COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE................................................................ 33 NATURE AND PURPOSE ..................................................... 33 CLAIMS ......................................................................... 33 RELEVANT CLAUSES IN MOTOR VEHICLE INSURANCE ................ 34 CASUALTY ................................................................. 34 RISKS IN CASUALTY INSURANCE ......................................... 34 LIABILITY V. INDEMNITY .................................................... 34 NO ACTION CLAUSE ......................................................... 34

Insurable Interest ................. 34 DEFINITION ............................................................... 34 RATIONALE ............................................................... 34 WHEN INSURABLE INTEREST SHOULD EXIST ............35 CHANGE OF INTEREST ...............................................35 INSURABLE INTEREST IN LIFE/HEALTH ....................35 INTEREST IN ONES OWN LIFE ..............................................35 INTEREST IN LIFE OF ANOTHER ............................................35 BENEFICIARY ..................................................................36 INTEREST IN HEALTH ........................................................36 TRANSFER OF POLICY........................................................36 INSURABLE INTEREST IN PROPERTY.........................36 NATURE OF INTEREST .......................................................36 MEASURE OF INSURABLE INTEREST IN PROPERTY .................... 37 TIME OF EXISTENCE .......................................................... 37 TRANSFER OF POLICY........................................................ 37 DISTINCTIONS BETWEEN INSURABLE INTERESTS IN PROPERTY AND IN LIFE .................................................. 37 DOUBLE INSURANCE AND OVER INSURANCE ........... 37 DOUBLE INSURANCE ......................................................... 37 RE-INSURANCE .............................................................. 38 DOUBLE INSURANCE V. REINSURANCE ................................. 38 MULTIPLE OR SEVERAL INTERESTS ON SAME PROPERTY ................................................ 38 OPEN MORTGAGE OR LOSS PAYABLE MORTGAGE CLAUSE .......... 38 UNION MORTGAGE OR STANDARD MORTGAGE CLAUSE ............. 39

Perfection of the Contract of Insurance .......................... 39 FORM OF INSURANCE POLICY .................................. 39 OFFER AND ACCEPTANCE/CONSENSUAL ................ 39 DELAY IN ACCEPTANCE ..................................................... 39 DELIVERY OF POLICY ........................................................ 39 PREMIUM PAYMENT ................................................. 39 DEFINITION ................................................................... 39 AUTHORITY OF AGENT TO RECEIVE PREMIUM ......................... 40 EFFECT OF PAYMENT BY POSTDATED CHECK .......................... 40 EFFECT OF NON-PAYMENT OF PREMIUM ............................... 40 EXCUSES FOR NON-PAYMENT OF PREMIUM ........................... 40 NON-DEFAULT OPTIONS IN LIFE INSURANCE .......... 40 CASH SURRENDER VALUE ................................................. 40 ALTERNATIVE TO OBTAINING CASH SURRENDER VALUE ............ 40 REINSTATEMENT OF A LAPSED POLICY OF LIFE INSURANCE ................................................... 41 REFUND OF PREMIUMS ............................................. 41 WHEN RETURN OF PREMIUMS CAN BE MADE ........................... 41

Rescission of Insurance Contracts ............................... 41 CONCEALMENT ......................................................... 41 DEFINITION .................................................................... 41 PROOF OF FRAUD IN CONCEALMENT..................................... 41 TEST OF MATERIALITY....................................................... 41 EFFECTS OF CONCEALMENT ............................................... 41 CONCEALMENT IN MARINE INSURANCE V. ORDINARY INSURANCE 42 NON-MEDICAL INSURANCE ................................................ 42 MATTERS WHICH NEED TO BE DISCLOSED EVEN IN THE ABSENCE OF INQUIRY ....................................... 42 MATTERS WHICH DO NOT NEED TO BE DISCLOSED .................... 42 MISREPRESENTATION/OMISSIONS .......................... 42 DEFINITION .................................................................... 42 KINDS OF REPRESENTATIONS ............................................. 43 REQUISITES OF MISREPRESENTATION ................................... 43 PROOF OF FRAUD IN MISREPRESENTATION ............................ 43 TEST OF MATERIALITY....................................................... 43 WHEN MISREPRESENTATION IS MADE ................................... 43 EFFECT OF MISREPRESENTATION......................................... 43 CONCEALMENT V. MISREPRESENTATION ............................... 43 BREACH OF WARRANTIES ......................................... 43 PURPOSE OF WARRANTIES ................................................ 43 KINDS OF WARRANTIES ..................................................... 43 CHARACTERISTICS ........................................................... 44 EFFECT OF BREACH OF WARRANTY....................................... 44 WARRANTIES IN FIRE INSURANCE ........................................ 44 WARRANTY V. REPRESENTATION ........................................ 44

Claims Settlement and Subrogation .................. 44 CONCEPT OF LOSS ..................................................... 44 DEFINITION .................................................................... 44 CAUSES OF LOSS ............................................................. 44 LIABILITY FOR LOSS.......................................................... 44 REQUISITES FOR RECOVERY FROM INSURANCE ....................... 45 NOTICE AND PROOF OF LOSS .................................... 45 NOTICE OF LOSS .............................................................. 45 FORM OF NOTICE ............................................................. 45 PROOF OF LOSS .............................................................. 45 FORM OF PROOF ............................................................. 45 GUIDELINES ON CLAIMS SETTLEMENT ..................... 45 HOW CLAIMS ARE PAID/SETTLED ........................................ 45 UNFAIR CLAIMS SETTLEMENT; SANCTIONS............................. 46 PRESCRIPTION OF ACTION ................................................. 46 SUBROGATION ................................................................ 46 THE INSURANCE COMMISSIONER ......................................... 47

TRANSPORTATION LAWS

Common Carriers ................ 49 DILIGENCE REQUIRED OF COMMON CARRIERS ........ 50 DILIGENCE REQUIRED ....................................................... 50 DEFINITION .................................................................... 50 REASONS ...................................................................... 50

LIABILITIES OF COMMON CARRIERS ........................ 50 GOODS ......................................................................... 50 PASSENGERS ................................................................. 50 PRINCIPLES AS TO THE LIABILITY OF COMMON CARRIERS ........... 51 PRESUMPTION OF NEGLIGENCE ........................................... 51 KABIT SYSTEM................................................................. 51

Vigilance Over Goods ............. 4 EXEMPTING CAUSES .................................................. 51 REQUIREMENT OF ABSENCE OF NEGLIGENCE.......................... 52 ABSENCE OF DELAY ......................................................... 52 DUE DILIGENCE TO PREVENT OR LESSEN THE LOSS .................. 52 CONTRIBUTORY NEGLIGENCE .................................. 52 DURATION OF LIABILITY ........................................... 52 DELIVERY OF GOODS TO COMMON CARRIER ............................53 ACTUAL OR CONSTRUCTIVE DELIVERY ...................................53 TEMPORARY UNLOADING OR STORAGE .................................53 STIPULATION FOR LIMITATION OF LIABILITY ............53 VOID STIPULATIONS ........................................................ 54 LIMITATION OF LIABILITY TO FIXED AMOUNT .......................... 54 LIMITATION OF LIABILITY IN ABSENCE OF DECLARATION OF GREATER VALUE ......................................................... 54 LIABILITY FOR BAGGAGE OF PASSENGERS .............. 54 CHECKED-IN BAGGAGE ..................................................... 55 BAGGAGE IN POSSESSION OF PASSENGERS ............................ 55

Safety of Passengers ........... 55 VOID STIPULATIONS ................................................. 55 DURATION OF LIABILITY ........................................... 56 WAITING FOR CARRIER OR BOARDING OF CARRIER .................. 56 ARRIVAL AT DESTINATION ................................................. 56 LIABILITY FOR ACTS OF OTHERS .............................. 56 EMPLOYEES ................................................................... 56 OTHER PASSENGERS AND STRANGERS .................................. 57 EXTENT OF LIABILITY FOR DAMAGES ........................ 57 DAMAGES RECOVERABLE .................................................. 58

Bill of Lading ........................ 58 THREE-FOLD CHARACTER ........................................ 58 DELIVERY OF GOODS ................................................ 58 PERIOD OF DELIVERY ....................................................... 59 DELIVERY WITHOUT SURRENDER OF BILL OF LADING ................ 59 REFUSAL OF CONSIGNEE TO TAKE DELIVERY .......................... 59 PERIOD FOR FILING CLAIMS ..................................... 59 PERIOD FOR FILING ACTIONS ................................... 59 OVERLAND TRANSPORTATION AND COASTWISE SHIPPING ......... 59 INTERNATIONAL CARRIAGE OF GOODS BY SEA ........................ 59

Maritime Commerce ........... 59 CHARTER PARTIES .................................................... 59 BAREBOAT/DEMISE CHARTER ............................................ 60 TIME CHARTER ............................................................... 60 VOYAGE/TRIP CHARTER ................................................... 60 LIABILITY OF SHIP OWNERS AND SHIPPING AGENTS ............................................ 60 LIABILITY FOR ACTS OF CAPTAIN ......................................... 60 EXCEPTIONS TO LIMITED LIABILITY ....................................... 61 ACCIDENTS AND DAMAGES IN MARITIME COMMERCE .......................................... 61 AVERAGES ..................................................................... 61

KINDS .......................................................................... 61 SIMPLE AVERAGE ............................................................ 61 GENERAL AVERAGE .......................................................... 61 COLLISION ..................................................................... 62 CARRIAGE OF GOODS BY SEA ACT ............................ 63 APPLICATION ................................................................. 63 NOTICE OF LOSS OR DAMAGE .............................................. 63 PERIOD OF PRESCRIPTION ................................................. 63 LIMITATION OF LIABILITY ................................................... 63

The Warsaw Convention ..... 64 APPLICABILITY .......................................................... 64 INTERNATIONAL AIR TRANSPORTATION .................................. 6 PERIOD COVERED .............................................................. 6 LIABILITY OF CARRIER FOR DAMAGES ..................................... 6 LIMITATION OF LIABILITY ............................................ 5 LIABILITY TO PASSENGERS ................................................... 6 LIABILITY FOR CHECKED BAGGAGE ......................................... 6 LIABILITY FOR HAND-CARRIED BAGGAGE ................................. 6 WILLFUL MISCONDUCT ............................................... 5

CORPORATION CODE

Corporation ........................... 67 DEFINITION ............................................................... 67 ATTRIBUTES OF THE CORPORATION ........................ 67 AN ARTIFICIAL BEING ........................................................ 67 CREATED BY OPERATION OF LAW ......................................... 67 HAS THE RIGHT OF SUCCESSION .......................................... 67 HAS THE POWERS, ATTRIBUTES AND PROPERTIES EXPRESSLY AUTHORIZED BY LAW OR INCIDENT TO ITS EXISTENCE ............... 67

Classes of Corporations ....... 67 STOCK CORPORATION .............................................. 67 NON-STOCK CORPORATION ...................................... 67 OTHER CORPORATIONS ............................................ 67

Nationality of Corporations 69 PLACE OF INCORPORATION TEST ............................. 69 CONTROL TEST .......................................................... 69 GRANDFATHER RULE ................................................ 70

Corporate Juridical Personality ............................ 70 DOCTRINE OF SEPARATE JURIDICAL PERSONALITY ... 5 LIABILITY FOR TORTS AND CRIMES ....................................... 70 RECOVERY OF MORAL DAMAGES ......................................... 70 DOCTRINE OF PIERCING THE CORPORATE VEIL ........ 70 GROUNDS FOR APPLICATION OF DOCTRINE ............................ 70 TEST IN DETERMINING APPLICABILITY .................................... 71

Incorporation and Organization................... 71 PROMOTER ................................................................. 71 LIABILITY OF PROMOTER .................................................... 71

LIABILITY OF CORPORATION FOR PROMOTERS CONTRACTS ........ 71 NUMBER AND QUALIFICATIONS OF INCORPORATORS ................................................. 71 CORPORATE NAME LIMITATIONS ON USE .............. 71 CORPORATE NAME ........................................................... 71 CORPORATE TERM .................................................... 72 MINIMUM CAPITAL STOCK AND SUBSCRIPTION REQUIREMENT ........................................................... 72 MINIMUM CAPITAL STOCK .................................................. 72 SUBSCRIPTION REQUIREMENT ............................................ 72 ARTICLES OF INCORPORATION ................................. 72 NATURE AND FUNCTION OF ARTICLES ................................... 72 CONTENTS ..................................................................... 72 AMENDMENT .................................................................. 73 NON-AMENABLE ITEMS ..................................................... 73 REGISTRATION AND ISSUANCE OF CERTIFICATE OF INCORPORATION .................................................. 74 REGISTRATION OF ARTICLES OF INCORPORATION..................... 74 ISSUANCE OF CERTIFICATE OF INCORPORATION BY SEC.............. 74 GROUNDS FOR DISAPPROVING AOI ....................................... 74 ADOPTION OF BY-LAWS ............................................. 74 WHEN ADOPTION IS MADE .................................................. 74 EFFECT OF FAILURE TO FILE BY-LAWS WITHIN THE PERIOD ......... 74 NATURE AND FUNCTION OF BY-LAWS.................................... 74 REQUISITES OF VALID BY-LAWS ........................................... 74 BINDING EFFECTS ............................................................ 74 AMENDMENT OR REVISION ................................................. 74

Corporate Powers ................. 75 GENERAL POWERS, THEORY OF GENERAL CAPACITY ............................... 75 SPECIFIC POWERS, THEORY OF SPECIFIC CAPACITY................................. 75 EXTEND OR SHORTEN THE CORPORATE TERM ......................... 75 INCREASE OR DECREASE CAPITAL STOCK ............................... 75 INCUR, CREATE OR INCREASE BONDED INDEBTEDNESS ............. 75 DENY PREEMPTIVE RIGHT................................................... 76 SELL OR DISPOSE OF SUBSTANTIALLY ALL ITS ASSETS ............... 76 ACQUIRE ITS OWN SHARES ................................................. 76 INVEST IN ANOTHER CORPORATION OR BUSINESS .................... 76 DECLARE DIVIDENDS ........................................................ 76 ENTER INTO MANAGEMENT CONTRACTS ................................ 76 ULTRA VIRES ACTS ........................................................... 77 DOCTRINE OF INDIVISIBILITY OF SUBSCRIPTION ....................... 77 HOW EXERCISED ........................................................ 77 BY THE SHAREHOLDERS..................................................... 77 BY THE BOARD OF DIRECTORS ............................................. 78 BY THE OFFICERS ............................................................. 78 TRUST FUND DOCTRINE ............................................ 78

Board of Directors and Trustees ......................... 79 DOCTRINE OF CENTRALIZED MANAGEMENT ............ 79 BOARD IS SEAT OF CORPORATE POWERS ............................... 79 PRINCIPLE ON DELEGATION OF BOARD POWERS ..................... 80 BUSINESS JUDGMENT RULE ..................................... 80 CONSEQUENCES OF THE BUSINESS JUDGMENT RULE ................ 80 REMEDIES IN CASE OF MISMANAGEMENT .............................. 80 TENURE, QUALIFICATIONS AND DISQUALIFICATIONS OF DIRECTORS OR TRUSTEES................................... 80 TENURE........................................................................ 80

QUALIFICATIONS ............................................................. 80 DISQUALIFICATIONS ......................................................... 81 ELECTIONS ................................................................ 81 CUMULATIVE VOTING........................................................ 81 STRAIGHT VOTING ........................................................... 81 QUORUM ....................................................................... 81 REMOVAL .................................................................. 81 FILLING OF VACANCIES ............................................. 81 VACANCY BY REMOVAL, BY EXPIRATION OF TERM, OR WHEN THE REMAINING DIRECTORS DO NOT CONSTITUTE A QUORUM ......................................... 81 VACANCY BY REASON OF INCREASE IN THE NUMBER OF THE DIRECTORS/TRUSTEES ........................................... 81 VACANCY BY OTHER CAUSES............................................... 81 COMPENSATION ........................................................ 81 COMPENSATION OF DIRECTORS AS CORPORATE OFFICERS ......... 81 FIDUCIARY DUTIES AND LIABILITY RULES ................ 82 DUTIES ......................................................................... 82 SOLIDARY LIABILITY FOR DAMAGES ...................................... 82 LIABILITY FOR WATERED STOCKS ......................................... 82 PERSONAL LIABILITIES ...................................................... 82 SPECIAL FACTS DOCTRINE ................................................. 83 RESPONSIBILITY FOR CRIMES ................................... 83 INSIDE INFORMATION ............................................... 83 CONTRACTS ............................................................... 83 BY SELF-DEALING DIRECTORS WITH THE CORPORATION ............ 83 BETWEEN CORPORATIONS WITH INTERLOCKING DIRECTORS....... 84 MANAGEMENT CONTRACTS ................................................ 84 EXECUTIVE COMMITTEE ............................................ 84 CREATION ..................................................................... 84 LIMITATION ON ITS POWERS ............................................... 84 MEETINGS.................................................................. 84 REGULAR OR SPECIAL ....................................................... 84 WHO PRESIDES ............................................................... 84 QUORUM ....................................................................... 84 RULE ON ABSTENTION ...................................................... 84

Stockholders and Members ....................... 85 RIGHTS OF STOCKHOLDERS AND MEMBERS ............ 85 DOCTRINE OF EQUALITY OF SHARES ..................................... 85 PARTICIPATION IN MANAGEMENT ............................ 85 PROXY .......................................................................... 85 VOTING TRUST ................................................................ 86 CASES WHEN STOCKHOLDERS ACTION IS REQUIRED ................ 86 PROPRIETARY RIGHTS .............................................. 88 RIGHT TO DIVIDENDS ........................................................ 88 RIGHT OF APPRAISAL ....................................................... 88 RIGHT TO INSPECT ........................................................... 89 PRE-EMPTIVE RIGHT ........................................................ 89 RIGHT TO VOTE ............................................................... 90 RIGHT OF FIRST REFUSAL .................................................. 90 REMEDIAL RIGHTS .................................................... 90 INDIVIDUAL SUIT ............................................................. 90 REPRESENTATIVE SUIT ..................................................... 90 DERIVATIVE SUIT ............................................................. 90 OBLIGATIONS OF A STOCKHOLDER .......................... 91 LIABILITY TO THE CORPORATION FOR UNPAID SUBSCRIPTION ..... 91 LIABILITY TO THE CORPORATION FOR INTEREST ON UNPAID SUBSCRIPTION IF SO REQUIRED BY THE BY-LAWS ..... 91 LIABILITY FOR WATERED STOCKS ......................................... 91 LIABILITY FOR DIVIDENDS UNLAWFULLY PAID ......................... 92

LIABILITY FOR ASSUMING TO ACT AS A CORPORATION KNOWING IT TO BE WITHOUT AUTHORITY .............................. 92 MEETINGS ................................................................. 92 REGULAR OR SPECIAL ...................................................... 92 WHO CALLS THE MEETINGS ................................................ 92 QUORUM ...................................................................... 93 MINUTES OF THE MEETINGS ............................................... 93

Capital Structure .................. 93 SUBSCRIPTION AGREEMENTS .................................. 93 CHARACTERISTICS .......................................................... 93 STATUS AS SHAREHOLDER ................................................ 93 TYPES OF SUBSCRIPTION CONTRACTS .................................. 93 INTEREST ON UNPAID SUBSCRIPTION ................................... 94 CONSIDERATION FOR STOCKS ................................. 94 LIMITATIONS ON CONSIDERATION ....................................... 94 SHARES OF STOCK .................................................... 94 NATURE OF STOCK .......................................................... 94 SUBSCRIPTION AGREEMENTS ............................................. 94 CONSIDERATION FOR SHARES OF STOCK ............................... 94 WATERED STOCK ............................................................ 94 SITUS OF THE SHARES OF STOCK ......................................... 95 CLASSES OF SHARES OF STOCK ........................................... 95 PAYMENT OF BALANCE OF SUBSCRIPTION .............. 96 CALL BY BOARD OF DIRECTORS ........................................... 96 NOTICE REQUIREMENT ...................................................... 97 SALE OF DELINQUENT SHARES ............................................ 97 CERTIFICATE OF STOCK ............................................. 97 NATURE OF CERTIFICATE ................................................... 97 UNCERTIFICATED SHARES ................................................. 98 NEGOTIABILITY ............................................................... 98 ISSUANCE ..................................................................... 98 LOST OR DESTROYED CERTIFICATES..................................... 98 STOCK AND TRANSFER BOOK .................................. 99 CONTENTS .................................................................... 99 WHO MAY MAKE VALID ENTRIES.......................................... 99 DISPOSITION AND ENCUMBRANCE OF SHARES ....... 99 ALLOWABLE RESTRICTIONS ON THE SALE OF SHARES ............... 99 SALE OF PARTIALLY PAID SHARES ....................................... 99 SALE OF A PORTION OF SHARES NOT FULLY PAID .................... 99 SALE OF ALL OF SHARES NOT FULLY PAID .............................. 99 SALE OF FULLY PAID SHARES ............................................. 99 REQUISITES OF A VALID TRANSFER ...................................... 99 INVOLUNTARY DEALINGS WITH SHARES ................................ 99

Dissolution and Liquidation ................... 100 MODES OF DISSOLUTION ......................................... 100 VOLUNTARY ................................................................. 100 INVOLUNTARY .............................................................. 100 METHODS OF LIQUIDATION ......................................101 BY THE CORPORATION ITSELF ............................................101 CONVEYANCE TO A TRUSTEE WITHIN A 3-YEAR PERIOD .............101 BY MANAGEMENT COMMITTEE OR REHABILITATION RECEIVER ... 102 LIQUIDATION AFTER 3 YEARS ............................................ 102

Other Corporations ............ 102 CLOSE CORPORATIONS ........................................... 102 CHARACTERISTICS OF A CLOSE CORPORATION ....................... 102 VALIDITY OF RESTRICTIONS ON TRANSFER OF SHARES ............ 102

ISSUANCE OR TRANSFER OF STOCK IN BREACH OF QUALIFYING CONDITIONS .............................. 103 WHEN BOARD MEETING IS UNNECESSARY OR IMPROPERLY HELD .................................................... 103 PRE-EMPTIVE RIGHT ...................................................... 103 AMENDMENT OF ARTICLES OF INCORPORATION .................... 103 DEADLOCKS ................................................................. 104 NON-STOCK CORPORATIONS .................................. 106 DEFINITION .................................................................. 106 PURPOSES ................................................................... 106 TREATMENT OF PROFITS ................................................. 106 DISTRIBUTION OF ASSETS UPON DISSOLUTION ...................... 106 RELIGIOUS CORPORATIONS .................................... 106 CORPORATION SOLE ...................................................... 106 NATIONALITY ............................................................... 106 RELIGIOUS SOCIETIES ..................................................... 106 FOREIGN CORPORATIONS ....................................... 106 BASES OF AUTHORITY OVER FOREIGN CORPORATIONS ............ 106 NECESSITY OF A LICENSE TO DO BUSINESS ............................107 PERSONALITY TO SUE ......................................................107 SUABILITY OF FOREIGN CORPORATIONS .............................. 108 INSTANCES WHEN UNLICENSED FOREIGN CORPORATIONS MAY BE ALLOWED TO SUE ISOLATED TRANSACTIONS .............. 108 GROUNDS FOR REVOCATION OF LICENSE ............................. 108

Mergers and Consolidations ............ 108 DEFINITION AND CONCEPT ..................................... 108 CONSTITUENT V. CONSOLIDATED CORPORATION .. 109 PLAN OF MERGER OR CONSOLIDATION .................. 109 ARTICLES OF MERGER OR CONSOLIDATION ........... 109 PROCEDURE ............................................................ 109 EFFECTIVITY ............................................................ 109 LIMITATIONS ........................................................... 109 EFFECTS ................................................................... 110

SECURITIES REGULATION CODE

State Policy .......................... 112

Securities Required to be Registered .................. 112

Procedure for Resigtration of Securities ......................... 113

Prohibitions on fraud, manipulation and insider trading .............. 114 MANIPULATION OF SECURITY PRICES ..................... 114 SHORT SALES ........................................................... 114 FRAUDULENT TRANSACTIONS ................................ 115 INSIDER TRADING .................................................... 115

Protection of Investors ........ 115 TENDER OFFER RULE ............................................... 115 RULE ON PROXY SOLICITATION ................................ 116 DISCLOSURE RULE .................................................... 116 DISCLOSURE BY THE ISSUER .............................................. 116 DISCLOSURE BY EQUITY HOLDERS ....................................... 116 DISCLOSURE BY INSIDER ................................................... 117

Civil Liability ......................... 117 CIVIL LIABILITIES ON ACCOUNT OF FALSE REGISTRATION STATEMENT ..................................... 117 WHO MAY BE LIABLE ........................................................ 117 WHO MAY SUE ................................................................ 117 CIVIL LIABILITIES ARISING IN CONNECTION WITH PROSPECTUS, COMMUNICATIONS AND REPORTS ... 117 LIABILITY OF SELLERS/OFFERORS ....................................... 117 LIABILITY OF MAKERS OF FALSE MISLEADING STATEMENTS ....... 117 CIVIL LIABILITY OF FRAUD IN CONNECTION WITH SECURITIES TRANSACTIONS .................................... 117 WHO MAY BE LIABLE ........................................................ 117 WHO MAY SUE ................................................................ 117 CIVIL LIABILITY FOR MANIPULATION OF SECURITY PRICES ...................................................................... 118 WHO MAY BE LIABLE ........................................................ 118 WHO MAY SUE ................................................................ 118 CIVIL LIABILITY WITH RESPECT TO COMMODITY FUTURES CONOTRACTS AND PRE-NEED PLANS ...... 118 WHO MAY BE LIABLE ........................................................ 118 WHO MAY SUE ................................................................ 118 CIVIL LIABILITY ON ACCOUNT OF INSIDER TRADING ............................................... 118 LIABILITY FOR NON-DICLOSURE ......................................... 188 LIABILITY FOR COMMUNICATING NON-PUBLIC INFORMATION ABOUT ISSUER ............................................................... 118 LIABILITY OF CONTROLLING PERSONS, AIDER AND ABETTOR AND OTHER SECONDARY LIABILITY ................................................................... 118 LIABILITY OF CONTROLLING PERSONS .................................. 118 LIABILITY OF DIRECTOR/OFFICER FOR DELAY IN THE FILING OF REQUIRED DOCUMENTS................................................ 118 LIABILITY OF AIDER/ABETTOR ............................................ 118

BANKING LAWS

The New Central Bank Act 123 STATE POLICIES ....................................................... 123 SALIENT FEATURES ................................................. 123 CREATION OF THE BANGKO SENTRAL NG PILIPINAS ........................................................... 123 NATURE OF THE BSP ....................................................... 123 RESPONSIBILITY AND PRIMARY OBJECTIVE ............ 123 PRIMARY OBJECTIVES ..................................................... 123 OTHER RESPONSIBILITIES ................................................ 123 MONETARY BOARD .................................................. 123 POWERS AND FUNCTIONS ................................................ 123 COMPOSITION ............................................................... 123 MEMBERS .................................................................... 123 QUALIFICATIONS ........................................................... 123 DISQUALIFICATIONS ....................................................... 123 PROHIBITION ON MEMBERS OF THE MB ................................ 124

GROUNDS FOR REMOVAL OF ANY MEMBER OF THE MB ............ 124 VACANCIES, HOW FILLED ................................................. 124 SALARIES .................................................................... 124 MEETINGS ................................................................... 124 CIVIL LIABILITY OF MEMBERS OF THE MB .............................. 124 HOW THE BSP HANDLES BANKS IN DISTRESS ........ 124 CONSERVATORSHIP ....................................................... 124 RECEIVERSHIP ...............................................................125 LIQUIDATION/CLOSURE ...................................................125 HOW THE BSP HANDLES EXCHANGE CRISIS ............126 LEGAL TENDER POWER ....................................................126 RATE OF EXCHANGE ........................................................126

Law on Secrecy of Bank Deposits ................ 126 PURPOSE ..................................................................126 PROHIBITED ACTS ....................................................126 DEPOSITS COVERED .................................................126 EXCEPTIONS ............................................................. 127 OTHER EXCEPTIONS ........................................................ 127 NOT CONSIDERED AS EXCEPTIONS ...................................... 127 GARNISHMENT OF DEPOSITS .................................. 128 CONFIDENTIALITY OF FOREIGN CURRENCY DEPOSITS .............................................. 128 PENALTIES FOR VIOLATION .....................................129

General Banking Law of 2000 ............................... 129 POLICY ......................................................................129 DEFINITION AND CLASSIFICATION OF BANKS .........129 CORE BANKING FUNCTIONS...............................................129 CLASSIFICATION OF BANKS ...............................................129 DISTINCTIONS BETWEEN BANKS, QUASI-BANKS AND TRUST ENTITIES .......................129 AS OPPOSED TO QUASI-BANKS ..........................................129 AS OPPOSED TO TRUST ENTITIES ....................................... 130 BANK POWERS AND LIABILITIES ............................. 130 BANKING AND INCIDENTAL POWERS................................... 130 DILIGENCE REQUIRED OF BANKS ............................. 131 FIDUCIARY NATURE OF BANKS ........................................... 132 STIPULATION ON INTERESTS ................................... 132 GRANT OF LOANS AND SECURITY REQUIREMENTS ....................................................... 132 RATIO OF NET WORTH TO TOTAL RISK ASSETS ........................ 132 SINGLE BORROWERS LIMIT .............................................. 133 RESTRICTIONS ON INSIDER LENDING ...................................134 LOAN-LOSS PROVISIONING ...............................................134 RESERVES ....................................................................134 PDIC INSURANCE ............................................................134 EQUITY INVESTMENT LIMITS .............................................. 135 PENALTIES FOR VIOLATION ..................................... 135 FINE/IMPRISONMENT ...................................................... 135 ADMINISTRATIVE SANCTIONS ............................................ 135

Philippine Deposit Insurance Corporation Act .................. 136 BASIC POLICY ........................................................... 136 CONCEPT OF INSURED DEPOSITS ............................ 136

LIABILITY OF DEPOSITORS....................................... 136 DEPOSIT LIABILITIES REQUIRED TO BE INSURED WITH PDIC ....... 136 COMMENCEMENT OF LIABILITY .......................................... 136 DEPOSIT ACCOUNT NOT ENTITLED TO PAYMENT ..................... 136 EXTENT OF LIABILITY ...................................................... 137 DETERMINATION OF INSURED DEPOSIT ............................... 137 CALCULATION OF LIABILITY .............................................. 137

Foreign Currency Deposit Act ......................... 138 CONFIDENTIALITY .................................................... 138 PRIVILEGES .............................................................. 138

INTELLECTUAL PROPERTY CODE

Intellectual Property Rights, In General ............................ 140 STATE POLICIES ....................................................... 140 INTELLECTUAL PROPERTY RIGHTS ......................... 140 DEFINITION .................................................................. 140 INTELLECTUAL PROPERTY RIGHTS UNDER THE INTELLECTUAL PROPERTY CODE ............................................................ 140 DIFFERENCES BETWEE COPYRIGHTS, TRADEMARKS AND PATENTS .......................................................... 140 PATENTABLE INVENTIONS ................................................ 140 TRADEMARK ................................................................ 140 TRADE NAME ................................................................ 140 COPYRIGHT .................................................................. 140 OTHER FORMS OF INTELLECTUAL PROPERTY ......................... 140 TECHNOLOGY TRANSFER ARRANGEMENTS ............ 141

Patents ................................. 141 PATENTABLE INVENTIONS ....................................... 141 INVENTION PATENT ......................................................... 141 STATUTORY CLASSES OF UTILITY MODELS ............................. 141 GROUNDS FOR CANCELLATION OF UTILITY MODELS ................. 141 INDUSTRIAL DESIGN ........................................................ 141 LAY-OUT (TOPOGRAPHIES) OF INTEGRATED CIRCUITS.............. 142 NON-PATENTABLE INVENTIONS ............................. 142 OWNERSHIP OF A PATENT ...................................... 142 RIGHT TO A PATENT ........................................................ 142 FIRST-TO-FILE RULE ....................................................... 142 INVENTIONS CREATED PURSUANT TO A COMMISSION .............. 142 RIGHT OF PRIORITY ........................................................ 142 GROUND FOR CANCELLATION OF A PATENT .......... 143 REQUIREMENT OF THE PETITION ........................................ 143 NOTICE OF HEARING ....................................................... 143 EFFECT OF CANCELLATION OF PATENT OR CLAIM ................... 143 REMEDY OF THE TRUE AND ACTUAL INVENTOR ..... 143 TIME TO FILE ACTION IN COURT ......................................... 143 REMEDY OF PERSONS NOT HAVING THE RIGHT TO A PATENT ..... 143 RIGHTS CONFERRED BY A PATENT .......................... 143 LIMITATIONS OF PATENT RIGHTS............................ 143 PRIOR USER ................................................................. 144 USE BY THE GOVERNMENT ............................................... 144 PATENT INFRINGEMENT .......................................... 144 CONTRIBUTORY INFRINGER .............................................. 144 DOCTRINE OF PATENT EXHAUSTION .................................... 144

TESTS IN PATENT INFRINGEMENT ...................................... 144 DEFENSES IN ACTION FOR INFRINGEMENT ........................... 145 LICENSING ............................................................... 145 VOLUNTARY ................................................................. 145 COMPULSORY ............................................................... 146 ASSIGNMENT AND TRANSMISSION OF RIGHTS ....... 147 ASSIGNMENT OF RIGHTS .................................................. 147 TRANSMISSION OF RIGHTS ................................................ 147 REQUIREMENTS FOR RECORDING OF ASSIGNMENT ................. 147 EFFECT OF NON-RECORDING OF ASSIGNMENT WITH THE IPO ..... 147

Trademarks ..........................147 DEFINITION OF MARKS, COLLECTIVE MARKS, TRADE NAMES .......................................................... 147 MARKS ........................................................................ 147 COLLECTIVE MARKS ....................................................... 148 TRADE NAME................................................................ 148 FUNCTIONS OF A TRADEMARK .......................................... 148 ACQUISITION OF OWNERSHIP OF MARK ................. 148 ACQUISITION OF OWNERSHIP OF TRADENAME ...... 148 NON-REGISTRABLE MARKS .................................... 148 DOCTRINE OF SECONDARY MEANING .................................. 149 PRIOR USE OF MARK AS A REQUIREMENT ............. 149 USE OF MARK AS A REQUIREMENT ..................................... 149 NON-USE OF MARK WHEN EXCUSED ................................... 149 TESTS TO DETERMINE CONFUSING SIMILARITY BETWEEN MARKS .................................................... 149 DOMINANCY TEST .......................................................... 149 HOLISTIC TEST .............................................................. 149 AS TO THE GOODS OR SERVICES IN CONNECTION WITH WHICH THE MARKS ARE USED (DODCTRINE OF RELATED GOODS/SERVICES) 149 WELL-KNOWN MARKS ............................................ 149 DETERMINANTS ............................................................ 149 PROTECTION EXTENDED TO WELL-KNOWN MARKS ................. 150 RIGHTS CONFERRED BY A WELL-KNOWN MARK ..................... 150 RIGHTS CONFERRED BY REGISTRATION ................. 150 LIMITATIONS ON SUCH RIGHTS .......................................... 150 ASSIGNMENT AND TRANSFER OF APPLICATION AND REGISTRATION ....................................................... 150 PROTECTION LIMITED TO GOODS SPECIFIED IN REGISTRATION CERTIFICATE .......................................... 151 USE BY THIRD PARTIES OF NAMES, ETC. SIMILAR TO REGISTERED MARK ............................................. 151 INFRINGEMENT AND REMEDIES .............................. 151 TRADEMARK INFRINGEMENT ............................................. 151 FALSE DESIGNATIONS OF ORIGIN; FALSE DESCRIPTION OR REPRESENTATION ...................................................... 151 INFRINGEMENT OF NAME AND MARKS OF OWNERSHIP STAMP ON CONTAINERS ...................................................152 DAMAGES .....................................................................152 REQUIREMENT OF NOTICE ................................................152 OTHER REMEDIES AVAILABLE ............................................152 LIMITATIONS TO ACTIONS FOR INFRINGEMENT .......................152 UNFAIR COMPETITION ............................................. 153 TRADE NAMES OR BUSINESS NAMES ..................... 154 WHAT MAY NOT BE USED AS TRADE NAME ........................... 154 COLLECTIVE MARKS ................................................ 154 GROUNDS FOR CANCELLATION ......................................... 154

Copyrights ........................... 154 DEFINITION ............................................................. 154 BASIC PRINCIPLES ................................................... 154

COPYRIGHTABLE WORKS ........................................ 155 ORIGINAL LITERARY AND ARTISTIC WORKS ........................... 155 DERIVATIVE WORKS ........................................................ 155 NON-COPYRIGHTABLE WORKS................................ 156 UNPROTECTED SUBJECT MATTER ....................................... 156 WORKS OF THE GOVERNMENT OF THE PHILIPPINES................. 156 WORKS OF THE PUBLIC DOMAIN ........................................ 156 USEFUL ARTICLES .......................................................... 156 RIGHTS OF COPYRIGHT OWNER .............................. 156 COPYRIGHT OR ECONOMIC RIGHTS ..................................... 156 MORAL RIGHTS ............................................................. 157 RIGHTS TO PROCEED IN SUBSEQUENT TRANSFER ................... 157 NEIGHBORING RIGHTS ..................................................... 158 PERFORMERS RIGHTS .................................................... 158 RIGHTS OF PRODUCERS OF SOUND RECORDING ..................... 158 RIGHTS OF BROADCASTING ORGANIZATIONS ........................ 158 RULE ON OWNERSHIP OF COPYRIGHT .................... 159 OWNERSHIP OF COPYRIGHT .............................................. 159 DURATION OF COPYRIGHT ................................................ 160 PRESUMPTION OF AUTHORSHIP ........................................ 160 TRANSFER OR ASSIGNMENT OF COPYRIGHT .......................... 160 LIMITATIONS ON COPYRIGHT ................................... 161 DOCTRINE OF FAIR USE .................................................... 161 COPYRIGHT INFRINGEMENT ............................................... 161

SPECIAL LAWS

Chattel and Real Estate Mortgage Laws ................... 165

Anti-Money Laundering Act ................... 165 DEFINITION .............................................................. 165 POLICY OF THE LAW ................................................. 165 COVERED INSTITUTIONS ......................................... 165 OBLIGATIONS OF COVERED INSTITUTIONS ............. 165 CUSTOMER IDENTIFICATION ............................................. 165 RECORD KEEPING .......................................................... 165 REPORTING OF COVERED AND SUSPICIOUS TRANSACTIONS ...... 165 COVERED TRANSACTIONS ....................................... 166 SUSPICIOUS TRANSACTIONS ................................... 166 WHEN IS MONEY LAUNDERING COMMITTED .......... 166 UNLAWFUL ACTIVITIES OR PREDICATE CRIMES ...... 166 ANTI-MONEY LAUNDERING COUNCIL ...................... 166 FUNCTIONS .............................................................. 166 FREESING OF MONETARY INSTRUMENT OR PROPERTY .......................................................... 167 AUTHORITY TO INQUIRE INTO BANK DEPOSITS ...... 167

Foreign Investments Act .... 167 POLICY OF THE LAW ................................................. 167 DEFINITION OF TERMS ............................................ 167 FOREIGN INVESTMENT .................................................... 167 DOING BUSINESS IN THE PHILIPPINES .................................. 167 EXPORT ENTERPRISE ...................................................... 168 DOMESTIC MARKET ENTERPRISE........................................ 168 REGISTRATION OF INVESTMENTS ON NON-PHILIPPINE NATIONALS ............................ 168

FOREIGN INVESTMENTS IN EXPORT ENTERPRISE .. 168 FOREIGN INVESTMENTS IN DOMESTIC MARKET ENTERPRISE ....................... 168 FOREIGN INVESTMENT NEGATIVE LIST ................... 168

UP COLLEGE OF LAW LETTERS OF CREDIT BAR OPERATIONS COMMISSION

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Definition and Nature DEFINITION Letters of credit (L/C) are those issued by one merchant to another, or for the purpose of attending to a commercial transaction. (Art. 567, Code of Commerce) A letter of credit is one whereby one person requests some other person to advance money or give credit to a third person, and promises that he will repay the same to the person making the advancement, or accept the bills drawn upon himself for the like amount. (Campos, Notes and Selected Cases on Negotiable Instruments Law) A written instrument whereby the writer requests or authorizes the addressee to pay money or deliver goods to a third person and assumes responsibility for payment of debt therefor to the addressee (Transfield Philippines v. Luzon Hydro, 2004). An engagement by a bank or other person made at the request of a customer that the issuer shall honor drafts or other demands of payment upon compliance with the conditions specified in the credit (Prudential Bank v. Intermediate Appellate Court, 1992). PURPOSE Its purpose is to substitute for, and support, the agreement of the buyer-importer to pay money under a contract or other arrangement, but does not necessarily constitute as a condition for the perfection of such arrangement (Reliance Commodities, Inc. v. Daewoo Industrial Co., Ltd., 1993) ESSENTIAL REQUISITES OF LETTERS OF CREDIT (1) Issued in favor of a definite person and not to order. (2) Limited to a fixed and specified amount, or to one or

more undetermined amounts, but within a maximum the limits of which has to be stated exactly.

Those which do not have one of these conditions shall be mere letters of recommendation. (Art. 568, Code of Commerce) NATURE (1) Financial device L/Cs are developed by merchants as a

convenient and relatively safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of a seller, who refuses to part with his goods before he is paid, and a buyer, who wants to have control of the goods before paying. (Bank of America, NT&SA v. Court of Appeals, 1993)

A letter of credit is one of the modes of payment, set out in Sec. 8, Central Bank Circular No. 1389, "Consolidated Foreign Exchange Rules and Regulations," dated 13 April 1993, by which commercial banks sell foreign exchange to service payments for, e.g., commodity imports (Reliance Commodities v. Daewoo, 1993).

(2) Composite of three distinct contracts An L/C

transaction involves three distinct but intertwined relationships:

(a) First Contract between the party applying for the L/C (buyer/importer/account party) and the party for whose benefit the L/C is issued (seller/exporter/beneficiary).

(b) Second Contract between the buyer and the issuing bank. This contract is sometimes called the "Application and Agreement" or the "Reimbursement Agreement".

(c) Third Contract between the issuing bank and the seller, in order to support the contract, under (a) above (Reliance Commodities v. Daewoo, 1993).

TYPES OF LETTERS OF CREDIT AS TO THE TYPE OF THE MAIN CONTRACT (1) Commercial L/C The main transaction involves a

contract of sale. The credit is payable upon the presentation by the seller of documents that show he has taken affirmative steps to comply with the sales agreement. The beneficiary of a commercial credit must demonstrate by documents that he has performed his contract (Transfield Philippines v. Luzon Hydro, 2004).

(2) Standby L/C Used in non-sale settings. The credit is payable upon certification of a party's nonperformance of the agreement. The creditor-beneficiary of the standby credit must certify that the debtor-applicant has not performed the principal obligation. (Transfield Philippines v. Luzon Hydro, 2004).

AS TO REVOCABILITY (1) Revocable L/C One which can be revoked by the

issuing bank without the consent of the buyer and seller (2) Irrevocable L/C One which the issuing bank cannot

revoke without the consent of the buyer and seller (Feati Bank and Trust Co. v. CA, 1991)

AS TO THE OBLIGATION ASSUMED BY CORRESPONDENT BANK (1) Unconfirmed L/C One which continues to be the

obligation of the issuing bank (2) Confirmed L/C One which is supported by the absolute

assurance to the beneficiary that the confirming bank will undertake the issuing bank's obligation as its own according to the terms and conditions of the credit (Feati Bank and Trust Co. v. CA, 1991)

Parties to a Letter of Credit RIGHTS AND OBLIGATIONS OF THE PARTIES There are at least three parties to a letter of credit: (1) Buyer/Exporter/Account Party one who procures the letter of credit and obliges himself to reimburse the issuing bank upon receipt of documents of title. (2) Issuing Bank the bank which undertakes: (a) to pay the seller upon receipt of the draft and proper documents of title; and (b) to surrender the documents to the buyer upon reimbursement. The obligation of the issuing bank to pay the seller is direct, primary, absolute, definite and solidary with the buyer, in the absence of stipulation in the letter of credit (MWSS v. Daway, 2004)

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(3) Seller/Importer/Beneficiary one who ships the goods to the buyer in compliance with a contract of sale and delivers the documents of title and draft to the issuing bank to recover payment.

Depending on the transaction, the number of parties to the letter of credit may be increased. Thus, the different types of correspondent banks:

(4) Advising/Notifying Bank the bank which conveys to the

seller the existence of the credit. The bank assumes no liability except to notify and/or transmit to the seller the existence of the letter of credit. A notifying bank is not a privy to the contract of sale between the buyer and the seller, its relationship is only with that of the issuing bank and not with the beneficiary to whom he assumes no liability. The bank may suggest to the seller its willingness to negotiate, but this fact alone does not imply that the notifying bank promises to accept the draft drawn under the documentary credit (Feati Bank and Trust Co. v. CA, 1991).

(5) Confirming Bank the bank which lends credence to the

letter of credit issued by a lesser known issuing bank.

The bank assumes a direct obligation to the seller and its liability is a primary one as if the bank itself had issued the letter of credit (Feati Bank and Trust Co. v. CA, 1991).

(6) Negotiating Bank the bank which discounts the draft

presented by the seller. The bank buys or discounts a draft under the letter of credit. Its liability is dependent upon the stage of the negotiation. If before negotiation, it has no liability with respect to the seller but after negotiation, a contractual relationship will then prevail between the negotiating bank and the seller (Feati Bank and Trust Co. v. CA, 1991).

(7) Paying Bank the bank which undertakes to encash the

drafts drawn by the seller.

Basic Principles of Letter of Credit DOCTRINE OF INDEPENDENCE The principle of independence assures the seller or the beneficiary of prompt payment independent of any breach of the main contract and precludes the issuing bank from determining whether the main contract is actually accomplished or not.

Under this principle, banks assume no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any documents, or for the general and/or particular conditions stipulated in

the documents or superimposed thereon, nor do they assume any liability or responsibility for the description, quantity, weight, quality, condition, packing, delivery, value or existence of the goods represented by any documents, or for the good faith or acts and/or omissions, solvency, performance or standing of the consignor, the carriers, or the insurers of the goods, or any other person whomsoever (Transfield Philippines v. Luzon Hydro, 2004; Bank of America, NT&SA v. Court of Appeals, 1993). The concept of guarantee vis-a-vis the concept of an irrevocable credit are inconsistent with each other. In the first place, the guarantee theory destroys the independence of the bank's responsibility from the contract upon which it was opened. In the second place, the nature of both contracts is mutually in conflict with each other. In contracts of guarantee, the guarantor's obligation is merely collateral and it arises only upon the default of the person primarily liable. On the other hand, in an irrevocable credit the bank undertakes a primary obligation. (Feati v. CA, 1991) The independent nature of the letter of credit may be: (1) Independent in toto - the credit is independent from the

justification aspect and is a separate obligation from the underlying agreement;

(2) Only as to the justification aspect like in a commercial letter of credit or repayment standby, which is identical with the same obligations under the underlying agreement. (Transfield Philippines v. Luzon Hydro, 2004; Bank of America, NT&SA v. Court of Appeals, 1993).

FRAUD EXCEPTION PRINCIPLE The principle that limits the application of the independence principle only to instances where it would serve the commercial function of the credit and not when fraud attends the transaction. In the case of Transfield Philippines v. Luzon Hydro, 2004, the petitioner alleged misrepresentation as constituting fraud. The Court, however, made no ruling as to whether the same indeed constitutes fraud. The case asserts that the "fraud exception" exists when the beneficiary, for the purpose of drawing on the credit, fraudulently presents to the confirming bank, documents that contain, expressly or by implication, material representations of fact that to his knowledge are untrue. In such a situation, petitioner insists, injunction is recognized as a remedy available to it. Citing Dolan's treatise on letters of credit, petitioner argues that the independence principle is not without limits and it is important to fashion those limits in light of the principle's purpose, which is to serve the commercial function of the credit. If it does not serve those functions, application of the principle is not warranted, and the common law principles of contract should apply. (Transfield Phils. v. Luzon Hydro, 2004) DOCTRINE OF STRICT COMPLIANCE The settled rule in commercial transactions involving letters of credit requires that the documents tendered by the seller must strictly conform to the terms of the letter of credit.


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Otherwise, the issuing bank or the concerned correspondent bank is not obliged to perform its undertaking under the contract. The tender of documents by the beneficiary (seller) must include all documents required by the letter. A correspondent bank which departs from what has been stipulated under the letter of credit, as when it accepts a faulty tender, acts on its own risks and it may not thereafter be able to recover from the buyer or the issuing bank, as the case may be, the money thus paid to the beneficiary (Feati v. CA, 1991).

UP COLLEGE OF LAW TRUST RECEIPTS LAW BAR OPERATIONS COMMISSION

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Concept of Trust Receipt Transaction A Trust Receipt Transaction is any transaction by and between an entruster and another person as entrustee, whereby the entruster, who owns or holds absolute title or security interests over certain specified goods, documents or instruments, releases the same to the possession of the entrustee upon the latter's execution and delivery to the entruster of a signed document called a trust receipt [Sec. 4, PD 115 (Trust Receipts Law)]. A Trust Receipt is a written or printed document signed by the entruster wherein the entrustee binds himself: (1) to hold the designated goods, documents or

instruments in trust for the entruster; and (2) to sell or otherwise dispose of the goods, documents or

instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster or as appears in the trust receipt or the goods, documents or instruments themselves if they are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in the trust receipt (Sec. 4)

LOAN/SECURITY FEATURE A letter of credit-trust receipt arrangement is endowed with its own distinctive features and characteristics. Under that set-up, a bank extends a loan covered by the letter of credit, with the trust receipt as a security for the loan. In other words, the transaction involves a loan feature represented by the letter of credit, and a security feature which is in the covering trust receipt. A trust receipt, therefore, is a security agreement, pursuant to which a bank acquires a "security interest" in the goods (Vintola v. IBAA, 1987) A trust receipt arrangement does not involve a simple loan transaction between a creditor and debtor-importer. Apart from a loan feature, the trust receipt arrangement has a security feature that is covered by the trust receipt itself. That second feature is what provides the much needed financial assistance to our traders in the importation or purchase of goods or merchandise through the use of those goods or merchandise as collateral for the advancements made by a bank. The title of the bank to the security is the one sought to be protected and not the loan which is a separate and distinct agreement (People v. Nitafan, 1992) OWNERSHIP OF THE GOODS, DOCUMENTS AND INSTRUMENTS UNDER A TRUST RECEIPT Entrustee is the factual owner of the goods, documents and instruments (Prudential Bank v. NLRC). Entruster is the real owner of the goods, documents and instruments A trust receipt transaction, within the meaning of this Decree, is any transactionwhereby the entruster, who owns or holds absolute title or security interests over certain specified goods, documents or instruments... (Sec. 4) Note: Security Interest means a property interest in goods, documents or instruments to secure performance of some obligations of the entrustee or of some third persons to the

entruster and includes title, whether or not expressed to be absolute, whenever such title is in substance taken or retained for security only. Accordingly, in order to secure that the banker shall be repaid at the critical point that is, when the imported goods finally reach the hands of the intended vendee the banker takes the full title to the goods at the very beginning; he takes it as soon as the goods are bought and settled for by his payments or acceptances in the foreign country, and he continues to hold that title as his indispensable security until the goods are sold. [I]n a certain manner, (trust receipt contracts) partake of the nature of a conditional sale as provided by the Chattel Mortgage Law, that is, the importer becomes absolute owner of the imported merchandise as soon as he has paid its price. The ownership of the merchandise continues to be vested in the owner thereof or in the person who has advanced payment, until he has been paid in full, or if the merchandise has already been sold, the proceeds of the sale should be turned over to him by the importer or by his representative or successor in interest. (Prudential Bank v. NLRC, 1995) Note: In the earlier cases of Vintola v. IBAA (1987) and Abad v. Court of Appeals (1990), the Supreme Court held that the entrustee becomes the absolute owner of the goods, documents and instruments, the entruster being a mere security holder.

Rights of the Entruster VALIDITY OF THE SECURITY INTEREST AS AGAINST THE CREDITORS OF THE ENTRUSTEE/ INNOCENT PURCHASERS FOR VALUE The entruster shall have the following rights: (1a) Right to the proceeds from the sale of the goods,

documents or instruments released under a trust receipt to the entrustee to the extent of the amount owing to the entruster or as appears in the trust receipt; OR

(1b) Right to the return of the goods, documents or instruments in case of non-sale; AND

(2) Right to the enforcement of all other rights conferred on him in the trust receipt provided such are not contrary to the provisions of the TRL.

(3) Right to cancel the trust and take possession of the goods, documents or instruments subject of the trust or of the proceeds realized therefrom at any time upon default or failure of the entrustee to comply with any of the terms and conditions of the trust receipt or any other agreement between the entruster and the entrustee.

(4) Right to sell the goods, documents or instruments at public or private sale at least five days notice to the defaulting entrustee of the intention to sell.

(5) Right to purchase the goods, documents or instruments at a public sale.

(6) Right to recover the deficiency from the entrustee should the proceeds of the sale not be sufficient (Sec. 7)


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Obligation and Liability of the Entrustee OBLIGATIONS OF THE ENTRUSTEE (1) To hold the goods, documents or instruments in trust for

the entruster and shall dispose of them strictly in accordance with the terms and conditions of the trust receipt;

(2) To receive the proceeds in trust for the entruster and turn over the same to the entruster to the extent of the amount owing to the entruster or as appears on the trust receipt;

(3) To insure the goods for their total value against loss from fire, theft, pilferage or other casualties;

(4) To keep said goods or proceeds thereof whether in money or whatever form, separate and capable of identification as property of the entruster;

(5) To return the goods, documents or instruments in the event of non-sale or upon demand of the entruster; and

(6) To observe all other terms and conditions of the trust receipt not contrary to the provisions of the TRL. (Sec. 9)

LIABILITIES OF THE ENTRUSTEE (1) Liability for Loss - The risk of loss shall be borne by the

entrustee. Loss of goods, documents or instruments which are the subject of a trust receipt, pending their disposition, irrespective of whether or not it was due to the fault or negligence of the entrustee, shall not extinguish his obligation to the entruster for the value thereof (Sec. 10)

(2) Liability for failure to turn over proceeds of sale or to return The failure shall constitute the crime of estafa, punishable under Art. 315 (b) of the Revised Penal Code (Sec. 13)

Note: Penal sanction if offender is a corporation: If the violation or offense is committed by a corporation, partnership, association or other juridical entities, the penalty shall be imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense, without prejudice to the civil liabilities arising from the criminal offense (Sec. 13)

Remedies Available (1) In case of default or failure of the entrustee to comply with

the trust receipt agreement - Entruster may cancel the trust receipt agreement, take possession of the goods, documents, instruments, and sell the same at any private or public sale at least five days from notice of intention to sell to the entrustee. The proceeds of any such sale, whether public or private, shall be applied (a) to the payment of the expenses thereof; (b) to the payment of the expenses of re-taking, keeping and storing the goods, documents or instruments; (c) to the satisfaction of the entrustee's indebtedness to the entruster (Sec. 7)

(2) In case of loss of the goods, documents, instruments - Entruster may claim damages from the entrustee (Sec.10)

(3) In case of failure to turn over proceeds of the sale of the

goods, documents or instruments or to return the same in case of non-sale - Entruster may file a criminal complaint for estafa (Art. 315 (b) of the Revised Penal Code) against the entrustee (Sec. 13)

Warehousemans Lien A warehouseman shall have a lien on goods deposited or on the proceeds thereof in his hands: (1) For all lawful charges for storage and preservation of the

goods; (2) For all lawful claims for money advanced, interest,

insurance, transportation, labor, weighing, coopering and other charges and expenses in relation to such goods;

(3) For all reasonable charges and expenses for notice, and advertisements of sale; and

(4) For sale of the goods where default had been made in satisfying the warehouseman's lien (Sec. 27)

Notes: (1) General rule: A warehouseman shall have lien only for

charges for storage of goods subsequent to the date of the receipt.

(2) Exception: When the receipt expressly enumerated other charges provided under Sec. 27 even though the amounts thereof are not stated in the receipt. (Sec. 30)

However, whether a warehouseman has or has not a lien upon the goods, he is entitled to all remedies allowed by law to a creditor against a debtor for the collection from the depositor of all charges and advances which the depositor has expressly or impliedly contracted with the warehouseman to pay (Sec. 32). (1) Against what property the lien may be enforced: (a) Against all goods, whenever deposited, belonging to the

person who is liable as debtor for the claims in regard to which the lien is asserted, and

(b) Against all goods belonging to others which have been deposited at any time by the person who is liable as debtor for the claims in regard to which the lien is asserted if such person had been so entrusted with the possession of goods that a pledge of the same by him at the time of the deposit to one who took the goods in good faith for value would have been valid (Sec. 28)

(2) Satisfaction of the lien by sale: In accordance with the

terms of a notice so given, a sale of the goods by auction may be had to satisfy any valid claim of the warehouseman for which he has a lien on the goods.

UP COLLEGE OF LAW NEGOTIABLE INSTRUMENTS LAW BAR OPERATIONS COMMISSION

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Definition Written contract for the payment of money, by its form and on its face, intended as substitute for money and intended to pass from hand to hand to give the holder in due course (HDC) the right to hold the same and collect the sum due. Instruments are negotiable when they conform to all the requirements prescribed by the NIL (Act 2031, 03 February 1911). Although considered as medium for payment of obligations, negotiable instruments are not legal tender (Sec. 60, New Central Bank Act, R.A. 7653). Q: Can the delivery of a negotiable instrument discharge an obligation? A: Settled is the rule that payment must be made in legal tender. A check is not legal tender and, therefore, cannot constitute a valid tender of payment. Since a negotiable instrument is only a substitute for money and not money, the delivery of such an instrument does not, by itself, operate as payment. Mere delivery of checks does not discharge the obligation under a judgment. The obligation is not extinguished and remains suspended until the payment by commercial document is actually realized. (BPI vs. Royeca, 2008, Nachura) Notes: (1) Negotiable instruments shall produce the effect of

payment only when they have been encashed or when through the fault of the creditor they have been impaired. (Art. 1249, Civil Code)

(2) BUT a CHECK which has been cleared and credited to the account of the creditor shall be equivalent to a delivery to the creditor of cash.

Forms and Interpretation REQUISITES OF NEGOTIABILITY An instrument to be negotiable must conform to the following requirements: (1) It must be in writing and signed by the maker or drawer; (2) Must contain an unconditional promise or order to pay a

sum certain in money; (3) Must be payable on demand, or at a fixed or

determinable future time; (4) Must be payable to order or to bearer; and (5) Where the instrument is addressed to a drawee, he must

be named or otherwise indicated therein with reasonable certainty (Sec. 1).

Section 184 (defining a promissory note) and Section 126 (defining a bill of exchange) contain the same requisites in Section 1. IN WRITING AND SIGNED BY THE MAKER OR DRAWER No person is liable on the instrument whose signature does not appear thereon.

One who signs in a trade or assumed name will be liable to the same extent as if he had signed in his own name (Sec. 18). Signature of any party may be made by duly authorized agent; no particular form of appointment necessary (Sec. 19) "In writing" - includes print; written or typed. Section 191 of the NIL provides that the word written includes printed, and writing includes print.

Reason: Since an instrument is a document, there must be something in written form that can be transferred from person to person. (Abad)

Signature is binding and may be in ones handwriting, printed, engraved, lithographed or photographed so long as it is intended or adopted as the signature of the signer or made with his authority.

It may appear on any part of the instrument. However, if the signature is so placed upon the instrument that it is not clear in what capacity the person intended to sign, he is deemed an indorser. (Sec. 17[f]) CONTAINING AN UNCONDITIONAL PROMISE TO PAY OR ORDER TO PAY An unqualified order or promise to pay is unconditional, though coupled with: (1) An indication of a particular fund out of which

reimbursement is to be made, or a particular account to be debited with the amount; or

(2) A statement of the transaction which gives rise to the instrument.

But an order or promise to pay out of a particular fund is not unconditional (Sec. 3). Unconditional The promise or order to pay, to be unconditional, must be unqualified. Must not be dependent upon a contingent event that is not certain to happen. (Abad) Fact that the condition appearing on the instrument has been fulfilled will not convert it into a negotiable one (see Sec. 4) A negotiable instrument is conditional when reference to the fund clearly indicates an intention that such fund alone should be the source of payment. (Metropolitan Bank vs. CA, 1991)

Fund for Reimbursement

Indicating a Particular Fund (non-negotiable)

(1) The drawee pays the payee from his own funds afterwards.

(2) The drawee pays himself from the particular fund indicated.

There is only one act the drawee pays directly from the particular fund indicated.


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Particular fund indicated is not the direct source of payment.

Particular fund indicated is the direct source of payment. (Sundiang and Aquino)

Order or promise to pay As to promissory note: Promise to pay should be express on the face of the instrument The word "promise" is not absolutely necessary. Any expression equivalent to a promise is sufficient. Mere acknowledgment of a debt is insufficient As to bill of exchange: Order command made by the drawer addressed to the drawee ordering the latter to pay the payee or the holder a sum certain in money; the instrument is, by its nature, demanding a right. Words which are equivalent to an order are sufficient. A mere request or authority to pay does not constitute an order. Although the mere use of polite words like "please" does not of itself deprive the instrument of its characteristics as an order, its language must clearly indicate a demand upon the drawee to pay. Sum payable must be certain The sum payable is a sum certain, although it is to be paid: (1) with interest; or (2) by stated installments; or (3) by stated installments, with a provision that, upon

default in payment of any installment or of interest, the whole shall become due; or

(4) with exchange, whether at a fixed rate or at the current rate; or

(5) with costs of collection or an attorney's fee, in case payment shall not be made at maturity (Sec. 2).

Note: A sum is certain if from the face of the instrument it can be determined even if it requires mathematical computation. (Sundiang and Aquino) Payable in money Capable of being transformed into money, since negotiable instruments are intended to be substitutes for money Money as used in the law is not necessarily limited to legal tender as defined by law but includes any particular kind of current money. (see, Sec. 6(e) and PNB v. Zulueta) An agreement to pay in foreign currency is valid. (RA 8183) Non-negotiable: An instrument which contains an order or promise to do an act in addition to the payment of money (with the exception of certain acts enumerated in Sec. 5) Payable in personal property like merchandise, shares of stock or gold.

Maker or the person primarily liable has the option to require something to be done in lieu of payment of money. (Campos)

Negotiable: If the option to require something to be done in lieu of payment of money is with the holder PAYABLE ON DEMAND OR AT FIXED OR DETERMINABLE TIME Purpose: to inform the holder of the instrument of the date when he may enforce payment thereof. On demand: An instrument is payable on demand: (1) Where it is expressed to be payable on demand, or at

sight, or on presentation; or (2) In which no time for payment is expressed. Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards the person so issuing, accepting, or indorsing it, payable on demand (Sec. 7). Note: Holder may call for payment any time; maker has an option to pay at any time, and the refusal of the holder to accept payment will terminate the running of interest, if any, but the obligation to pay the note remains. At a fixed time: Only on the stipulated date, and not before, may the holder demand its payment. Should he fail to demand payment, the instrument becomes overdue but remains valid and negotiable. It is merely converted to a demand instrument with respect to the person who issued, accepted, or indorsed it when overdue. (Sec. 7) At a determinable future time: An instrument is payable at a determinable future time, which is expressed to be payable: (1) At a fixed period after date or sight; or (2) On or before a fixed or determinable future time

specified therein; or (3) On or at a fixed period after the occurrence of a specified

event which is certain to happen, though the time of happening be uncertain.

An instrument payable upon a contingency is not negotiable, and the happening of the event does not cure the defect (Sec. 4). Note: Requires that the maturity of the instrument can be absolutely determined with certainty. (Abad) Examples: At a fixed period after date or sight, e.g., 30 days after date. On or before a fixed or determinable future time specified therein, e.g., payable on or before December 1, 2000 On or at a fixed period

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UP Bar Reviewer 2013 - Mercantile Law